Monday, June 28, 2010

missed reunion

I missed my high school reunion last weekend. That I had one is only mildly surprising as I found out about it through slightly indirect means, but that’s admittedly esoteric. That I missed it should be not at all surprising since I live at least three flights away now (Port Gentil - Libreville - Paris - SFO) and am not currently in a position to be away from work since we’re transitioning over here and it’s important I be generally awesome or something like that.

It would have been nice to go back and see people, although any trip back to the Bay Area would be generally great since I would be in the Bay Area, which the newscast calls “the best place on earth” and they seem like impartial folks. The reunion itself would have been fun. It also would not have been as interesting without this internet thing, facebook, various chat programs, e-mail, and all our other modern splendors. Let’s face it. You’re still in touch with most of the people you want to be in touch with. And you’re semi-in touch with everyone else through the magic of friends of friends on facebook. Who knew that people married high school sweethearts? Well, we all basically knew. The only people you’re not in touch with at all are those who dropped off the face of the earth because they wanted to get away, hated everyone (or maybe only me), or thought Jason Bourne was a good role model. Or they are the ones who you always had a crush on, but never said anything about and now regret not doing anything, but are too afraid to try and get in touch with them because it will ruin the impossibly good image of that person that you have built up in your mind. Um, yeah. It could be that, though it would likely make for an awkward encounter if you ever ran into said object of affection.

Anywho, we’re in touch. Aggravatingly in touch? No, since it’s easy to go semi-off grid like me and generally ignore friend requests into oblivion. But this in-touch-ness is rendering reunions less interesting and consequently seems like a possible reason why attendance was not that high. For our class (and possibly all the classes from my school), I would venture to guess post-graduation mobility is also quite high compared to some sort of national average. Furthermore, I know many people who are still in school, either pursuing PhDs or they worked a few years and are off to earn MBAs now. Sure it’s summer (in the northern hemisphere), but people are away from the Bay.

I’ll be back one day. Maybe another 10 years from now. Or sooner. But in 10 years it’ll be more interesting to see how far afield everyone has gone.

Sunday, June 27, 2010

flopping and officiating

The flopping and faking of injuries in soccer is a disgrace to the sport. It makes me cringe any time a player goes down clutching his angle, shin, knee, face (you know who you are Keita), etc and rolling around on the ground like someone in a stop, drop and roll instructional video. I played soccer for many years up into high school for school and club teams. We played hard, sometimes aggressively, and yes, people ran into each other, fouls were committed, and general contact occurred. But I never saw a teammate or opponent go down in apparent pain who was not actually hurt and did not need to be substituted for. (Cramps and getting the wind knocked out are other matters, but I’ve never seen anyone use those as a ploy for slowing down the game or drawing a free kick). This is why it pains me to see these professional athletes, some of whom have been made wealthy and famous by their sport, disgrace that same sport with such contemptible behavior. Put more simply, it is cheating.

Unfortunately, it will never end as long as there is no real consequence for the actions. I was pleased a few World Cups back when they started to dole out yellow cards for blatantly fake falls and play acting. However, many plays are still missed and much over-acting of actual fouls occurs in an attempt to induce a yellow or even red card instead of a simple free kick. Much like the need for some instant replay to improve the quality of the officiating, post-game reviews of penalties, both real and imagined is necessary. This review must come with consequences that includes suspension from international play, league play, and fines (as a function of player pay as players make highly variable pay). This is the only way it will have teeth and, if not stop, at least strongly curtail the flopping, because if I wanted to watch that, I’d be watching the fishing championship on the Outdoors channel. Regrettably, much like drug-testing in baseball, financial reform on Wall Street, and energy policy legislation, if it ever happens, it will be weak and ineffectual.

Perhaps the biggest hindrance to improved officiating in soccer is FIFA President Sepp Blatter, who has taken the stance of a luddite when it comes to using technology to improve the games. He has been critical of the use of replay or other means to assess when goals are scored because “the game must be played the same way no matter where you are in the world.” Excuse me? "Men, women, children, amateurs and professionals all play the same game all over the world.” No they don’t. If you think those kids playing on that dirt pitch over there is the same thing as professionals on a sod field with professional horticulturists looking after the grass, then you’re a moron at best, and a disingenuous liar at worst. Sometimes you play with just one linesman, sometimes none, sometimes two, who knows. But let’s not avoid the use of technology to improve the fairness of the sport at its highest level while hiding behind some “think of the children” mantra. Tennis has successfully brought technology into their officiating at high levels and it has not ruined the amateur and developmental levels of the sport. Soccer could do likewise, if only a bloated relic of the past wasn’t dragging it down.

