Analyzing the risk of deep water rigs

NY Times:

In a remote reach of the Gulf of Mexico, nearly 200 miles from shore, a floating oil platform thrusts its tentacles deep into the ocean like a giant steel octopus.

The $3 billion rig, called Perdido, can pump oil from dozens of wells nearly two miles under the sea while simultaneously drilling new ones. It is part of a wave of ultra-deep platforms — all far more sophisticated than the rig that was used to drill the ill-fated BP well that blew up in April. These platforms have sprung up far from shore and have pushed the frontiers of technology in the gulf, a region that now accounts for a quarter of the nation’s oil output.

Major offshore accidents are not common. But whether through equipment failure or human error, the risks increase as the rigs get larger and more complicated.

Yet even as regulators investigate the causes of the Deepwater Horizon disaster, the broader dangers posed by the industry’s push into deeper waters have gone largely unscrutinized.

“Our ability to manage risks hasn’t caught up with our ability to explore and produce in deep water,” said Edward C. Chow, a former industry executive who is now a senior fellow at the Center for Strategic and International Studies. “The question now is, how are we going to protect against a blowout as well as all of the other associated risks offshore?”

Dangers do not directly increase with greater depth, according to experts like Mr. Chow. But they do rise as exploration and production rigs become more complex and more remote.

Perdido, for example, is more than a 20-hour supply boat journey from shore — far enough out that a major fire could burn out of control before assistance arrived. Hurricanes regularly batter the region with giant waves and winds exceeding 100 miles an hour. Underwater, both powerful currents and mudslides play havoc with delicate equipment and the pipelines that bring oil and gas back to shore.

The water temperature, which hovers at just above freezing at depths below 3,000 feet, can harden natural gas into crystallike structures called hydrates that can clog pipelines and other equipment. And because the wells are deeper than human divers can go, oil companies must rely on remote-controlled submarines to maintain their equipment or perform repairs.

Oil industry officials, while acknowledging the risks, say safety concerns are overblown.

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In contrast to the Deepwater Horizon, a floating rig that was focused on drilling new wells, the Perdido platform is a vast hub that can drill and pump oil from wells across 30 miles of ocean floor. Below it is a subsea cityscape of pumps, pipes, valves, manifolds, wellheads and blowout preventers — all painted a bright yellow so as to be visible to the floodlights of the remote-controlled submarines that maintain it.

Shell, in reducing the weight of the platform, which can produce up to 130,000 barrels of oil a day, is among the first companies to use a new technique: instead of pumping the drilled liquid to the platform and separating the oil, gas and water there, as is typically done, engineers installed new separation equipment directly on the sea floor. While that improves efficiency, the equipment is also more difficult to monitor and fix than if it were on the platform.

Thomas M. Leschine, a marine expert at the University of Washington, Seattle, said oil companies and regulators have become complacent about the growing risks of offshore drilling because accidents are so rare.

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I don't think that is a fair statement. Drilling for oil has always had an element of risk. In the early days, the risk was that you would hit a dry hole and the investment in the drilling would be lost. As our ability to find oil has increased, the risks have changed. The cost of an environmental disaster is greater than the cost of a dry hole. I think the management of the oil companies understand this risk and make it a top priority.

In some ways it is like leverage in the investment markets. If you buy a stock and it goes to zero that is the extent of your loss, but if you borrow money to buy that stock through the use of a margin account then you can lose more than you invested in the account, but you also stand to gain more if the investment pays off. Either way the company has to manage its risks.