The Economics Of Offshore Drilling

Determining who is financially responsible for the massive oil spill in the Gulf of Mexico is still confusing, more than a month after the initial explosion. Melissa Block talks to Peter Coy of Bloomberg BusinessWeek magazine about the financial agreements behind the oil drilling project.

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MELISSA BLOCK, host:

We're going to step back now to explore the economics of offshore drilling and we're going to focus specifically on the Deepwater Horizon before things went so terribly wrong. That rig was owned and operated by Transocean and leased by BP.

Peter Coy has been writing about this for Bloomberg Business Week magazine. He says BP takes on enormous costs when it chooses to drill a well, beginning with the rig itself.

Mr. PETER COY (Senior Writer, Bloomberg Business Week): You have to understand, this drilling rig is kind of like a boat. It can move under its own power from one place to another - or it could before it sank to the bottom of the Gulf of Mexico.

It would cost about half a million dollars a day for BP to rent that rig from Transocean. The total cost for BP for doing business there was about a million dollars a day. So you can see why any kind of overrun in time becomes very costly for them, give them incentive to try to stay on schedule as much as possible.

BLOCK: And we've now heard an engineer from the Minerals Management Service say that BP was behind schedule, in fact. They wanted to use that Deepwater rig to move on and drill another well. They would've had an incentive, presumably, to try to speed things up.

Mr. COY: Right. And it remains to be seen. There's certainly some evidence coming out now, people making accusations that they rushed the job. Yet, that's still unproven.

BLOCK: Before the Deepwater rig exploded, how much had BP spent on this exploratory well?

Mr. COY: Well, the first step, of course, is leasing the block where you're going to do the drilling. And BP spent in 2009, worldwide, about $4 billion in operating leases for exploring for oil. They're operating all over the place. This is like one small corner of the global empire. This particular one might've cost only single digit millions, maybe tens of millions of dollars to lease that space. And then the cost is the actual drilling.

What's really interesting to me is that they might never have gone back to this well. You know, they were in the process of cementing it over so they could move on to other places. What they do is usually after they do an exploratory well like this, they do so-called step-out wells, which is they go, like, a mile in different directions and see what the characteristics of the fields are like there. If it turns out that one of those step-out wells has better characteristics, they might produce from it.

BLOCK: The oil field in the Gulf that BP was tapping here is called the Macondo Field. What's known about those reserves, how much oil they hold and how much money BP could conceivably reap there?

Mr. COY: You know, you would think that we would know that by now, but in fact that was what they were in the process of trying to find out. All they could do is make wild guesses about how much oil a field holds. The irony here, of course, is that this turned out to be better probably than most people expected. It's like one of those good news, bad news stories.

The good news, of course, is that the oil field is very productive. You can tell that by the amount of oil that's spilling out into the Gulf of Mexico. And the bad news, of course, is exactly that, that it's out of control, it's been spewing oil and completely destroying the environment of the Gulf.

BLOCK: Peter, obviously a lot of attention right now on this one well. How important was this well to BP's overall operation?

Mr. COY: Well, it would not have been extremely important at all. I mean, it's a good well. It's a good one. And they would've been happy to have it. But you have to remember, this is a gigantic company. It's one of the so-called super majors. And any given well for a company as big as BP, Shell, ExxonMobil, doesn't really count for very much. This would've been one well out of one field out of one region of the world.

BLOCK: When you think about how much it's costing BP now to deal with this explosion and spill, put that in some perspective for us, how much is that eating into BP's profits?

Mr. COY: That's a good question. Actually, the cost to BP through May 24th the company estimated at $760 million. Now, just to put that into perspective, that comes to roughly $22 million a day. BP's average daily profit in 2009 was $45 million a day. So it's costing a lot of money. It's equal to about half of their daily profit. But that underestimates the total cost.

First of all, President Obama today announced that he wants to extend a moratorium on offshore drilling. That's bad for BP, it's bad for the entire oil industry. And then there's the damage to BP's reputation. That's really severe. Even aside from the direct financial cost, this is going to hurt the company in ways that we really can't even imagine now.

BLOCK: Peter Coy is a senior writer for Bloomberg Business Week magazine. Peter, thanks very much.

Mr. COY: Thank you.

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