The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

David R. Kotok
Chairman and Chief Investment Officer
Oil Slickonomics – Part 8– Chemotherapy in the Gulf of Mexico
June 20, 2010

>

>

“Plaquemines Parish President Billy Nungesser was out on Terrebone Bay at the break of dawn with his new industrial strength, compressed air-powered vac. Within 15 minutes, he said his crews had collected 55 gallons of oil and Nungesser — vocally frustrated by the response from BP and the federal government — was thinking about whipping out his credit card to pay for more pumps from an online site.”

Meanwhile, the BP president, “After being lambasted in Congress on Thursday … was spending the weekend with his family in Britain’s Isle of Wight. “On Saturday — Day 61 of the oil disaster – Tony Hayward was watching his yacht, a Farr 52 named Bob, compete at the J.P. Morgan Assessment Management Round the Island Race.” Source: CNN, June 19, 2010

>

Let’s be blunt. Only one of three presidents “gets it.” That one is Billy.

President Tony continues to demonstrate that he doesn’t get it. His congressional testimony proved it. We wonder how much prep help he got from his fellow BP board member and former US Senator Tom Daschle. Reminder: Daschle was a prospective President Obama appointee, whose name was withdrawn after financial revelations killed his nomination. Daschle is the former US Senate leader of his, and Obama’s, political party.

UPDATE: In our earlier comments related to BP we wrongly identified Former Senator Tom Daschle as a member of the BP board.  That information is incorrect.   He is not listed as board member according to the BP website reviewed this afternoon.  We apologize to Mr. Daschle for our error.

The third president is now in deep trouble. Our national leader faces huge and growing disapproval and repudiation by his core constituency. “Whose ass to kick” was supposed to be a demonstration of toughness. It backfired. Harvard lawyer and Chicago politician Obama is a skilled orator and chooses every word carefully. This phrase was selected by him to convey some type of forceful political nuance. It failed because it showed Obama out-of-character and therefore suggested that he is a politician first and leader second.

The timeline of events starting with April 20 shows that the White House and the Obama administration had conflicting contingency plans and were disorganized. On April 22, the day the rig sank, President Obama, Homeland Security Secretary Napolitano, Interior Secretary Salazar and others did not know there was a leak. They were in an emergency meeting together in the Oval Office and were operating without good information. That is understandable. What is not comprehensible is why it took them so long to realize the seriousness of their ignorance.

It took Coast Guard Admiral Allen to wake them up. On April 24, Obama’s staff was told there was a meaningful spill. On April 28, the White House finally accepted that it was big.

The president made his first trip to the Gulf a week later and two weeks after the rig explosion. And he did not immediately activate sufficient federal resources to the level we now know was needed even when briefed by Admiral Allen and Governor Jindal. That is why Obama is being compared to George Bush and Katrina when the public evaluates the response to crisis.

Sorry, Mr. President. You failed us at the beginning. You were ill prepared. You announced expansion of offshore drilling because of politics and, we now know that, you hadn’t considered increased research funding for NOAA and for the preventive measures we now know are necessary. You formed no commission of experts to study it. You failed to heed warnings. And we now know that your administration’s Mineral Management Service was a mess.

And we also know that your present moratorium structure is improperly conceived, politically driven and lacks petroleum engineering professional skills. We also know that your present moratorium plan was discussed in Washington last week with Gulf folks who traveled to our nation’s capitol. They returned home convinced that Washington is likely to do huge damage to the US by the way you are shutting down existing and non-BP activity. Your moratorium doesn’t make us safer. It will make the US dependent on foreign sources for oil to the tune of another 2 million barrels a day as it shuts down the Gulf and if it causes the Alaska pipeline to cease operations for insufficient throughput.

The list of bungling is extensive, Mr. President. When looking for asses to kick, you might want to start with the mirror. But first help me explain the use of this language to my four year old granddaughter after she sees her president demean himself and his office on national television.

Let’s get to some very real economic reality.

Five states are now suffering because of the BP spill. Florida, Alabama, Louisiana, and Mississippi are hit by oil slicks that are devastating their fisheries and tourism. Texas is a casualty along with the others because the drilling moratorium that was poorly designed by Obama’s team was created out of a political response.

The moratorium payback will be the loss of thousands of jobs.

