Deepwater Horizon Blowout

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Table of Contents

Introduction
Executive summary
Problem statement
Major economic consequences of the incident
Conclusion
Reference List

Introduction

Background information

The Deepwater Horizon is a rig that blew out on April 20, 2010 and caused 11 deaths. Environmental consequences as well as financial, economical, and political concerns have become the major topic for discussion by companies involved in the issue as stated in the article (PE Magazine Archive, 2010).

The contingency plan was established for this large project, as reported by Goldenberg (2010). In this respect, the BP officials had to observe certain rules established for all unexpected situations that may rise in the rig. In other words, it is unclear whether the plan had been established after the incident or it was not followed by the employees. However, the workers should have known about the plan that could have saved their lives.

Moreover, numerous consequences of the oil spill should be eliminated in order to avoid environment disasters and different economic, financial, and political consequences. As the British Petroleum is the major producer of oil in the world, the incident has resulted in the petroleum price changes and influenced the location of rigs previously located in the Gulf of Mexico (PE Magazine Archive, 2010).

Executive summary

The current report is aimed at identifying the major economic consequences of the incident, detecting financial and political changes, and analyzing the influence of the oil spill on all parties concerned. The blowout happened on April 20, 2010 in the Gulf of Mexico and caused many unexpected changes in the financial and political concerns.

The tragedy killed 11 employees that were working on the rig; the contingencies plan was ignored, whereas the National Incident Commander Thad Allen calls on the British Petroleum officials to provide the contingencies plan that was supposed to be followed on the rig (Offshore staff, 2010).

Thus, it is necessary to overview the possible consequences of the explosion that can affect the parties concerned, especially the joint venture companies and partners of BP as well as the government. Environment of the ocean and coast territories is sure to be influenced as well; for instance, the marine life such as fisheries and the wide life habitats have suffered hence damaging the tourism industry which is major source of income in the country (Coimbra, 2010).

Problem statement

Deepwater Horizon blowout

It is obvious that the reasons for that incident that occurred in the Gulf of Mexico should be identified. However, the major issue to be solved at the moment concerns the numerous consequences of the tragedy that happened on April 20, 2010 and took the lives of 11 people.

The major problem of the Deepwater Horizon is that most sectors of human activity turned out to be involved in the explosion and adjustment of visible and implicit consequences.

Companies that provided supplies and carried out technical operations, joint venture partners of the British Petroleum as well as rig owners, government services, and environmentalists and those companies that try to eliminate the natural consequences of the oil spill. Regarding this, the problem of the explosion includes long-lasting consequences rather than short-term reasons and minor changes adopted in the contingency plan.

Results of the oil spill

As stated by most officials that took part in the elimination of the consequences related to the contamination of the ocean together with its inhabitants and measures taken to plug the leaking well. Barak Obama, the President of the United States of America, claimed that the oil spill is a “massive and potentially unprecedented environmental disaster” (Heinberg, 2010).

Due to this fact, the US Administration agreed on $20 billion to be paid during several years by the BP Company as a compensation for the oil spill. Consequently, BP party have accepted the responsibility but still holds that it was not due to their fault but the accident was caused by the rig run by Transocean personnel (Memoli & Nicholas, 2010). Though the consequences of the disaster are tangible today, some other consequences will be visible and perceivable during further years.

Major economic consequences of the incident

Technical and engineering matters

One of the issues concerning the disaster includes technical and engineering matters as a part of the staff responsibilities. “The engineers conducting and supervising the drilling operation were aware of the problems; however, the management ignored the safety aspects of the operation and continued drilling, in order to meet the schedule which was already late” (Kalani, 2010).

The contingency plan and the working conditions have to be established before making people work, whereas the BP seems to have concealed the genuine contingency measures adopted for the Deepwater Horizon rig in order to save costs on contingency plans and technological matters. This idea finds documentary evidence in the article provided by Somaiya (2010); this article reveals the history of BP ventures, each known for reduced costs on personnel and cleaning staff.

