Junk Shot

We are disabused of illusions unwillingly, suddenly, unexpectedly for the most part.

Since the end of World War II, it was widely believed that the United States was a self-evidently unchallengeable superpower. Now we're shocked to discover that it's a paper tiger, unable to strike at North Korea, no matter how egregious the provocation or loss of life, and barely able to pay for ongoing operations in Afghanistan and Iraq, because it's funded on borrowed money. America's credibility as a guarantor of peace and prosperity could collapse overnight, if there was a severe stock market crash, but truly we all saw it slip by degrees each year and each decade. The first Gulf War was funded by Germany, Japan, and Kuwait. Conquest of Iraq was funded by China.

No terrible collapse is causeless or unexpected. For example, Iran has outmaneuvered and dodged American sabre-rattling for thirty years. US power is a shallow puddle of inertia.

It's misleading and illusory that we're the biggest oaf in a room full of midgets and mendicants, clinging to each other for support in fear of truth. What possible good can be achieved by the US Federal Reserve worrying about the euro and actively intervening to maintain its value relative to the dollar? The dollar is a piece of paper. The underground economy of drug dealers and post-Soviet gangsters use Franklins. You'd think that the world would wake up eventually and face facts.

Sometimes it takes an explosion. That's exactly what happened at Macondo.

I was no better than anyone else, before April 20, guessing clairvoyantly that BP was a ticking time bomb about to explode in a ball of flame and sink itself morally and financially.

Worse -- I congratulated BP and lauded their ultradeep Thunder Horse project as an exemplary achievement, bringing in a billion barrel prize at reasonably cheap capex of $5 a barrel. I glossed over the fact that their Thunder Horse rig capsized and then discovered subsea corrosion that necessitated a major refit. Even my production reports were ridiculously foolish, taking a press release as fact. Now it's revealed that Thunder Horse was struggling to pump half of the volume predicted and probably never make payback. Nor is it the biggest black hole in BP's deepwater portfolio.

What happened at Macondo? In Congressional testimony, it was revealed that BP lied about the rate of oil leaking. They concealed the existence of underwater cameras. Their internal documents establish a calculated intent to deceive, because the rate of spilled oil determines how much BP will pay in Federal civil penalties, up to $4000 per barrrel, perhaps over $10 billion in total.

And there's a much worse deception that is going to be made public. BP ordered the Deepwater Horizon crew to ignore risk and pull up the riser pronto, to move the rig to another location. Blaming contractors is not going to work. There are too many survivor witnesses and too many documents to disguise who blew up Deepwater Horizon and why.

At the moment, market analysts and bullish investors say that BP is a great value play. Too much has been wiped off its market cap. BP's share price fell from $60 to $40. Even assuming the worst case, BP can drag its feet and dicker with appeals for 20 years like Exxon did after Valdez. Buy! Buy! Buy! They have enormous cash flow, huge profits, solid dividend yield.

Not in bankruptcy, which is a distinct possibility. Another felony conviction, this time for multiple manslaughter and obstruction of justice could financially damage BP far more than a collapse in crude price. Put both together in a global financial panic and it's far from certain that BP plc will survive. There has been some quiet speculation about a "white knight" takeover.

Obama's six-month moratorium on drilling in the Gulf of Mexico is hitting the service companies, too. Whatever we thought was big could be gone in a blink, throughout the oil industry, including rock solid Norway, which shut in a blowout last week and asked China to fund a new project.

I'm sorry to be so dismal. Part of my outlook was warped by watching the Joint Investigation MMS US Coast Guard hearings on a live link. Never again will I think highly of Transocean. The rig boss and senior toolpusher spent twelve hours playing pattycake with visiting BP dignitaries on the day Deepwater Horizon exploded. The man they left in charge of a bad well plan had a backwoods high school education and started his career at Transocean as a paint chipper. My eyes were opened all of a sudden to the term "oilfield trash," worn proudly as a badge of distiction among roughnecks, drillers, and toolpushers.

They exist everywhere in the world, from Cairo to Bangkok to Tulsa and Tunis. Their motto is: If You're Not Having Fun, You're Doing It Wrong. They work hard and play hard, drinking and whoring between hitches and hardhats. As one writer explained, oilfield trash are tolerated because there is enormous profit to be made, no matter what what goes wrong on or off the job: "The only thing that will force the oilfield trash out, and bring the oilfield to a highly technical and professional level, is jail time. And not just jail time for the grunts," he concluded. "Jail time for the executives who pushed hurry up! hurry up!"

It was BP's well design, BP's improvised workaround to plug lost circulation, BP's decision to ignore bad pressure tests and skip a cement bond test. It was easy to bluff and baffle the "oilfield trash" on deck. If you don't do what the Company Man tells you to do, you're out of a job, sonny.

Undoubtedly Petrobras feels better. The loss of their P-36 platform faded from collective memory, although it was just as bad as Macondo with 11 dead and a semisubmersible sunk. Australia's Montara blowout had a sloppy cement job, just like Macondo. Accidents happen overseas.

But something is fundamentally different when disaster strikes the Gulf of Mexico in US waters. It was the best rig in Transocean's fleet. They won awards for safety. BP was the premiere operator with a string of ultradeep discoveries and hand-on-heart corporate commitment to safety.

The world of High Tech Squeaky Clean America has been shocked into a dirty truth, that oil has never been clean or safe, that the men who were in charge at Macondo are appallingly uneducated and unsophisticated. And BP engineers look like fools, trying cofferdams and siphons that don't work, top kills that don't work, junk shots that don't work. Now they propose to piggyback another blowout preventer, which requires an open flowing riser stub and killing a relief well.

I'm with Matt Simmons, who believes Macondo suffered a subsurface blowout and is spewing oil into a shallower formation that reaches the seafloor miles away. BP is shooting junk in the wrong hole. God help us if the measure of BP's folly ultimately kills the entire US offshore industry.

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