We now add the Alaska pipeline as a possible casualty, because of insufficient throughput due to the shutdown of existing drilling thousands of miles from the Gulf. The pipeline is built for 2 million barrels a day capacity. It currently carries about 700,000 which is near the minimum necessary to operate. It is supplied by oil drilled offshore. If it doesn’t maintain sufficient volume of warm oil the oil will cool and congeal. Five existing offshore wells that would keep the volume sufficient are now affected by the Obama moratorium.

We estimate that an extended moratorium, which we now expect to continue because of Obama political calculus, will cost up to 200,000 higher-paying jobs in the oil drilling and oil service business and that the employment multiplier of 4.7 will put the total job loss at nearly 1 million permanent employment shrinkage occurring over the next few years. Five states have a regional recession/depression development underway. Alaska could become the sixth state on the damaged list.

Readers may note that for the Gulf region, they can watch the Beige Books of the Atlanta and Dallas Federal Reserve Banks for economic details over the next several months.

And we must not be deceived by the $20 billion fund. It is not nearly enough to cover the liabilities that may develop for BP and its partners, who are already in dispute with each other over who is going to pay for what and when and how much. Remember at $4300 fine for each leaked barrel of oil, the $20 billion is likely to just cover the fine. We expect that the total cleanup and payment of the liabilities to all injured parties in all five states may approach 5 times that amount.

Let’s get to dispersants.

The United States has approved and is supervising the administration of chemotherapy to the Gulf of Mexico. I have personally watched chemo too many times. It attempts to restrain the fast-growing cells by doing more damage to them than it does to the healthy cells, in a desperate attempt to keep the patient alive. There are many warnings in chemotherapy about longer-term damage and about unknowns. They are accepted because chemo for a cancer victim is viewed as a life or death option.

Dispersants in the GOM are similarly problematic. Think of them as chemotherapy to a 2000 mile coastline and to hundreds of square miles of sea.

Use them sparingly and on the surface and we have a pretty good idea what will happen – they seem to accelerate evaporation and natural processes that get rid of the oil.

Use them below the surface, however, and we have little experience and simply do not know what the longer-term effects will be. Oil on the sea floor is a naturally occurring phenomenon. There are natural processes that Mother Earth has to deal with it. Microbes eat it. And when it rises to the surface it is then broken down and evaporates. Yes, it’s toxic, and, yes, it does do damage.

Dispersants are manmade; no Mother Nature involved in this one. They are toxic chemicals that can do damage themselves.

When they are used in very cold water and a mile below the surface, we simply do not know what the outcome will be. And we do not know if the small droplets they create become an emulsion that travels for hundreds or thousands of miles. There is initial, but inconclusive, evidence that this is happening in the GOM. We will soon find out. I fear it will be the hard way.

The rest of this commentary consists of quotes from the Obama Administration’s Environmental Protection Agency and other sources. They were extracted from public documents.

During the GIC meetings in Europe last week there were several discussions on the impacts of the GOM events. We owe great thanks to Jim Lucier for sharing his insight. His database on this subject is enormous.

The quotes follow. They are sequenced and lead to the issue of the use of Corexit. Remember, about 5 million liters of dispersants, mostly Corexit, have been used in the GOM in the last two months. About one-third of that has been at the wellhead, 5000 feet below the surface, in very cold, very high-pressure water. There are numerous reports of deeper-water oil plumes that are sufficiently subsurface to avoid easy measurement and detection. We will leave the rest of this to each reader to consider for her/himself.

As you read these extracts, please note that the UK has now banned Corexit. British oil comes from the cold and deep water off its coast.

First quote: “The EPA and the U.S. Coast Guard have authorized BP to use dispersants underwater, at the source of the Deepwater Horizon leak. Preliminary testing results indicate that subsurface use of the dispersant is effective at reducing the amount of oil from reaching the surface – and can do so with the use of less dispersant than is needed when the oil does reach the surface. While BP pursues the use of subsurface dispersants, the federal government will require regular analysis of its effectiveness and impact on the environment, water and air quality, and human health through a rigorous monitoring program.” Source: US Environmental Protection Agency (EPA) website: www.epa.gov

Second quote: “On May 26th, EPA and the Coast Guard issued a directive to BP requiring them to decrease overall volume of dispersant by 75 percent and to cease use of dispersant on the surface of the water altogether unless provided prior written authorization from the Coast Guard. EPA continues to allow BP to use undersea dispersant but only at a maximum of 15,000 gallons per day.”

