MONTREAL -- One of the most disturbing issues concerning BP is that its CEO spoke initially about taking responsibility for a mere US$75 million in damages. This meant he had no idea of the seriousness of the situation, the scale of damage or his legal liability.
That mentality reveals non-existent risk management and may be why BP did not take extra precautions such as relief wells or back-up systems. If you think a problem will cost "only" US$75 million then why spend that much on precautions?
It appears as though BP will have to place its U.S. assets into bankruptcy protection against the wall of litigation and liability headed its way. The tab is US$140 billion and climbing. That doesn't include the financial damage it has caused to those with whom it shared a trillion-dollar sub-economy of drilling, fishing and tourism.
At the end of the day, BP's inept risk management sank the company. Had its management and board realized the magnitude of financial exposure to them should an accident occur they might have insisted on expensive, fail-safe, back-up systems. The same risk management mentality should have also applied to regulators in the region who, according to a disturbing report, appear to have left it all up to the oil companies and their suppliers. That aside, the ramifications of this gigantic risk management mishap are profound.
It's likely that BP's blow-out means that the approaching hurricane season may require the use of the world's strategic stockpiles of oil, said Nobuo Tanaka, executive director of the International Energy Agency.
"Hurricanes in the area may result in a supply disruption serious enough to have to mobilize stockpiles," he said in an interview at this week's International Economic Forum of the Americas.
The IEA has 28 country members which have stored a supply of 90 days' oil imports to draw upon during emergencies. These stocks were drawn down after the 1978 oil shock and during the Katrina Hurricane.
The Gulf of Mexico production represents 1.6 million barrels a day in total, which is 30% of all oil produced in the United States. The U.S. consumes about 19 million barrels a day and produces only 8.5 million daily.
Offshore drilling worldwide will face excessive regulation as well as insurance premium costs which could add $5 a barrel or more to costs and discourage marginal production. BP's financial disaster is frightening investors away from investments in oil companies or projects due to concern about environmental liabilities. This means supply problems down the road because trillions of dollars are needed to develop more supplies to feed growing economies.
"About 80% of current energy usage is fossil fuels and even with a very drastic change [to nuclear, alternatives and severe conservation measures] fossil fuels will still represent 68% of energy sources by 2030. And there is a huge investment required," he pointed out. Current world oil production is 86 million barrels a day, 37 million of which is by OPEC. The Gulf of Mexico, and Middle East instability, makes Alberta's oil sands the world's most important strategic sources of petroleum, said Tanaka.
"It is strategic because it is not OPEC. If oil from there can be produced sustainably it will be very important to the global energy market" he said. "The current oil price is high enough for the oil sands."
Increased investment by China and others has boosted oil sands production forecasts to 3.5 million barrels by 2025 bringing the total crude production to 4.34 million barrels a day, equivalent to Iran and Nigerian production levels.
Another "winner" is shale gas and Zim Smati, CEO of GDF Suez North America, (the world's largest electrical utility) said there is "enough shale gas in the U.S. to meet needs for 100 years."