Our Analysis of BP's Bly Report

We're not convinced that BP's findings will successfully shift some blame on to the services contractors

Stephen Ellis 13 September, 2010 | 9:47AM
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We think three of the most important issues raised in the Bly Report are the extended focus on Halliburton's cement job, the incorrect acceptance of the negative-pressure test, and BP's defence of its heavily criticised long string well design. First, the extended focus by BP on the cement design in the report seems to indicate that BP views the cement job as the root cause of the blowout. Halliburton has noted that it believes the report contains substantial inaccuracies. That said, the BP investigation and Halliburton's lab test results indicated that the cement slurry tested at 12.98% foam quality, versus the 18%-19% foam quality specified to meet the well requirements. The lower foam quality meant the cement was likely unstable, which could have let hydrocarbons into the wellbore. This is one component of a complex cement job, and it appears that Halliburton and BP managers focused on other important aspects of the cement design, and conducted only limited testing on the cement slurry prior to placing it in the well. Deciding how important this foam quality factor was in causing the blowout will be critical to determining the root cause of the blowout: Was it the cement job or BP's long string well design? Ultimately, we think BP's acceptance of the questionable cement job places the responsibility on its shoulders.

Other areas of the cement job were also problematic, but BP minimised their roles in the report. For instance, the BP well team incorrectly thought that 15 additional centralisers were not suited for the well, when in reality, they would have worked fine. BP states that the additional centralisers wouldn't have had an impact on the ultimate outcome of the cement job. However, Halliburton's model specified that the centralisers would have reduced the risk of severe gas flows. Finally, the BP well team decided not to run a cement evaluation log, which appears to be in violation of BP's own well policies. This critical test, which would have been performed by Schlumberger, may have pointed to issues with the cement that could have been addressed prior to the blowout.

The second issue is the incorrect acceptance of the negative-pressure test. It appears that a nonstandard spacer mix provided by MI-SWACO may have made the interpretation of the test result more complicated. That said, Transocean rig workers interpreted a 1,400 psi pressure abnormality as evidence of a phenomenon referred to as annular compression, or bladder effect. After further discussion, the BP managers accepted the negative-pressure result. However, the biggest problem with interpreting the negative-pressure test is that there are no detailed industry guidelines on what a successful test result actually is, which means the interpretation and acceptance of the test rests solely on BP's rig leaders.

The third issue is BP's defence of its long string well design. BP cited data that indicated 57% of wells drilled in the area surrounding Macondo were long string, and only 36% used liners or liners with tiebacks. BP's use of the data is questionable, in our view. The Gulf of Mexico data was from 113 wells, and included 35 from BP, which used the long string design in more than 80% of its wells. If we exclude BP from the data, 52% (41/78) of the remaining wells were liners, liners with tiebacks, or long string with liners, and only 36% (28/78) of the wells used the long string design. Therefore, we think industrywide acceptance of the long string design is actually much lower than what BP presented in the report. We believe the well data actually indicate that BP takes a more aggressive approach to deep-water drilling than that of its peers. Overall, we believe BP has conducted a deep and thorough investigation of the Horizon blowout, which is to be commended. Still, after a careful read, we're not convinced that BP's findings will successfully shift some blame on to the services contractors, which appeared to us to be BP's intention.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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