Friday, June 25, 2010

group H

In World Cup Group H, it's interesting to see how the standings are going into the final games of the round-robin group stage. We could end up in a situation where Chile, Spain, and Switzerland are all 2-1 with Hondurus taking the 0-3 drubbing. Or, we could up with Spain at 3-0 with Hondurus, Spain, and Switzerland each at 1-2. Tie-breakers are great.

Wednesday, June 23, 2010

housing still weak

I started a post back in December about how the housing market was still weak. To be clear, it is still weak. It is moderately local, but the overall US housing market is garbage. As always, my main man Ritholtz at The Big Picture cuts through the flim flam with his explanation of why there will be a second leg down in housing. Basically, unemployment is still high, real wages have staganted for a decade, inventory is high, and price-to-rent ratios are still high. Further context for a drop in new home sales and I recommend checking out the first few comments from this blurb on a debate on the state of the housing market.

For those of you in the Bay Area, you all know that market works in an alternate universe than everywhere else. However, a word for some of the married and/or soon-to-be-married young folks I know might be in the market for a domicile in the next 24 months is to be judicious. The market may rebound sooner (and has partially rebounded off the bottom), but keep an eye out for deals and taking advantage of what is fundamentally a buyers market. Have fun.

Tuesday, June 22, 2010

briefly on safety

Industrial safety is a tricky thing. I won't deny that corporate abuses have taken place in the past and still take place in some (probably most) parts of the world today. However, even in places that have rigorous safety programs and are building a safety-conscious culture, injuries will still occur. I have learned that people will always find new and surprisingly inventive ways to hurt themselves. And while this has perhaps been said by someone before, I'll go with Scott Adams on this:
"There's nothing more dangerous than a resourceful idiot."

Monday, June 21, 2010

port gentil, gabon

Transferred to Port Gentil, Gabon. Already here. It's the next country north from Congo. That is all.

deepwater decisions

It should hardly come as a surprise that a great many e-mails circulate around the interwebs regarding the Deepwater Horizon and the circumstances leading up the explosion. I recently received something that I assume is public record and that would be the letter from Congressmen Waxman and Stupak to BP CEO Tony Hayward dated June 14, 2010. If you want a copy, let me know.

Before I get into the letter, along with many legitimate articles and investigation pieces, there is a great deal of false information running around. Some of it takes the form of sloppy reporting and some takes the form of nonsensical rumor-mongering. (To be clear, the claim that SLB paid for a private helicopter to fly personnel off of Deepwater Horizon is incorrect). Ah internet, you will always be strange and mystical things to people who do not know much. That misinformation can spread so pervasively is the reality of the world, but it is hardly a new phenomenon, just a much faster phenomenon now.

The letter from Congressmen Waxman and Stupak addresses five key points:
1) The decision to use a well design with few barriers to gas flow
2) The failure to use a sufficient number of “centralizers” to prevent channeling during the cement process
3) The failure to run a cement bond log to evaluate the effectiveness of the cement job
4) The failure to circulate potentially gas-bearing drilling muds out of the well
5) The failure to secure the wellhead with a lockdown sleeve before allowing pressure on the seal from below

As I have written before, I do not have special or “inside” knowledge of Deepwater Horizon and the events surround the explosion of the rig. I only have my own experience and I most definitely do not represent an official opinion. I am simply slightly better informed than the general public on the matter.

I want to deconstruct the five points in the letter. I am not trying to suggest that mistakes were not made or that best practices were followed. I merely want to provide an explanation of why some of the decisions may have been made and give some more context. It is clear from the general media and reporting that the decisions are generally being portrayed as beyond reckless and driven by financial considerations. Well, yes. This is a business. Almost all decisions are driven by financial considerations, and even seemingly ethical or ‘soft’ factors can be given a price. However, I don’t want to go down that path of what a human life is worth right now. I just want to note that businesses are in the business of staying in business. Yes? But that does not mean BP did not weigh considerations beyond the most basic ones being seen on the surface.

