How To Plug The Oil Leak

[ScottA]

I'm not ready to belive a doomsday scenario yet but losing Florida and the gulf coast seems to be a real concern at this point. I've worked in industry long enough to know that accidents of this scale are usualy caused by bean counters. Someone needs to held accountable for the skimping on safety that obviously went on here.

[John Raabe]

Here's an interesting take on how the bean counters of the previous record holding oil disaster invented the 2008 financial crisis.

How The Exxon Valdez Disaster Destroyed The Economy 20 Years Later
JASON LINKINS - The Huffington Post

The Exxon Valdez disaster, which occurred on March 24, 1989, played a major role in the collapse of the economy some 19 years later. See, as Stein documented, after lengthy litigation, Exxon managed to get the amount of punitive compensatory damages reduced from the hoped-for $5 billion to a paltry $500 million. But, back when Exxon had reason to imagine it might actually have to part with the $5 billion, the oil giant needed to find a way to cover its hindquarters. Exxon found a savior in the form of J.P. Morgan & Co., who extended the beleaguered company a line of credit in the amount of $4.8 billion.

Of course, that put J.P. Morgan on the hook for any potential judgment against Exxon. So the bank went looking for a way to mitigate that risk. Its solution made history, which you can read about in a June 2009 piece from the New Yorker's John Lancaster, entitled "Outsmarted." Here's the relevant portion:

In late 1994, Blythe Masters, a member of the J. P. Morgan swaps team, pitched the idea of selling the credit risk to the European Bank of Reconstruction and Development. So, if Exxon defaulted, the E.B.R.D. would be on the hook for it--and, in return for taking on the risk, would receive a fee from J. P. Morgan. Exxon would get its credit line, and J. P. Morgan would get to honor its client relationship but also to keep its credit lines intact for sexier activities. The deal was so new that it didn't even have a name: eventually, the one settled on was "credit-default swap."


So far, so good for J. P. Morgan. But the deal had been laborious and time-consuming, and the bank wouldn't be able to make real money out of credit-default swaps until the process became streamlined and industrialized. The invention that allowed all this to happen was securitization. Traditionally, banking involves a case-by-case assessment of the risk of every loan, and it's hard to industrialize that process. What securitization did was bundle together a package of these loans, and then rely on safety in numbers and the law of averages: even if some loans did default, the others wouldn't, and would keep the stream of revenue going, thereby diffusing and minimizing the risk of default. So there would be two sources of revenue: one from the sale of the loans, and another from the steady flow of repayments. Then someone had the idea of dividing up the securities into different levels of risk--a technique called tranching--and selling them off accordingly, so that riskier tranches of debt would pay a higher rate of interest than safer ones. Bill Demchak, a "structured finance" star at J. P. Morgan, took the lead in creating bundles of credit-default swaps--insurance against default--and selling them to investors. The investors would get the streams of revenue, according to the risk-and-reward level they chose; the bank would get insurance against its loans, and fees for setting up the deal.

There was one final component to the J. P. Morgan team's invention. The team set up a kind of offshore shell company, called a Special Purpose Vehicle, to fulfill the role supplied by the European Bank for Reconstruction and Development in the first credit-default swap. The shell company would assume $9.7 billion of J. P. Morgan's risk (in this case, outstanding loans that the bank had made to some three hundred companies) and sell off that risk to investors, in the form of securities paying differing rates of interest. According to J. P. Morgan's calculations, the underlying loans were so safe that it needed to collect only seven hundred million dollars in order to cover the $9.7-billion debt. In 1997, the credit agency Moodys agreed, and a whole new era in banking dawned. J. P. Morgan had found a way to shift risk off its books while simultaneously generating income from that risk, and freeing up capital to lend elsewhere. It was magic. The only thing wrong with it was the name, BISTRO, for Broad Index Secured Trust Offering, which made the new rocket-science financial instrument sound like a place you went to for steak frites. The market came to prefer a different term: "synthetic collateralized debt obligations."

As Lancaster notes: "Inevitably, J. P. Morgan's innovation was taken up by more aggressive and less cautious banks." Oh, you don't say!

Mortgage-based versions of collateralized debt obligations were especially profitable. These C.D.O.s involved the techniques that the J. P. Morgan team had developed, but their underlying assets were pools of mortgages--many of them based on the most lucrative mortgages, the now notorious subprime loans, which paid higher than usual rates of interest. (These new instruments could be pretty exotic: some consisted of C.D.O.s of C.D.O.s, pools of pools of debt.) J. P. Morgan was wary of them, as it happens, because it didn't see how the risks were being engineered down to a safe level. But institutions like Citigroup, U.B.S., and Merrill Lynch plunged in.

Flash forward to 2008, and there's widespread systemic failure that shreds the employment market and sends huge sums of wealth straight to Money Heaven.

