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Decisions by BP with procedures and materials seem to
be responsible for the huge environmental disaster in the Gulf of Mexico
says The Wall Street Journal.
According to the results of the Journal's investigation, the well was over budget,
so BP made decisions which seem to be related to the costs involved, leading
the Journal to conclude that "BP made choices over the course of the project
that rendered this well more vulnerable to the blowout, which unleashed a spew
of crude oil that engineers are struggling to stanch."
Chart Courtesy of StockCharts.com
The report goes on to say that "BP, for instance, cut short a procedure involving
drilling fluid that is designed to detect gas in the well and remove it before
it becomes a problem, according to documents belonging to BP and to the drilling
rig's owner and operator, Transocean Ltd" and that "BP also skipped a quality
test of the cement around the pipe—another buffer against gas—despite what BP
now says were signs of problems with the cement job and despite a warning from
cement contractor Halliburton Co."
Those decisions led to the current scenario as "Once gas was rising, the design
and procedures BP had chosen for the well likely gave this perilous gas an easier
path up and out, say well-control experts. There was little keeping the gas from
rushing up to the surface after workers, pushing to finish the job, removed a
critical safeguard, the heavy drilling fluid known as "mud." BP has admitted
a possible "fundamental mistake" in concluding that it was safe to proceed with
mud removal, according to a memo from two Congressmen released Tuesday night."
Making matters worse 'a BP manager overseeing final well tests apparently had
scant experience in deep-water drilling. He told investigators he was on the
rig to "learn about deep water," according to notes of an interview with him
seen by the Journal."
The participation of the Minerals and Management Services may have had some influence
on the outcome. According to The Journal: "Some of these decisions were approved
by the U.S. Interior Department's Minerals Management Service, which has come
under fire for what President Obama has called its "cozy relationship" with the
oil industry. But in at least one case, the decision made apparently diverged
from a plan MMS approved. MMS declined to comment."
That means that there are both buyers and sellers. And it’s important to consider
why each class of participant may be doing each particular thing. The sellers,
we suspect are those, at least partially, who are receiving margin calls. That
means that some hedge funds may have made some big bets and are now under water.
They have to pay their bills and are using liquid assets such as stocks to raise
capital. The buyers seem to think that we’ve reached that crucial “blood in the
streets” buying opportunity and are rushing in after sellers are starting to
look exhausted.
One technician who worked for a subcontractor, and who is suing BP and Transocean
told the Journal that BP seemed to be "in a hurry" pushing to finish the project.
BP acknowledged that they were over budget but "says it didn't cut corners" according
to The Journal.
The Journal, based on reviews of documents and other sources summarizes the timeline
as follows. BP had scheduled the well to be drilled in 78 days but was trying
to finish it in 51 days. The reality was that on the day of the explosion the
project was on its 80th day, and over budget. The conditions on the ocean floor,
such as "brittle" rock and other equipment malfunctions led to a complicated
set of circumstances which BP seemed to address and make appropriate adjustments,
although costs continued to climb.
According to the report: "by mid-April, the well seemed a qualified success.
BP was convinced it had found a lot of oil. Until engineers in Houston could
make plans to start pumping it out, the workers on the nearly complete well,
in a standard practice, would plug it and temporarily abandon it."
Then the major issues arose. Halliburton told BP to install 21 "centering devices," around
the well to plug it. The centering devices would guide the steel pipe required
to funnel cement into the pipe into proper alignment. BP decided to install 6
of the devices, against Halliburton's advice. According to The Journal: "In an
April 18 report to BP, Halliburton warned that if BP didn't use more centering
devices, the well would likely have "a SEVERE gas flow problem." Still, BP decided
to install fewer of the devices than Halliburton recommended—six instead of 21.
BP said it's still investigating how cementing was done. Halliburton said that
it followed BP's instructions, and that while some "were not consistent with
industry best practices," they were "within acceptable industry standards."
Conclusion
BP was in trouble from the beginning here. They had a well in a tough geographical
and geological region of the Gulf. They found oil, with some difficulty, but
thought that even though the project was over budget, it would be worth the trouble
eventually.
The problem seems to have come when it was time to plug the hole until real production
could start. It seems, based on the Journal report, that BP chose to try to save
money at the end of the project, perhaps the most crucial time of the whole episode.
And it made some significant judgment errors. The key here seems to be whether "acceptable
industry standards" are an adequate substitute for "industry best standards."
We are witnessing the dark side of what it takes to produce fuel to power cars,
heat homes, and light cities. It's clearly all about spot decisions, made in
remote areas of the world, with little supervision from anyone who has enough
power at the chain of command to make anyone do what seems to be the "best practice."
As with most disasters, it's all about human error, which is often derived from
the bane of humanity, self interest.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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The S & P
SPDR ETF (NYSE: SPY) looks poised to tackle a move above
its 200-day moving average.
Chart Courtesy of StockCharts.com
In yesterday's installment of this column, we noted that
the Short S & P 500 ETF (NYSE: SH) was looking as if
it was ready to reverse. After a 12% correction in the
market, the short side was clearly looking overdone.
The reverse is now worth considering, as the S & P 500 SPDR ETF (NYSE:SPY),
which tracks the S & P 500, rising and falling with the index, looks ready
to move above its 200-day moving average.
If SPY closes above 110 for a couple of days, it could signal that the market
has bottomed and that it's time to play the long side.
There is resistance above for SPY at 112.50 and 115, so those wishing to play
the long side here could use 110, 112.50, and 115 as places to partially enter
the market, depending on how the trend evolves.
Only one thing seems nearly certain, selling this market short, for today, at
least, seems dangerous.
One way to stay out of trouble is to use sell stops and to ratchet them up as
the ETF climbs in value.
Follow Dr. Duarte on Twitter |
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