Point 1 on using a design with few barriers is a reference to run a single string of casing (which was actually in two different sizes but that’s not important) instead of a liner. The single string of casing is a reference to the metal pipe used in the well. Casing (or liners) are run into a newly drilled section of the hole and then usually cemented in place. The cement isolates the various formations (which contain oil, gas, water, etc) from each other and also keeps the casing/liner in place. A single-string refers to having casing in one continuous length that runs from the bottom of the well all the way to the sea floor. A liner would only run from the bottom of the well to somewhere inside the previous casing/liner. On a final section like this one, a tieback section of casing would later be run from the top of the liner to the sea floor and that would also be cemented in place. The liner and subsequent tieback would take significantly more time to run than a single string of casing mostly owing to the time it would take to set the liner, wait on cement, run the tieback, cement the tieback, and wait on cement again. However, a liner carries with it additional operational risks. There is an increased risk of placing little to no cement in the open-hole annulus at all. This is due to possible failures that can occur at the top of the liner where darts and plugs (used to wipe the inside of the pipe and separate fluids that are pumped) can get stuck in the liner top assembly. This is not necessarily a high risk, but I have seen some operators express enough concern that they do not run darts and plugs, but instead another method of pipe-wiping and fluid separation that is generally less effective and carries its own set of risks. What is the risk of a liner failure where (almost) all your cement ends up inside the liner instead of on the outside? Generally, it’s a disaster since there is no isolation of the annulus and now you cannot even circulate the well.

Point 2 discusses centralizers. As their name implies, the centralizers are used to keep the liner centered in the hole. Without them, the liner will tend to lay against the “low” side of the hole. Even in a vertical well this will still occur (and there is also no such thing as a perfectly vertical well). When the liner is against one side of the well (or even if it is sufficiently out-of-center without touching the side), there will be little to no fluid flow on that narrow side. The mud, spacers, and cement slurries will all take the path of least resistance which is on the wide side. Once again, this could result in inadequate cement coverage and a lack of isolation. This makes it seem like we should be running a lot of centralizers all the time, yes? (A lot of centralizers could be about 1-2 centralizers per joint of casing/liner where a joint is usually about 40-45 ft long.) No. Centralizers work because they act like springs on the side of the casing/liner pushing it off the walls of the open hole. When running the casing into the well, centralizers create a drag force and lots of centralizers means lots of drag force. This will make it more difficult to get the casing to the bottom of the well and increases the chance the pipe will get stuck before it is at the bottom. Based on what I have read, HAL proposed 21 centralizers which seems like it would be a bit less than 1 per joint of casing/liner in the open hole. This is probably very reasonable for a well that was planned to be vertical. BP chose to run six centralizers out of concern for time (which equals money) but also at least expressed a concern about getting stuck. (As an aside that is probably worth a post on its own, getting operators to run enough centralizers is one of the more difficult things to convince a client to do. It is an example of the nature of the relationship between the operators and service companies).

Point 3 discusses the evaluation, or lack thereof, of the cement job. Ok, I’ll admit to not knowing why they would not run some sort of log to at least determine top of cement, but preferably a proper evaluation of the job. At this point, cost considerations are probably the most prominent factor in the decision.

Point 4 is on the lack of circulation prior to cementing operations. Circulation is important to both evaluate the mud and ensure it is not coming back with gas in it and also to cool the well as cementing is done with prejob tests at specific temperatures that generally assume a particular amount of circulation. For a well that is experiencing losses that cannot be easily stopped, operators will sometimes not fully circulate the well with one hole volume or a “bottoms up” as it’s often called. This is because losses consume mud and circulating usually increase the rate of loss. If losses are severe enough, it can make it difficult to maintain sufficient mud volume (which needs to be constantly made up at the rig) to both circulate the well and keep adequate emergency reserve if well control problems do occur. As a consequence, cementing operations sometimes occur when the well has not been fully circulated. (Cementing a well that is experiencing losses carries with it many risks, but sometimes it remains the “best” option instead of spending more time trying to stop losses.)

Point 5 is on the lockdown sleeve and I am not really familiar with this device. I will instead cheat and speak generally about hardware and tools and how much stuff gets put into a well. The more complicated something is, the more likely it is to fail. What are the risks of a sleeve? Maybe it sets at the wrong time or place. Perhaps it creates an additional flow restriction which would make loss problems more difficult to deal with. I don’t know and I’m not going to get worked up over it.

I want to drive home that problems are rarely simple black and white choices. In this business, many factors go into decisions and selection processes. This is what we need to remember when examining why failures occur and how complex decisions get made.