As it can be now observed in the Deepwater Horizon oil spill, the long way to the disaster was a matter of time, ‘a culture of arrogance and risk-taking spanning decades’ (Somaiya, 2010). Companies responsible for plugging the oil well had to employ skilled and competent labourers because it was tricky and risky venture to solve that problem (Mason, 2010).

The technical matters of the rig operation can be considered by the BP. However, the company is not likely to admit that the failure appeared due to cost saving strategies adopted in the company, even regarding the oil spill risk. In this respect, the consequences of the disaster should be solved by the company that still conceals important documentation on this issue.

Other service providers such as technical providers, drilling rig, tanker and pipeline owners, engineering design, construction and inspection companies have had major economic impacts as a result of the explosion. The Deepwater Horizon rig construction was almost half way when the explosion occurred and these service providers had already injected a lot of money as well as technical expert in its construction.

They have incurred significant losses which will take a lot of time to recover; the United State government has been considering whether to give these service providers another opportunity for drilling other rigs although this does not seem viable given that Gulf of Mexico produced only 2% of the total oil production in the world. “They [BOPs] are normally very reliable. They have two control switches and a number of different ways of closing the pipe,” as reported by Per Holand from Exprosoft, the company that assesses risk (Ravilious 2010).

Political, commercial, and financial concerns

One of the most obvious political concerns relevant to the Deepwater Horizon oil spill includes the states that are likely to suffer losses because of the disaster. As major coast line territories are involved into the touristic business, the oil spilt in the ocean impacts the income of the hotels and other objects involved into service business that provides tourists with appropriate entertainment and accommodations.

Besides, most rig owners dislocate their rigs and other equipment due to the restrictions on the oil exploration and production in the region of the oil spill. Consequently, financial losses of businesses that were going to explore the sea-shore and the damage brought to the coast area as well as to marine ecosystem are unbearable.

The political consequences also concern the Mexico as many joint venture companies that took part if the Deepwater Horizon operation belong to Mexican businessmen. It is obvious that these businesses are not likely to keep tight relations after a disaster regarding the consequences of the oil spill.

International market is sure to suffer losses because other companies that also explore and produce petroleum do not have sufficient amounts of petroleum to supply it to the world-wide consumers, whereas the British Petroleum is the largest company in the area of oil exploration but it will have to redirect the costs and pay certain amounts to compensate the measures taken to eliminate the oil from the ocean and to plug the leaking well.

Out of all the parties that were negatively affected by the explosion, the owner of the rig (Swiss-based Transocean LTD) suffered the most economic loss. This party had injected a lot of money into the program since they expected immense returns once it was complete. They did not only lost some of their skilled personnel, but also their businesses came to a stand still. For over the years, crude oil has been known to be one of the non renewable energy resources that earn countries a lot of foreign exchange.

The United States is not an exception and the country’s economy has been boasted by oil export. Not to mention, the owner of the rig must have had benefitted from such returns before he decided to venture into the program (Broad, 2010). The tourism industry is a major source of income in the Gulf region (Spillius, 2010) is reported to have suffered losses and the recovery is not likely to come quickly. This industry will continue to suffer as long as the spilt oil remains unclean.

Short term measures and long-term changes

As reported by the Energy Information Administration (2009), the reserves of the United States of America, regarding the natural gas and oil amount, are not significant taking into account the level of the US oil consumption.

However, the British Petroleum had long plans for the Gulf of Mexico reserves and not likely to follow the limitations and bans on the exploration. It is obvious that large businesses always have a back-up plan not to suffer losses. Besides, the company should pay out the compensation costs equal to $20 billion.

The short-term measures, that take place if the Gulf of Mexico, are aimed at eliminating the detectable consequences of the oil spill, mostly regarding the environment and marine ecosystem. Marine animals as well as those that inhabit the coast of the gulf suffer from the oil spilt in the ocean. As reported by various environmentalist organizations, turtles and other animals die from the oil. Besides, many species are extinct and their revival seems to be impossible if the remaining exemplars would die of oil poisoning.

The government suffered unfavourably from the spilt oil. Its gross domestic product dropped and may continue deteriorating as efforts are aimed at cleaning up the mess. A lot of money has to be injected to petroleum industry, tourism and recreations industry and other major industries in the country.