So, something you might want to say the next time you hear someone lament that holding BP to account might lead to people losing their jobs is, "Well, I'll see you in 20 years, then, chum, on the breadline!"

Truly, these oil spill disasters are the gift that keeps on boning you, just as hard as the dickens.

[ScottA]

Here we go. Nuke it.

http://www.youtube.com/watch?v=CpPNQoTlacU&feature=player_embedded#!

[kenhill]

I know people that work for BP. They are truly sick over this.  They have talented, bright employees.  It would be ashame for them to be punished. 

The culture of maintenance and safety starts at the top of the organization.  Those few people make millions of dollars a year to make investors money.  This is where the pain should be felt.

Unfortunately, I am an investor that wants to make money so I can retire and I want cheap energy.  Therefore, I am the enemy, too

[John Raabe]

That video of the underground nuke closing off a runaway gas pipe leak was quite interesting. I wonder where that was done?

The problems of BP are not good thing for the world economy - let alone its effects on the gulf economy. I hear that one of every seven tax dollars (pounds) the UK collects come from BP. The company has over 10k employees in the UK.

[ScottA]

I belive it was in the old USSR somewhere John.

[ScottA]

Leak estimate revised up to 2 million gallons a day...wtf? They started out saying 200,000...someone is full of it.

Fox news http://www.foxnews.com/us/2010/06/10/million-gallons-oil-flowing-day-researchers-say/

[glenn kangiser]

Gosh ---- who'da thunk.....

http://countryplans.com/smf/index.php?topic=8898.msg115773#msg115773

... of course I probably underestimated.... [ouch]

[ScottA]

I guess I missed that post. Sounds like you nailed it. Does this 120,000 psi number I'm hearing sound realistic?

[glenn kangiser]

At 5000 feet depth the sea water pressure to be overcome should be around 2200 psi.

At 18360 feet the water pressure of the ocean water is around 8078 psi.

I am not sure where they get the well pressure but probably from the instruments that were on the rig.

120,000 sounds way high to me, but obviously it is greatly over the weight of the sea water above.

Found it - extra zero there... 12000 which is agreeable with what I calc'ed out.... more than the bottom of the sea pressure.... by around 4000 psi - that should do it.

4) Even at best, the cement is in the upper depths of the well bore where the natural geologic rock structure is the loosest, weakest, most porous and fragile (hell some of it may effectively be silt). The oil and gas, which has a natural well pressure of 12,000 or so psi is going to erode and corrode through and around the cement and the porous well bore rock.

http://emptywheel.firedoglake.com/2010/06/07/senator-nelson-says-bp-well-integrity-may-be-blown/  (note - just a reference I found - I don't know anymore about this guy... )

[ScottA]

That sounds more realistic. Lots of oil people around here and ofcourse right now they are all experts on deep drilling. I've been hearing all sorts of crazy stuff. I'm impressed you came up with that flow rate for free. I'm sure the government paid alot of money for the several wrong flow rates they have had since this started. 

[glenn kangiser]

Hey, what can I say, Scott?....

I worked with my geologist (contract developing for me) on a lot of water wells and he taught me a lot about developing.  When he decided to jack his rates up and he cost me too much I was able to take over the job I had been hiring him to do.  I don't like to get myself in a position that allows anyone to hold me up by the short hair...

So I looked at the video... estimated the flow rate from it and cut it in half for the gas I saw coming through.  The bad thing is that in my opinion it could be more.  I was using a rather low estimate....

Perhaps they would be interested in sending me a check? [ouch]

I always assume that if a politician says it and that they may have investments personally in a corporation, that they will do what they can to feather their own nest.  I always assume that they are lying. 

[Phssthpok]

I heard they were going to put a giant wedding ring on the well head... that's a sure way to make it stop putting out!

[ScottA]

Latest BP spill video. It's much worse than anyone imagined. This is a must see.

http://www.youtube.com/watch?v=2AAa0gd7ClM

[bayview]

Latest BP spill video. It's much worse than anyone imagined. This is a must see.

http://www.youtube.com/watch?v=2AAa0gd7ClM

   That's just about right . . .

./

[Native_NM]

I'm not ready to belive a doomsday scenario yet but losing Florida and the gulf coast seems to be a real concern at this point. I've worked in industry long enough to know that accidents of this scale are usualy caused by bean counters. Someone needs to held accountable for the skimping on safety that obviously went on here.

You are confusing the bean counters with the MBA's!      Real bean counters just keep score.  MBA's are management and authorize "skimping".

Sincerely,

A former bean counter.  

[ScottA]

You are confusing the bean counters with the MBA's!       Real bean counters just keep score.  MBA's are management and authorize "skimping".

Sincerely,

A former bean counter. 

I supose you're right. In a company that large the bean counters wouldn't have much say so. My apologies to the bean counters.