Friday, June 18, 2010

oilfield and technology adoption

Technology in the oilfield is a curious thing. There is a broad range of technological sophistication within the industry. It ranges from a "if it ain't broke, don't fix it" mentality all the way to "we're going to use underground sensors and satellites to monitor what is happening a few miles beneath the ground in real-time from an office thousands of miles away and adjust the program on-the-fly." It is hardly surprising to have such a wide range since the work and intensity runs such a large gamut.

Some fields are simple for various reasons like they are some combination of being shallow, low-temperature, low-pressure, older (which usually implies better characterization and understanding and thus fewer unknowns), and within easy reach of people and equipment. Many places like that are also in field development, which typically means drilling lots of the same wells over and over again with little variation. This means high-frequency, repeatable tasks that usually results in relatively few problems as the objective is a type of factory-drilling that tries to produce wells the way a factory might make, well, whatever it is factories make.

Some fields are more complex, but still going through field development. (Really, all discoveries need to be developed to ever be commercial). Conditions that are the opposite of the ones I mentioned before can make drilling more difficult. (There are many more conditions that influence drilling, completion and production, but this is not about getting bogged down in a discussion of industry jargon). Nonetheless, these fields can still be developed, albeit with more sophisticated tools and techniques, more money, usually more time, and thus the expectation is of a better pay-off. More risk should generally not be undertaken without more potential reward. Even in complex field development, you can get repeatability of certain operations but variation within a field or difficult conditions make it riskier.

Exploration work is a potentially tricky and dangerous beast. Deepwater Horizon was not drilling in a mile of water because it was convenient. With NOCs controlling somewhere between 75-88% of proven oil reserves, the IOCs are increasingly drilling in more difficult operating environments. The technology required to operate in such environments often did not exist ten or even five years ago. Leading edge technology is expensive and my employer spent more than $800 million on research and engineering last year (will open .pdf). Admittedly, the figure is pretty silly without context, but it’s not free. Technology is also frequently difficult to sell within the industry. Many operators, especially the large ones, fancy themselves as early technology adopters, but the reality is quite different. Corporate culture and the very nature of individuals’ experience with past field development often makes getting people to change very difficult. Why use a new tool if the old one worked last time? Why use a new and little-tested system if the old one worked in the past? Conditions change, technology improves and we can do a better job. That is why, but the convincing is usually quite costly. The joke (which seems very dark after Deepwater Horizon) is that there is always enough money to do it wrong three times before spending the money to do it right.

Semi-related note: I was tempted to make a comparison to Apple products like the iPhone, but it would not be apt. The iPhone was a "game changer" (whatever that means) and many companies tried to emulate and/or surpass the iPhone with their own products and touch screens and whatever. (Personal opinion: A phone must be a phone first before it can be considered a useful tool.) The reason the analogy is weak is because technologically, while the iPhone did many unique things when it came out, much of it was riding on somewhat older technology. Apple's big focus was on form and user experience. Both of those are significantly less important in the oil and gas industry. (I am referring to the upstream oil and gas industry). The oil and gas industry very rarely sells to end use consumers. Instead, it is mostly sales from one company to another company. Thus, marketing and advertising, while not useless, is less critical. Additionally, cute and magical are not adjectives used to sell products in this business. Despite this, selling technology to corporate customers can be difficult, perhaps it has something to do with the lack of fan-boys in the corporate world.

Tuesday, June 15, 2010

push polls and politics

A couple weeks ago, I saw a teaser headline for a Wall Street Journal piece with the delightful title of Are you Smarter Than a 5th Grader? Well, maybe I am. Of course, I clicked through and checked out the opinion piece.

Meh. That's right, meh. That was my reaction to the piece. Of course, it was followed with the thought that the piece was such a hack job. Check it out and make your own decision. My issues with the piece fall into two broad categories. First the nature of their polling and second the content of their polling.

The polling. Oh, why anyone would use Zogby, masters of the push poll, if they wanted to be taken seriously is beyond me. Zogby is to polling what Fox is to news. A disgrace. Furthermore, Zogby is notably (or notoriously?) inaccurate compared to other polling services. They have been thouroughly deconstructed more than once by FiveThirtyEight.

If you take umbrage with FiveThirtyEight as being left of center and principally penned by a known Obama supporter, then check out their track record for the 2008 presidential election. Yeah, you didn't predict it that well. Nate Silver runs a good site and I followed it heavily for the 2008 election for well-written and excellent analysis of polls, the nature of polling, and wading through the numerous garbage created by sloppy polls. People can have opinions and still be objective, a rarely seen trait in the political world these days.