The government has to undergo extra costs (that will go to geologists) as they investigate the area to rule out the likely hood of such a disaster occurring again. The fishing industry employed about 71% of the total labour force in the Gulf region and most of these people have been rendered jobless.

The government has to deal with the increasing number of unemployment rates and the problems that come with it, for example, increased crime rate. The 2008 statistics review reported that the fishing industry generated over $10 billion in sales, about $5.5 billion in income, and employed approximately two hundred thousand employees (Chase, 2010).

Other than human beings, there are other species that have been affected by the oil slick that spread from the deepwater horizon. This include fisheries, wide life and many species of birds who breed annually at the ashore. These birds attract tourists from all over the world; and this has been hindered. Coral reefs have been known to provide shelter to more than 25% of marine animals. Geologists have found out that In the Gulf of Mexico, there are at least two coral reefs that provide shelter for most of the marine species. After carrying out research on the oil slick, scientists have found out that, the dispersants contain more toxins than the crude oil. These dispersants caused a lot of harm to the coral reefs leading to their death or delayed growth which in turn has hindered the growth and production of marine species.

Water microbes are important in breaking down oil dispersants; however, if they increase in number, they can create a dead zone on the water surface that sucks oxygen from water. This in turn leads to death of the marine life. This has been the case at the Gulf of Mexico where microbes have increased in number due to the concentrated BP spill (Spisharam, 2010).

According to the Environmental Economic (2010), there are other birds and animals that live on the Gulf of Mexico or on its shores that have been affected by the oil slick. The oil has contaminated most of the nesting grounds for many species of birds especially the brown pelican whose food has also been contaminated. The Brown Pelican bird came back to the Gulf of Mexico after their habitats were destroyed by the hurricanes Katrina and Rita.

Consequences for the global petroleum market

The price of the petroleum can increase due to the shortage of oil exploration and the measures that should be taken to plug the leaking well. As the BP is the largest supplier of oil, it is obvious that the level of the oil exploration in all other countries exporting the oil and petroleum can either increase or decrease.

However, neither change will bring benefit to the British Petroleum and the global market. In this respect, it is appropriate to consider the measures taken by rig owners to relocate their equipment from the Gulf of Mexico to other areas where the exploration is not limited by restrictions set by the government.

“Moody’s today put the current total insured loss estimate between $1.4 billion and $3.5 billion. Moody’s noted that insured losses would be significantly higher if BP plc, the operator and majority owner of the project, had purchased liability insurance in the commercial market instead of self-insuring its risks through its captive insurer, Jupiter Insurance Ltd., for property and liability coverages” (McDonald, 2010).

In this respect, the cost of insurance is likely to affect the petroleum price all over the world due to necessity to pay off the compensation and costs for ‘cleaning-up’. Other major contributors to the Deepwater Horizon construction and operation are Anadarko which has 25 percent of working interest, Mitsui having10 per cent, Transocean which owns the rig, and Halliburton and Smith International responsible for providing the rig with drilling services (McDonald, 2010).

Regarding the number of parties involved, it is clear that all similar businesses will increase the cost of their services in order to include the possible contingencies insurance. Though the United States of America is the largest oil consumer in the world consuming two thirds of the globally explored and produced oil, mainly as petroleum, the British Petroleum is the largest business in the sector of exploration and production.

Increasing oil wells in the United States will render other nations unproductive since America has other oil producing wells. James Hamilton noted that there is no cause for alarm because the demand elasticity would be lower in the long-run (Mouawad, 2010).

Possible drilling in future

The oil and gas industry is known as one of the major industries that earns nations a lot of income. For a long time, it has been considered as the best industry to raise a nation’s economic status in the global market. People have become dependant on this industry as a major source of energy for cooking, driving automobiles among others.

They have already incurred a lot of financially loses from reduced sales due to lack of sufficient supply of oil. This problem is going to continue until other wells are drilled since it will take a long time before the Mexican Gulf oil can be explored to the full capacity (Broad, 2010).

