The sinking of Transocean's Deepwater Horizon, operated by BP, has resulted in an oil slick of around 80,000 barrels, and growing by 5,000 barrels a day -- and up to 25,000 a day by some estimates.
The 5,000 barrels a day ($400,000 worth) is small change compared to the total costs.
If we have a look at what we already know, we can find that total costs should exceed $30 billion:
Oil production: $1.5 billion
BP will lose its entire production from
these wells for the foreseeable future.
If we discount the revenues of $146 billion (at $80 a barrel) at 10%, we
get $1.46 billion. This is conservative
given that BP's cost of finance is a fraction of this, and that oil prices are
headed higher.
Cleanup: $8-10 billion
Exxon spent around $2 billion cleaning up the Valdez disaster in Alaska in 1991. After 19 years of inflation averaging 5% based on data from shadowstats (probably conservative given that energy company costs have climbed faster), this would be $5.05 billion.
Of course, we aren't comparing apples with apples right now. When the Valdez struck Bligh Reef in Alaska, it spilled 250,000 barrels of oil into Prince William Sound -- a place so cold that oil remains very gooey and doesn't like to spread out too far.
The Gulf of Mexico, however, is a nice warm 80°F (27°C). This warms up the oil to a nice runny mess and helps it spread into a massive slick -- as the news programs never get sick of showing.
So there will be a slick of around 100 miles square or more (10,000 square miles). To put that in perspective, an oil skimmer travelling at a rapid 10 knots skimming a width of 300 feet would skim a respectable 18.2 million square feet per hour. Not bad until you realize that 100 miles square is 279 billion square feet. 100 such skimmers could cover the area in just 60 days -- IF they existed, IF the weather permitted, and IF the oil were to stay in one spot. They don't, the weather won't, and the oil won't. Instead, it will be skimmed off beaches. At great cost.
Already BP is spending $6 million a day to clean up this mess, or an annualized $2 billion. That's not bad considering they've only had 10 days to begin the cleanup. Seriously, if FEMA were this fast, New Orleans would have made George Bush smell like roses. This spending is obviously going to increase rapidly and keep going for a year or more.
New well. BP is drilling a new well to plug the leaking one. No estimates on costs here yet, but a deep water rig with associated equipment typically costs around $1 million a day. Conservatively, this would be costing BP closer to $2 million a day with contractors brought in a short notice. That's another $120 million at least.
In total, based on the cleanup cost of the
Valdez and the increased complications of having warmer sea, BP's cost should
head towards $8-10 billion. That may
well be conservative, given some other estimates put the cost at
$12.5 billion.
Lawyers and legal fees: $3 billion
BP has hired a large law firm to send people out to everyone near by to buy them off. Specifically, BP is offering up to $5,000 to coastal land owners and fishermen to waive their right to sue BP. This is already backfiring and BP has agreed not to enforce the waivers already signed. How's that for fast response? Already getting waivers signed and now already backpedalling. This is just one more thing that will blow up in their face.
For the Valdez sinking, Exxon spent about
$1 billion on legal fees. Adjusting for
inflation, that's around $2.5 billion.
And considering that there are a bunch more affected parties (Valdez was
in Alaska after all), total legal costs could be double this.
Litigation and penalties
This of course is the big one. There are going to be dozens of lawsuits and
probably one great big dirty tort case that will milk BP for billions. If we ignore all the other settlements of a
few million here and a few million there, and concentrate on the Big Two, it
makes the numbers a little easier.
Penalties: $2 billion
In BP's most recent incident in Alaska, a
pipeline leaked 5,000 barrels of oil, resulting in a criminal case (thanks to
around 100 whistle-blowers) and fines of $20 million -- $4,000 a barrel. If we assume a similar fine (which may be
conservative given the public furore and presidential attention) for around
500,000 barrels , this should be around $2 billion.
Litigation: $20 billion+
Four class action suits have already been filed by the fishing industry.
Either a class action or an action by the fishing industry should be able to net at least $2.5 billion in economic damages (the fishing industry is worth $2.4 billion a year). BP is protected from this by the Oil Spill Liability Trust Fund beyond the first $75 million and up to a maximum of $2.7 billion (although the trust only has funding worth $1.6 billion so far).
If we assume BP gets the same treatment at court that Exxon did for the Valdez disaster (quite a conservative assumption considering the points below), BP will be ordered to pay punitive damages worth a year's profits, which in three of the past four years has been over $20 billion.
This may balloon far higher because:
1. It's a foreign company. While we like to imagine that this doesn't make a difference, you only have to look at the difference between how Japanese Toyota and American companies CTS (who made the pedals) and Chrysler (same problem as Toyota) are and were being treated for the same sticky accelerator problem.
2. There are a
growing number of reports about BP's negligence related to the Atlantis
project in the Gulf. This is even larger
than the one that just sank. Reports
stating, for example, that "95%
of the underwater welds didn't receive final approval" seem pretty
damning and wouldn't endear BP to a jury.
Total cost: $33 billion
Adding up the costs (and being conservative) we get:
Lost production: $1.46
Clean-up: $8 billion
Penalties and fines: $2 billion
Legal fees: $3 billion
Lawsuits and settlements: $20 billion
A very conservative total: $34.5 billion
Emptying the Oil Spill Liability Trust Fund completely: ($1.6 billion)
Total: $32.9
billion
Cheers,
Peter.
