Destined to Repeat? Shell Oil runs Deepwater Horizon clone in the Gulf

Deepwater Horizon's Sister Rig, Shell's Nautilus

Deepwater Horizon's Sister Rig, Shell's Nautilus

Shell’s Deepwater Nautilus rig was built just a year after the Deepwater Horizon. It came from the same shipyard, drilling in the same Mississippi Canyon as the BP disaster. Hoirzon and Nautilus were both built in South Korea by Hyandai Heavy Industries (009540:Korea SE) for Transocean Ltd.(NYSE: RIG). Transocean currently has about 48 deep water rigs leased to companies like Chevron (NYSE: CVX), Shell (NYSE: RDS-B) and British Petroleum (NYSE: BP). Both the Nautilus and the Horizon are held to the same safety specifications with all the same features and using the same technology.

BP Oil Rig Listing after Hurricane Dennis

BP Oil Rig Listing after Hurricane Dennis

Just last March, Shell announced it had “struck black gold” just a few miles to the west of the BP site, with the Nautilus.

Credit to the BP disaster was given to a failure in the cementing process that seals the pipe and the drilled hole, or perhaps the ‘acoustic trigger’ remote shut off device that is required on rigs from Brazil and Norway, but is absent on both of the Transocean rigs. Since the Bush administration, the Department of Interior no longer requires acoustic triggers.

Halliburton/KBR is listed as the company in charge of the cementing for the Deepwater Horizon, currently, Transocean’s website lists “third party” as responsible for the Deepwater Nautilus’s cementing.

Even with these safety standards, drilling that deep is risky. So why are all the oil companies here in the Gulf?

Just four years ago, a small fleet of ships moved slowly through the gulf of Mexico. Every 17 seconds, they would fire air guns towards the bottom of the sea, which would vibrate violently against the rocks on the surface, sending back valuable data.

Lying below 10,000 feet of water, and through 5 miles of hard rock and thick salt, was the perhaps the largest untapped oil reserve in the world.

Putting the damage this kind of process does aside, the discovery was monumental. Lying below 10,000 feet of water, and through 5 miles of hard rock and thick salt, was the perhaps the largest untapped oil reserve in the world.

“It’s not a place for the timid,” said Paul K. Siegele, the vice president for deepwater exploration at Chevron, which commissioned a survey by the Neptune. “It’s a place where a lot of people have lost their shirts.”

The discovery set off a frenzy, with Chevron, BP, Shell Oil and many others rushing to the scene. Drilling costs have soared lately, with deepwater drilling it can cost as much as $800,000 a day, or up to $100 million a year. A large investment that might be better invested elsewhere, considering roughly only one in every 4 rigs actually strike oil.

The job has been plagued with disaster. In 2005, BP lost $250 million when a hurricane took out one of its platforms. Then there’s the actual drilling. The closer you get to the Earth’s core, the hotter the rocks. At 30,000 feet into the Earth’s crust, oil comes out at about 400 degrees Fahrenheit, as its piped up, it hits near-freezing cold water at the bottom of the ocean. Therefore the drilling pipes have to be very well insulated, and are often primitively pumped with anti-freeze. If the oil were to freeze, it could solidify and rupture the pipes.

Paul Siegele

Paul Siegele is excited about deepwater drilling prospects in the Gulf

At time of press, 33 different oil rigs are paused mid-operation in the Gulf. With Judge Martin Feldman, holding more than $15,000 in shares of Transocean, overturning the deepwater drilling freeze, all 33 of these rigs are poised to resume production, including the Shell’s Deepwater Nautilus.

“A decade ago, I never even dreamed we’d get here,” Siegele states. “And a decade from now, this moonscape could be populated with rigs as far as the eye can see.”

The Nautilus has already met with disaster, in September of 2005, Hurricane Rita knocked the rig of its anchor, setting it adrift at sea. If the rig had already struck oil, pipes would have ruptured, and we’d would have already been dealing with this crisis. Again, in 2004, Hurricane Ivan set the Nautilus adrift, later found some 70 miles from hits drilling location. Then Katrina hit, sending the rig drifting 80 miles from its mooring lines.

The fact of the matter remains, extracting oil 5 miles below the oceans floor, safely, is plain and simply, impossible. Hurricane season in the Atlantic this year is elected to have a higher than average number of storms. Any rig knocked off its moorings that has already struck oil, is set to join the Horizon in spewing unrefined crude straight our into ocean.

Oil company executives, however, dismiss this notion. Upon finally hitting oil with the Nautilis, David Lawrence, Shell’s executive VP remarks:

“This discovery builds on a successful 2009 exploration program in the Gulf of Mexico, where Shell had discoveries at West Boreas, Vito and Cardamom Deep … Shell has the technology, the expertise and a skilled, motivated workforce to expand oil and natural gas production in the US and worldwide.”

Paul Siegele, VP of Strategic Planning for Chevron Corporation marvels at how far we’ve come:

“A decade ago, I never even dreamed we’d get here,” Siegele states. “And a decade from now, this moonscape could be populated with rigs as far as the eye can see.”

Sadly, with attitudes like this, the question is not ‘if’ this type of disaster could occur again in the Gulf, but “when”.

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