Transocean's Rig Replacement Could Cost $700m

We wouldn't be surprised to see adjustments to industry safety practices following this accident

Stephen Ellis 22 April, 2010 | 5:18PM
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Transocean reported that its Deepwater Horizon rig caught fire Tuesday. The vast majority of the 126 crew aboard the rig are safe, but 11 workers are missing and several are critically injured. The rig was working for BP for a day rate of $450,000. Transocean doesn't know yet what caused the incident. The rig appears to be a near-total loss, which is unfortunate for the firm, as it is one of Transocean's most advanced and recently set a world record for drilling depth in the Gulf of Mexico. The cost to replace the rig will be in the $600 million-$700 million range, but insurance may cover part of the loss.

The incident, while dramatic, shows the always-present risks of accidents in the industry. We think the offshore drilling industry and Transocean have worked very hard in the past few years to improve safety practices and reduce the number of accidents. The focus on safety reduces the level of expensive rig downtime as well as the chances of an unfortunate accident. It also helps attract and retain employees who want to minimise their own personal risk while doing dangerous work. Transocean is one of the industry's most safety-conscious and experienced deep-water contractors. We do not anticipate any significant changes in the regulatory environment or fines as a result of the incident. However, we wouldn't be surprised to see adjustments to industry safety practices to reduce the chances of a similar accident occurring in the future.

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Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.