If you still dig Zogby and don't mind their quetionable polling structure, then let's talk about the questions. If I call the first question number 0 and leave the rest with numbers 1 through 7, then I would take issue with most of the, ahem, "enlightened" answers to borrow their loaded term. Here are the true correct answers to the eight questions they asked starting with question 0: usually, not really, depends on who you are and what standard is being used (question is also deceptive as 30 years ago was a bad enough time that we thought Reagan would be a good choice for President), probably but depends on who owns it, it could be, quite often (based on what I have seen), for some people yes, and unknowable long-term consequences without them.

Economic theory is so delightfully gamed by politics to the point where the actual testing and implementation of many theories is muddied by outside factors and inconsistent application. Plus, the true long-term consequences of some ideas can never be adequately tested because policy usually shifts too soon to observe long-term effects.

Friday, June 11, 2010

quick movie comments

I saw Fast & Furious on French television a week or so ago. For those not in the know, it's the fourth and presumably final (but possibly penultimate!) movie in the Fast/Furious series. In French, it seemed non-sensical and generally ridiculous. A couple days later, I caught the second half of the movie in English. It was still non-sensical and ridiculous. If anything, comprehending the dialogue only served to increase the ridiculousness.

I also caught Alpha Dog earlier in the week. Decently acceptable fare. As much as I wanted it to end positively, I sort of knew it could only end one way since it's based on true events.

Monday, June 07, 2010

deepwater behavior

(I really haven't said what I want to fully say with this post, but I believe my message is still here.)

This is where I am going to come back to Occidental (Oxy) which I mentioned in my last post. As Anonymous commenter noted, they were the operator of the Piper Alpha, which was destroyed in an explosion and fire that claimed 167 lives in 1988 and is still the deadliest offshore oilfield accident to ever occur. You will generally not work in the industry for very long before you see some video or presentation related to the Piper Alpha and what it has meant to the safety culture of the industry.

Oxy still operates today. In fact, they have been quite successful and as I discussed the concept of super-majors yesterday, Oxy is now approaching the size of ConocoPhillips in terms of market capitalization. In terms of surviving, they have done a remarkable job of making it through the proverbial storm. I am not at all surprised that the company pulled through in part because of their key difference from BP that we discussed yesterday. They are not an integrated oil company and instead only operate in the upstream portion of the sector. There was certainly public outcry over the lives lost on Piper Alpha and there was some executive house-cleaning, but as a corporate entity, Oxy had far less to manage on the public front than BP does today. The changing media landscape has also meant increased scrutiny today that existed 22 years ago. Furthermore, as horrible as Piper Alpha was, it was a single event, with the platform going down in hours and not something that the general public had a chance to witness slowly unfold. All these factors worked to Oxy’s advantage while they are absolutely crushing BP right now.

One of the many things about the industry that is different today than in the Piper Alpha days is the approach to HSE (health, safety, and environment). The changes didn’t necessarily come quickly, but the approach today is significantly more proactive and process oriented. Basic safety is things like guard rails and warning signs. Another step up is process improvements. Beyond that is reporting of risks from employees. With each change, there is more structure and expectation for both management and employees in approaching safety. However, there is still a great safety gulf to close.

I am of the opinion that in terms of process, procedure, training, etc we have made significant progress in terms of safety in its current form. The last great gulf is the one that seems to be part of the failures that led to the loss of Deepwater Horizon. That gulf is behavioral. Process alone cannot change the way people think, act, and do. Process and procedure did not fail Deepwater Horizon. From what I have read, there is at least one, but probably more, instance where a decision was made that was directly contrary to the procedures that should have been followed. The system did not fail per se. People failed. This is a basic behavioral failure. For whatever reason or motivation, someone (or several someones) made a decision that on some level they almost certainly knew was wrong, but they did it anyway. While the stakes have clearly been shown to be incredibly high, this is something that almost everyone does at some point or another.

We make decisions that we know to be wrong. This is our human condition.

oilfield branding

For the so-called “super-majors” of the oil and gas industry, they are all really in two different businesses. There is the upstream side which focuses on exploration and drilling and extracting raw crude and gas from the ground. Then there is the downstream side which focuses on transport, refining and commercial retail sale of refined gasoline and other petroleum products. These two businesses are related in the sense that they both involve oil and gas and as such there are some overlapping technical and operational skill sets that can be employed. However, the two businesses are still rather separate. Their downstream units sell crude to any refinery that will accept it and their refinery business will purchase crude from any driller that extracts it from the ground.