Procedural lapses and a set of events that preceded the construction and operation of the Deepwater Horizon are emphasized in the article ‘Investigation of Deepwater Horizon points to human error’ (2010). Inappropriate well design, some problems with centralizers, cement bond log, mud circulation, and lockdown sleeve are not so urgent if those difficulties appear individually.

However, a scope of such problems can result in an unexpected explosion as it can be evidenced in Deepwater Horizon oil spill (‘Investigation of Deepwater Horizon’, 2010). The companies that have already incurred a lot of cost are the ones responsible for cleaning up the spilt oil that is the BP party. The Deepwater Horizon disaster occurred in April and this problem remains unsolved up to this moment; they have not managed to clean it up. It is estimated that, this will take a lot of time and will consume a lot of money.

Conclusion

The tragedy that happened on the rig Deepwater Horizon owned by the largest oil exploration and production company, British Petroleum, caused many negative effects and can be considered one of the most unprecedented disasters in the history of the United States.

The consequences of the explosion are extremely large, though the reasons of the oil spill are still not clear. The contingency plan and the cost saving strategies adopted by the company do not coincide with the effect produced by the oil spill in the ocean. The environment of the coast of the Gulf of Mexico as well as the marine ecosystem has suffered greatly. Moreover, the world saw many changes in terms of financial and economic concerns brought by the disaster.

The price on petroleum is likely to increase due to the costs spent by the BP to compensate the consequences of the disaster. The United States of America is one of the largest parties that suffer losses in various sectors of the economical activity. The touristic business of that region is likely to decrease.

The Gulf of Mexico has previously engaged many employees to work of the rigs, whereas the bans to currently explore the oil in this region made many rig owners revise their plans and relocate the equipment. In this respect, the numerous measures should be taken in order to improve the situation, plug the leaking well, and decrease the unemployment rate.

The more time runs, the fewer chances are left that the marine ecosystem of the Gulf of Mexico can be renewed. The disaster resulted in global changes and made the global community to revise the idea of the off-shore drilling in terms of long-lasting negative consequences.

Reference List

Broad, W. J., 2010. Nuclear option on gulf oil spill? No way, U.S. says. The New York Times. Web.

Chase, A, 2010. What will the economic impact of the Deepwater Horizon spill be? Web.

Coimbra, C., 2010. Deepwater Horizon disaster deeply threatens marine life-updates. Neptune 911. Web.

Energy Information Administration, 2009. World proved reserves of oil and natural gas, most recent estimates. Web.

Environmental Economic, 2010. Political impacts of Deepwater Horizon. Economists on Environmental and Natural Resources 2010. Web.

Goldenberg, S., 2010. We had a contingency plan for Louisiana spill, and it’s working, BP chief tells angry senators. The Guardian. Web.

Heinberg, R., 2010. Deepwater Horizon and the technology, economics and environmental impacts of resource depletion – the end is nigh. The Oil Drum. Web.

Kalani, G., 2010. Deepwater Horizon drilling platform explosion. The Institute of Engineering and Technology. Web.

Mason, R., 2010. UK firms suffer after BP oil spill. Daily Telegraph. Web.

Memoli, M., & Nicholas, P., 2010. BP agrees to $20-billion escrow fund; cancels dividends. Los Angeles Times. Web.

Mouawad, J., 2010. BP has a history of spills and safety lapses. The New York Times. Web.

Offshore staff, 2010. Deepwater Horizon: Incident Command wants BP plans, contingencies. Offshore. Web.

PE Magazine Archive, 2010. Spill ramifications spread beyond the Gulf of Mexico. Petroleum Economist Magazine. Web.

Somaiya, R., 2010. The road to Deepwater Horizon. Newsweek. Web.

Spisharam, 2010. Environmental impact of Deepwater Horizon oil spill. Environmental News. Web.

Ravilious, K., 2010. Deepwater Horizon: scrutiny falls on blowout preventer. NewScientist. Web.

McDonald, C., 2010. Deepwater Horizon Spill Could Cost Insurers $3.5B: Moody’s. National Underwriter. Web.

Investigation of Deepwater Horizon points to human error. The Rational Walk. Web.

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