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How To Profit From Oil Industry Mistakes

Introduction

Legal proceedings dealing with the disastrous Deepwater Horizon blowout in April 2010 are nearing an end, with BP (NYSE: BP) likely on the hook for billions of dollars in damages. Everybody remembers the months-long drama playing out, with repeated efforts to control the flow of oil ending unsuccessfully. The Macondo well continued to release thousands of barrels per day into the Gulf of Mexico until it was finally sealed.

Seared into the memories of oil executives (and regulators) around the world, there has been a greater emphasis on deep-water drilling safety in the intervening years. And that presents a big opportunity.

Capture the Oil

One of the key recommendations that came out of the Presidential commission on the Deepwater Horizon disaster called for an industry-wide coalition to address safety. Like the nuclear power industry, which collaborates on safety, the commission recognized that industry players, rather than merely being competitors, rise and fall together. Another disaster, even if it were the fault of BP, for example, would kill off drilling opportunities for all of its peers if regulators banned offshore drilling.

The industry heeded the commission’s advice and formed a little-known safety organization called the Marine Well Containment Company (MWCC), based in Houston. MWCC’s mission is to provide the safety equipment needed to respond to another disaster.

Minimum standards for future offshore drilling will likely involve the use of containment systems, which will be at the ready to deal with a well blow out in deep water. MWCC has put together an advanced containment system that can deal with future incidents. The containment system has several parts: two modular capture vessels (MCVs), three capping stacks, a subsea umbilical, and risers.

Here is how it works. A capping stack is placed over the blown out well, which will capture the flow of oil. The oil is then pumped to the surface onboard the MCV, where it is processed and offloaded onto a shuttle tanker that brings the oil to shore. The MCVs also have onboard storage in case shuttle tankers cannot arrive immediately or if there are just not enough of them. Each MCV can store up to 700,000 barrels of liquids.

The MCV can capture and offload up to 100,000 barrels of crude and 200 million cubic feet of natural gas per day. There is also processing equipment on board the MCV so that crude can be processed immediately, and flaring equipment to flare off gas if needed.

The MWCC organization received delivery of a key component on February 19, the Subsea Containment Assembly (SCA) – a capping stack and associated equipment. The assembly was constructed by Aker Solutions (Oslo: AKSO.OL), an industry leader in subsea systems. Aker is a pioneer in subsea production systems and has captured two-thirds of the market for sales of subsea trees. But they are also leading the sector in safety systems, evidenced by their Subsea Containment Assembly. They developed the 170 ton system over three years. The system can withstand 15,000 psi of pressure, powerful enough to operate in 10,000 feet of water depth.

Federal regulators at the Bureau of Safety and Environmental Enforcement (BSEE) are working heavily with the industry overseeing safety drills and tests of subsea containment systems. Royal Dutch Shell (NYSE: RDS.A) saw its capping stack “crushed like a beer can” during tests in 2012, delaying drilling in the Arctic. Aker Solutions and MWCC have a new generation of subsea safety systems in place that will avoid such safety snags. Looking forward, it will become increasingly commonplace around the world for oil companies to have subsea safety containment systems on hand. That offers Aker Solutions and its peers new opportunities.

Shut in the Well Before it Blows

Another safety development stemming from the Deepwater Horizon disaster is technological advances with blowout preventers, the last line of defense to head off a well blowout at the sea floor. The blowout preventer consists of shears that slash through pipeline and debris to seal off a well at the well head. When successful, blowout preventers ensure that capping stacks and other subsea containment systems are not even needed.

It was determined that BP’s blowout preventer failed to cut the pipe at the Macondo well due to buckles and shifts in the pipeline, precipitating the blowout. But a 2014 investigation by the U.S. Chemical Safety and Hazard Investigation Board found that multiple design flaws in current regulations for blowout preventers likely mean that other wells in the Gulf of Mexico are similarly exposed.

No doubt the investigation is informing new regulations being readied on blowout preventers by the Obama administration. BSEE has sent a proposal to the White House for review, and a proposed regulation is expected to be released in the spring. The new regulation will up the standards for blowout preventers, requiring greater power that will allow the devices to slice through pipeline regardless of the circumstances.

It remains to be seen how tough the regulations turn out to be. But it is clear that future wells will likely require more state-of-the-art blowout preventers, and also require their use throughout more phases of the drilling process, not just during well sealing.

GE (NYSE: GE), stands at the forefront of a new generation of blowout preventers. It is developing a blowout preventer capable of handling much greater pressure. Last year Maersk Drilling ordered four GE blowout preventers for its “20K” drilling ships, a new breed of drilling rigs. They will be delivered in 2018 with the option of further deliveries. The new rigs, equipped with GE’s blowout preventers, will be able to drill at 20,000 psi of pressure and at 350 degrees Fahrenheit.

Cameron International (NYSE: CAM) is another industry leader. It is one of the largest providers of subsea production systems. Its blowout preventer was implicated in the Deepwater Horizon incident, but having avoided serious damages during the aftermath, the company is looking forward. Cameron stands to gain from future growth in new blowout preventers, a multibillion dollar market that continues to grow. Cameron sold the industry’s first 25,000 psi manifold blowout preventer in 2011 and continues to win contracts.

National Oilwell Varco Inc. (NYSE: NOV) is another key player in the blowout preventer market. National Oilwell is banking on the fact that many older offshore oil rigs haven’t added blowout preventers, and even fewer are equipped with a second backup blowout preventer. As those rigs retire or get refurbished, the opportunity for blowout preventers grows.

Conclusion

Many of these companies have not fared well during the latest oil price downturn. As they are essentially service firms for offshore drillers, they are acutely vulnerable to a cutback in drilling. Investors should be cognizant of this fact. Drilling activity has been curtailed significantly in 2015, which will likely take months or even years to return.

Nevertheless, offshore oil drilling is here for the long haul. And as new technologies that have been developed in response to the Deepwater Horizon incident are beginning to come online, they are illustrating what the future of drilling might look like. A new generation of safety equipment is starting to become more and more common, which provides big business opportunities for their manufacturers.




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