There are six somewhat traditional super-majors: ExxonMobil, Shell, ChevronTexaco, Total, BP, and ConocoPhillips. However, it is arguable that if this being ranked be market capitalization, then ENI should also be included as they are almost as big as COP is now. While BP isn’t what they once were, but they’re not about to fall out of the super-six (barring some Michael Bay-esque hurricane of fire event this summer). COP has lagged for what seems like their ill-timed acquisitions, in particular their decision to acquire Burlington Natural Resources at the peak of the natural gas cycle in 2006. State-owned companies like Saudi Aramco are larger but they don’t qualify from a market perspective and neither do tradable but state-owned firms like PetroChina or Petrobras.

There are many companies in the oil and gas industry that only operate in one of the two business halves. Companies like Valero and Tesoro do not drill or contract rigs. They are just refiners and operators of gas stations. Companies like Occidental (Oxy) or BHP Billiton do not operate gas stations and to my knowledge are not involved in the refinery business. I could pick other drillers like any of the large natural-gas focused independents in the US like Chesapeake, EOG, Apache, Devon, XTO (now being bought by XOM), etc, but I want to work my way back to Oxy and BHP (in future posts).

For BP, they now have a branding problem. The most consumers can now do at this point is to not buy BP gas. However, they does very little to impact BP’s upstream division which is the side that was using Deepwater Horizon. While the cumulative effect will hurt BP and probably cause them to lose franchisees over time, the true business loss is not as significant as many might think. Initially, the protesting of BP stations will probably hurt the local franchise owners and managers who really make very little from the BP brand. Over time, it will reach the rest of BP, but that assumes a long and concerted effort on the part of generally lazy consumers.

BP can dig in their heels, stay together, and ride this out. Depending on public and governmental action, this could ultimately turn out to be an excellent buying opportunity of their stock if you can stomach the risk. Share prices are deeply depressed, but the core business is solid. The upteen-billion dollar question is how big will the bill be for the spill, clean-up, and years of lawsuits. Perhaps BP (and trial lawyers everywhere) should take solace in knowing that Exxon still has the Valdez case tied up in court. The dividend is still being paid despite presidential objections and it should be. (I am disappointed with Obama’s hypocrisy of calling out BP over paying the dividend while saying nothing when the banksters who destabilized our financial system and kited billions from taxpayers continued to pay dividends).

Another possible tact for BP is to separate their upstream and downstream businesses. In the process, they should give the downstream business some friendly-sounding name like ‘PowerPlanet’ or something equally ridiculous. That is the side that sells the gasoline and the 10-40W oil. The upstream business could get a new name as well, but they have a less severe problem because they do not sell to end-use consumers. They have far fewer customers to deal with who might purchase their crude.

This is one of the advantages for the service side of the industry. They don’t sell to end-use consumers. And some of the service companies work to maintain as little publicity as possible in the general public and to generally be not very well known. There is little value in public awareness of your brand if the public does not buy your product. As long as people in the industry know what you do, that is what counts since those people are your customers.

BP can survive, but I believe the choice (or ability) is going to be determined by after-the-fact legislation.

Sunday, June 06, 2010

deepwater media

News sensationalism is so commonplace it basically inures me (and I assume many others) from properly appreciating the magnitude of certain events anymore. Nonetheless, the oil gushing into the Gulf as a result of the Deepwater Horizon accident is an environmental disaster, despite what Congressman Don Young seems to think.

In a certain sense, his claim that this is natural may be somewhat correct. But only in a certain sense, and only somewhat. Have natural events led to the introduction of significant quantities of oil into the environment before? Yes, that’s essentially true. And that’s about as close to correct that Young is going to get this time. This is an unnatural disaster. It will get better, but it will take time and it will be costly. Again, it will also get better on its own, but that introduces the question of how long people are willing to wait. After the dinosaur die-off 65 million years ago, things got better too!

For BP, this is most costly because this is a continuing problem. The longer this stays at the top of the news hour and on the front page, the more costly it becomes. Public sentiment gets worse, congressional pressure increases, investigations become both more numerous and drawn out, and more oil-covered formerly adorable animals make their way into plush toy form. Their refinery explosion five years ago has nothing on this accident. A single time event enters the news and now leaves the news very quickly. Sensationalism does occur, but the trade-off is brevity. Maybe it’s an internet era thing, as our nibbling on news seemingly decreases attention spans.

