By Tom Whipple

Wednesday, June 30 2010 12:56:18 PM

At last report BP was making progress on the relief wells that are being
drilled to plug the runaway well in the Gulf. The London Times reports that
BP hopes to penetrate the casing of the leaking well and start pumping in
well-sealing mud in about two weeks. Let’s hope something works.

In the next few weeks, or if things do not go well, perhaps months, the
leaking well will be plugged, fishing hopefully will resume, the tourists
will return, and the whole matter will be left to lawyers who will spend
decades arguing how much New Orleans strip clubs that lost business during
the oil spill should be remunerated by BP.

Someday, however, it will become apparent that the real disaster is taking
place 150 miles to the south at BP’s multi-billion dollar Thunder Horse oil
platform that was supposed to extract a billion barrels of oil at a rate of
250,000 barrels a day (b/d). Production at Thunder Horse began in May of
2008 and by the end of the year had reached 170,000 b/d. Then something
unexpected happened; instead of production increasing to the rated 250,000
b/d, production began to drop at 2-3 percent each month so by the end of
2009 production was down to 60 or 70,000 b/d. As BP is under no obligation
to tell us what is going on, little news other than mandatory federal
production reports have been released.

While new oil discoveries are trumpeted widely, failing projects, especially
multi-billion dollar ones, just seem to fade away. Another Gulf project know
as Neptune is not doing too well either. Neptune was expected to produce
50,000 b/d. The platform peaked at 40,000 b/d in August 2008. Sixteen months
later production was down to 16,000 b/d. It now looks as if the platform
that was supposed to produce 150 million barrels of crude will produce on
the order of 33 million. The pattern emerging here is that deepwater oil
production is not only dangerous, it may not be all it is cracked up to be.

The international oil companies that are drilling in deep water certainly
are not about to connect the dots for us, but independent observers say it
is looking like our new deepwater oil wells are only going to be producing
some 10 or 20 percent of initial estimates. Deep water oil is a whole
different game with which no one has much experience. None of the deepwater
fields have been producing long enough to have established any track record
as to just how much oil can ultimately be recovered from deep beneath the
sea where temperatures and pressures are extreme.

Now all this might be of academic interest until we recall that, outside of
Iraq, there are few places left to drill on dry land with much potential.
The few good dry land and shallow water sites left are firmly in the hands
of national oil companies, whose first job is to ensure that their domestic
oil market is fully supplied with cheap oil for their citizens. If there is
any left over, they will be happy to sell it to foreigners.

The next question is what the fallout from the Deepwater Horizon disaster
will be for deepwater oil.
A recently released BP document shows that before the Deepwater Horizon
explosion, the company was basing its whole future on production from
deepwater wells. There is little doubt that there is a whole lot of oil deep
below the Gulf of Mexico, off the coast of Brazil and the east coast of
Africa. The industry hype says there is at least 100 billion barrels or even
more. Keep in mind that this is only three years of global oil consumption
and even in the best of circumstances; it would take decades to extract.

Right now there are two issues regarding deepwater oil.

First is how much can be extracted. If it turns out that 10 or 20 percent of
initial estimates is all that can really be recovered, then the cost of this
oil will be prohibitive. Deepwater wells were running $100 to in some cases
$200 million per well drilled. Platforms that drill and support multiple
wells can easily get into the billions of dollars before they are producing.
If these wells unlimitedly yield only a fraction of what their planners were
hoping for, there are going to be some very broke oil companies, or some
very expensive gasoline in our future.

The next question is what the fallout from the Deepwater Horizon disaster
will be for deepwater oil. The U.S. has already imposed a moratorium on
further drilling until the causes of the blowout are fully understood. This
moratorium alone is almost certain to add substantially to the costs of
drilling in deepwater. Add to this the new and most likely tougher drilling
regulations and the development and deployment of a new generation of
blowout preventers that work reliably and we are going to see some very high
cost oil coming from offshore wells.

All this says that we may not be getting half of our oil from deepwater
wells 10 or 15 years from now. Unless there are some major advances in
vehicle mileage, the oil that we get from offshore just may be too expensive
to put in our gas tanks.