There's not a lot of sympathy for BP's financial troubles right now, given the loss of human life, and the catastrophic environmental and economic costs resulting from the Deepwater Horizon explosion. But it's safe to say that BP is facing some catastrophic financial losses as well. Much of the media will focus on the company's cleanup costs; but even without the cleanup costs, BP is currently losing huge sums of money because the assets the rig was sent to find are literally floating away. There is the opportunity cost, in terms of lost drilling time to find new oil deposits, assuming another rig can't be found to continue operations. Finally there is the replacement cost, which will exceed the original cost of $350M. (It should be noted that BP didn't own Deepwater Horizon but was leasing it from Transocean.)
There's no shortage of finger-pointing right now, and this blog post does not purport to have any solutions or to blame any organization for the tragedy. Whether this tragedy was caused by human error or equipment failure is for the experts to determine. Rather, in this post I want to address the cost of equipment downtime.
For companies that rely on complex, capital equipment to generate revenue, it's critical to keep that equipment up and running. We don't have any definitive data points about the average cost of oil rig downtime, but it is undoubtedly high. Even before labor and maintenance costs, BP was leasing the rig for nearly $500,000 a day according to this source. Given BP's profits, the value of the oil extracted must be higher than that and the loss of this rig has put those assets in jeopardy. According to Bloomberg.com, "Transocean Ltd., the world's largest offshore oil driller, said the sinking of its Deepwater Horizon rig in the Gulf of Mexico will increase 2010 operating costs by $200 million and will cut revenue by $130 million."
Of course oil companies are concerned with rig maintenance and reliability; it makes economic sense to keep rigs running safely and efficiently. To do that, they need to keep comprehensive records of maintenance and repair operations, invest in preventive maintenance, and provide access to maintenance manuals and parts information.
A recent news article, however, suggests that oil companies might not be investing enough time into understanding or analyzing malfunctions because they are so intent on just getting the equipment back online:
"The 10-page 2003 report, delivered at the Offshore Technology Conference in Houston that year, suggests that the industry was so focused on drilling that it was willing to pay higher maintenance costs to keep rigs operating and avoid downtime rather than address some of the fundamental problems with the blowout preventers...
"Floating drilling rig downtime due to poor BOP (blowout preventer) reliability is a common and very costly issue confronting all offshore drilling contractors," the report said, adding that every major disruption could cost $1 million." ...
"The report said the reliability issues were directly related to the fact that drilling companies didn't have detailed design and functional specifications to give companies that manufactured blowout preventers...
"The preventers were being rushed into the field with limited testing, and if one malfunctioned, the pressure to keep drilling meant it was fixed with little time spent trying to figure out what had caused the malfunction...
"Because of the pressure on getting the equipment back to work, root cause analysis of the failures is generally not performed," the report said. "In many operations, high maintenance is accepted as a necessary evil to prevent downtime."
It just so happens that this week there was a major oil industry conference in Houston, the Offshore Technology Conference. Sponsored by a variety of household oil industry names such as ExxonMobil and BP, this conference is all about the science, nuts and bolts of offshore oil drilling (though its program now also addresses to a smaller degree alternative offshore energy sources such as geothermal and wind energy sources.)
The conference includes hundreds of technical presentations, many of which touch upon maintenance issues, but the vast majority of topics are on exploration and extraction. Here's the agenda. Not surprisingly, BP cancelled a presentation that it was supposed to deliver at the conference, on "The Challenges and Rewards in Operating in the World's Offshore Basins."
There are conferences that are solely dedicated to oil and gas equipment maintenance, and here are two I am aware of:
- Oil and Gas Maintenance Technology North America
- Middle East's Pipeline Rehabilitation & Maintenance Conference & Exhibition
Hopefully these conferences will shed light on methods of preventing future catastrophic rig failures, and improving maintenance. As the Deepwater Horizon shows us, the high-cost of downtime comes in many forms.
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