BP only wishes they could be out of the spotlight and tending to the spill containment on their own. Their strategies really wouldn’t change much if no one was watching since the technical aspects of the problem would not change. If anything, at this point, less scrutiny on the containment efforts might help. This is not to say there should not be much more scrutiny on how the accident occurred and what changes will be made to future operations, but only noting that applying too much pressure is not usually a recipe for success. So many ideas have been suggested and the vast majority of them are not practical, too time consuming, nonsensical, or just plain stupid that it has been a needless distraction from more practical suggestions. For now, BP hopes for a less scrutinized existence and in time they will recover (assuming no corporate death penalty). Just look where the Star Wars kid is today.

Saturday, June 05, 2010

service side liability

It has been interesting to see many news articles and editorials speculate on the potential liabilities of the service companies associated with the Deepwater Horizon. In particular, most of the articles discuss Transocean (rig), Cameron (blow-out preventer, aka: BOP), and Halliburton (cement). If you want an explanation on what each service company does and is responsible for, check out the infographics on the WSJ article I discussed in my last post. If that’s not enough, leave a question in the comments, though I’ll say that I think about one-third to one-half of my regular readership already received a pretty lengthy e-mail on the subject of cementing.

What has been most interesting is how many of the early articles seemed to be on a quest for blame beyond BP. There was much speculation about potential liability and responsibility of the service companies with little actual fact to back it up. Frankly, the relationship between service companies and oil and gas operators is somewhat strange and tortuous, but the liability is usually quite clear. Again, this is not meant to convey particular knowledge of the contract situation between BP and its service providers, but meant to explain what is common in the industry. Operators bear liability most of the time because they also reap the most rewards. Let’s put it this way. If a project/job/whatever goes well, the most a service company can expect to make is what was agreed upon in the contract. The least they should expect to make is nothing if they were late, didn’t deliver all items, had some service delivery failure, etc. The upside is limited and so is the downside. For the operators, their upside is much higher, meaning whatever they can extract from the ground. However, the cost of that upside, is that their potential downside is much greater.

Wednesday, June 02, 2010

deepwater risk and reward

From my favorite financial blog comes a very relevant post to some of the thinking I have doing related to the Deepwater Horizon. The comments section is interesting as lively though Ritholtz himself posts a rare non-immediate comment pushing back against those who claimed sufficient regulation was in place, not specifically related to Deepwater Horizon and the oil and gas industry, but in general about regulations and the many crises and failures we have seen in the last three or so years. In short, regulation so often fails because it is beholden to the very industry it is supposed to regulate. Ritholtz links to a previous post of his on the ineffectiveness of the SEC and how was rendered useless through what is essentially apathy.

As much as a I want to ponder the concept of "regulatory capture" as Ritholtz puts it, I really want to ponder how poorly we generally understand probability, risk, reward, consequence, and how singularly low probability events will invariably happen given enough time and/or frequency.

In general, we are not wired to intuitively grasp statistics. (I've always felt that Simpson's Paradox is a great example of how some basic statistics can be disbelieved by many). We love anecdotal evidence and what our own life experience has taught us, but so suspiciously view double-blind studies involving thousands of people. You've all heard someone mention a relation of some kind who smoked a pack a day and lived to be 90 or the moron celebrity whose child has autism that must have been caused by vaccinations. Whatever. Learn to accept a basic fact about existence: Life is statistical in nature.

We're drilling for oil a mile beneath the sea and then a few miles past that through the earth. Let's not pretend this doesn't involve extreme risk. The reward is very clear: oil and gas. Why we need the oil and gas is also very clear. What we should do to need less oil and gas is not as clear. As such, we keep drilling and we will continue to drill. Six-month moratoriums will not change the demand side of the equation. Formerly adorable, oil-soaked critters may cause people to stop buying gasoline at BP gas stations, but it will do little to change their actual consumptive habits. We're going to keep drilling for oil and gas because we need to continue. And we continue because, as a nation, we have not put together a viable plan on where our energy would otherwise come from.

The drilling carries risks and we can regulate the industry and do everything we can do control the risks, even strive to reach a point of regulatory non-capturedness. However, there will be another Deepwater Horizon. I don't say this because I want it to happen or think it's a good thing. I say it because failure is inevitable. If we do something often enough and for a long enough time, this must happen.