Third quote: “BP’s scientific analysis of alternative dispersants, in response to EPA’s May 20th Directive, was found insufficient by both EPA and the U.S. Coast Guard. Therefore, EPA and other government scientists are independently verifying the alternative dispersant data presented by BP and will be performing independent scientific verification of the data BP presented. EPA is conducting its own tests to determine the least toxic, most effective dispersant available in the volumes necessary for a crisis of this magnitude and to understand if Corexit remains the most appropriate dispersant, as supported by the science for this situation.”

Fourth quote: “EPA listed the components of Corexit 9500 and 9527 — the two brands that BP has deployed to prevent oil from reaching shore. More than 1 million gallons of the chemicals have been used so far in response to the ongoing Gulf spill, including 317,000 gallons injected directly into the leaking well nearly a mile below the water’s surface — a first-time application EPA authorized last month. Among the chemicals in the Corexit brands are 1,2-Propanediol; Ethanol, 2-butoxy-; Butanedioic acid, 2-sulfo-, 1,4-bis(2-ethylhexyl) ester, sodium salt (1:1); Sorbitan, mono-(9Z)-9-octadecenoate; Sorbitan, mono-(9Z)-9-octadecenoate, poly(oxy-1,2-ethanediyl) derivs.; Sorbitan, tri-(9Z)-9-octadecenoate, poly(oxy-1,2-ethanediyl) derivs; 2-Propanol, 1-(2-butoxy-1-methylethoxy)-; and Distillates (petroleum), hydrotreated light.” Source: INSIDEEPA.COM, June 19, 2010

Fifth quote: “People working with dispersants are strongly advised to use a half face filter mask or an air-supplied breathing apparatus to protect their noses, throats, and lungs, and they should wear nitrile or PVC gloves, coveralls, boots, and chemical splash goggles to keep dispersants off skin and out of their eyes.” Source: EPA

Sixth quote: “The harm or toxicity of dispersed oil in the environment is generally associated with the oil rather than with the dispersant alone. However, use of dispersants breaks up a slick of oil on the surface into smaller droplets that can go beneath the surface. When applied on the surface before spills reach the coastline, dispersants will potentially decrease exposure for surface-dwelling organisms (such as sea birds) and intertidal species (such as mangroves and salt marshes), while increasing exposure to a smaller population of aquatic life found deeper in the water. It is unknown if dispersed oil has toxic implications to the human population because bioaccumulation through the food chain has not been evaluated.” Source: EPA

Seventh quote: “We are currently unaware of published scientific information in the peer reviewed literature about the biodegradation of the dispersant itself. We do have information about the individual components (ingredients) of the dispersant, provided by the manufacturer’s Material Safety Data Sheets (MSDS).” Source: EPA

Eighth quote: “While dispersants have been used in previous oil spills, this is the largest application of dispersants at an oil spill response in the United States.” Source: EPA

Lastly, NOAA says that this spill seems to remain confined in the GOM for the time being. Here is the latest report (June 18):

“Recent satellite imagery analysis no longer shows the persistent patches of sheen to the S-SE of the main slick. However, non-recoverable sheens and tar balls previously observed in these regions may have been entrained into the large clockwise eddy (Eddy Franklin) that has pinched off the main Loop Current (LC). Trajectories indicate that most of these sheens will continue to move clockwise in Eddy Franklin. The connection between the spill source and Eddy Franklin has been cut off due to a change in the currents. The oil will biodegrade and photo-oxidize over the time frame of weeks to months. No recoverable oil is expected to enter the Florida current over the next 72 hours. The Loop Current is an area of warm water that comes up from the Caribbean, flowing past the Yucatan Peninsula and into the Gulf of Mexico. It generally curves east across the Gulf and then flows south parallel to the west Florida coast. An eddy is water that rotates.”

Remember: this NOAA analysis is derived from surface observations. There is no mention of subsurface movements or plumes. NOAA is now continually researching this issue of subsurface toxicity.

~~~
David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com