BP's murky deep-water future

    Not only did the virtually impossible happen -- a blowout on the Gulf of Mexico seabed a mile down -- it happened to a top-notch oil team. BP's debacle is the U.S. oil industry's most serious setback, undercutting nearly 60 years of incremental progress in offshore drilling, and it could crimp future output from ultra-deep water, the source of an increasing share of America's -- and the world's -- oil production.

    "I know all the companies have big egos, and they think they can do best, but when they see something like this happening to this [BP] team, they have to be shaking their heads and wonder what the heck is going on -- this was pretty much an all-star team," says Gary Taylor, a senior writer for Platts Oilgram News, who has four decades of experience covering the industry.

    What will happen is a major industry review, both from within, and from the U.S. government.

    Output will come at a higher cost as regulations tighten and insurance rates go up, in addition to the significant adjustments the industry will take on its own as the reverberations spread.

    The unprecedented oil spill came less than one month after President Obama decided to open up offshore drilling in the Atlantic, from Virginia to mid-Florida and the Gulf of Mexico. But last Thursday, the Department of the Interior halted all permits for any new exploratory drilling in the outer continental shelf, pending the outcome of a 30-day investigation -- a report is due May 28 -- into the cause of the Deepwater Horizon spill.

    The U.S. gets more than a third of the oil it produces domestically from the Gulf of Mexico. Already 20% to 25% of this is from ultra-deepwater; and that share is rising as fields in shallower water decline in productivity.

    "We have milked the on-shore cow pretty hard in all major oil-producing basins of the world. It is the offshore really where the future is," says John Olson, a former industry analyst who is now managing director of an energy hedge fund, Houston Energy Partners.

How the spill will affect the industry's reputation

    Typically, operators over-engineer and build in redundant safety systems that are meant to prepare for a worst-case scenario. But in the real world, three BP (BP) systems designed to shut the well-head off on the Deepwater Horizon rig failed.

    The media raised the suspicion that the oil industry has begun to inappropriately cut corners, but insiders say the industry has a frontline stake in maintaining safety standards.

    "There is a natural compulsion, that has nothing to do with regulation, to be careful," says Bob Tippee, editor of Oil & Gas Journal. "People in the industry, better than anyone, know the dangers. They are trained to know that; that's what all their education is about. They are putting their lives on the line."

    While the jury is out on whether BP was negligent in this case, its reputation seems bound to deteriorate after already being seriously dented by the 16 deaths from its Texas City refinery explosion in 2005 and by the Prudhoe Bay pipeline leak in 2006.

    Much rides on how quickly the company can staunch the flow of crude into the Gulf waters and how much damage the released crude does to the fishing and tourism industries. Initial efforts to cap the well failed, but the company continues to try. "My hat's off to them if they can make that work because they are taking a page out of Star Trek there with this thing," says Taylor.