Tuesday, June 01, 2010

why you should never listen to ben stein

Ben Stein apparently does not properly understand how being a shareholder works. And while he may have been funny in Ferris Bueller's Day Off, it is yet another example of why you should not take financial advice from him.

down almost 8%

Hmm, so it was Congressional inquiries and option traders that bludgeoned the stock so far down today.

deepwater horizon and the media

There's no particular reason I have not discussed what I have seen and read about the Deepwater Horizon tragedy, and it is tragedy in many ways in terms of the lives of those lost, the environmental damage, and the economic damage to many industries. I have found it more interesting to see how the issues are relationships are being discussed in the media thus far. Additionally, it’s been hard to find time to write at length and really express myself without simultaneously discussing matters I have made it a general rule to not discuss (such as specifics about work).

As always, I will be deliberately vague about certain items since this is of course a topic related to work. Also, I might as well declare this very simply: I have no special knowledge beyond what has been in the press about what happened leading up to, during, and after the explosion on the Deepwater Horizon. I do not know anything particular about the well they were drilling or the techniques being used beyond what has been in the press. Anything I write on about what may have happened, I will frame it as a hypothetical or an option of the types of choices that were available.

At this point, it has been six weeks since the explosion that claimed 11 lives. In that time, there have been thousands of articles, blogs, interviews, op-ed pieces, and info-graphics on the tragedy. However, almost every article I have seen either misstates facts about the industry and/or incident or implies (presumably deliberately) some industry complicity with purposely causing the accident or a claim of unsubstantiated negligence that does not make sense. It is highly likely, based on testimony so far, that human factors played a role, but not necessarily to the degree or type that has always been portrayed in the media and that does not necessarily make it negligence.

A very basic example of this comes from a New York Times article that made this comment on the cost that “Evidence began emerging Wednesday [May 26] that BP officials may have had an incentive to proceed quickly." Well, of course they had an incentive to proceed quickly, but to say it took five weeks to find “evidence” of this implies that BP has been hiding this fact. This is a business where time and money have strong correlations, thus the faster you can complete a project, the less money you spend. I’m not sure what level of great investigative sleuthing it took to come up with the evidence the NYT found, but the implication that this is some sort of discovery is mildly sensationalist.

In a newspaper-supported blog (or I presume it to be since it’s on their website), a Los Angeles Times blogger begins with the implicating headline of “Gulf oil spill: The Halliburton connection.” What? Hey, let’s slap together silly headlines for all the sub-contractors associated with the project and phrase them to imply that Dick Cheney has been clubbing baby seals with nuclear warheads before drowning them in toxic waste from strip mines. Oh, fine, that was a bit much, but a more factual and functional headline would be: “Halliburton provided cementing services on Deepwater Horizon” because at least that’s factual and does not use the word ‘connection’ which is clearly being used to imply a negative relationship. You may take issue with my opinion on this as I am drawing a lot form six seemingly simple words and you’re welcome to disagree. However, given Halliburton’s reputation in the media, I see that headline as a deliberate attempt to imply something negative.

In reality, my bigger problem with the article is this gem of a line about how, "the giant energy services company, which was responsible for cementing the drill into place below the water.” It is very rare to cement an actual drill into place and that is not what they did on this well. Drills are for drilling and they are very expensive. You do not leave them in the well if it can be avoided. Plus, if it isn’t the last section of the well to drill, then you need to drill up the drill with yet another drill (which sounds like something straight from the Yo Dawg meme). It is presumably pretty obvious why that would be a problem.

One of the better articles I have read, complete with lots of mostly good graphics came from the Wall Street Journal. However, there are some basic problems I have with the article, including their assertion that “When workers poured in cement to seal the sides, that gas would have been pushed up the outside of the well." I suppose this statement is mostly correct, but my beef is with the use of the word poured. We do not pour cement. We pump cement. There is a difference. Pouring makes it sound like it just gets dumped it in and maybe it goes somewhere good. Cement is mixed, pumped, and placed with a great deal of purpose.

Perhaps my quibbles come from a perspective of someone who both greatly appreciates the finer points of language and communication (despite all evidence to the contrary in my writing) and I am merely picking on little, minor details. That is possible. However, every single article I have read has said at least one, but usually a few things that are not accurate or are misleading. This is not meant to take away from the severity of the events that have occurred and are continuing to unfold in the Gulf, but it is meant to point out that misinformation is easily and frequently disseminated by the media.