[BITList] .More on the Horizon debacle!!!

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Whiskey & Gunpowder

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*Gary**'s Note:* The U.S. hopes of staving off the ravages of peak oil 
are bleeding away in the Gulf of Mexico at about 5,000 barrels per day. 
It won't be long before you see the effect of this at the pump and on 
just about everything else you buy. Byron King was just on /Transocean's 
Discoverer Inspiration/ deepwater vessel and he knows how important 
deepwater drilling will remain. And he knows what you need to do right 
now to make sure you're properly positioned for the coming higher energy 
prices. If you pay attention, you'll see that at the end he gives a 
rare, *_free_* investment tip...

*Whiskey & Gunpowder**
*By Byron King and Gary Gibson**
May 21, 2010
Pittsburgh, Pennsylvania, U.S.A.

*
*Byron King on the Deepwater Disaster**


*Gary Gibson:* Byron, can you start off by telling /Whiskey/ readers a 
little about why we're searching for deep sea oil in the first place? I 
mean, we know about peak oil already. But... is it really THAT bad that 
we're having to search for oil buried beneath 12,000 feet of water? And 
after the water, another 10,000 feet of dense rock? That's a lot of risk 
to take. Seems to be proof for the end of cheap oil theory, right?

*Byron King:* Exactly. The days of drilling a hole beneath the soil in 
Texas, inserting a pipe and watching oil gush out are gone. We're never 
going back to those days.

It gets into what we're dealing with here in the search for deep sea 
oil... The energy industry has to go deeper and deeper to make things 
work. Risking more and more capital -- and unfortunately, lives -- along 
the way.

Look at what we've seen in the last 20 years or so, since 1990, when the 
oil industry really started to go deep. There was something like an 
"arms race" to develop better and better deepwater technology, to go for 
the next levels down. We've seen this race to deeper and deeper water. 
And it's all because the so called "cheap oil" is gone.

It used to be that drilling at 1,000 feet water depth was the edge of 
technology! You know, back then in the early 1990s it was 1,500 feet, 
then it was 2,500 feet, then it was 5,000 feet...7,500, 10,000. Now 
they're drilling at 12,000 feet of water.

It's doable. But it's mind-blowing as well. I mean, 12,000 feet of water 
is where the Titanic sits. That's how deep that water is. Let me stress: 
12,000 feet is really deep water. So in 20 years, we're gone from 1,000 
to 12,000 feet: huge, huge technological leap. And the only thing that 
lets you do that is technology.

In the same sense you have a much, much better computer today than you 
did in 1990, you have much better offshore drilling equipment today than 
you did in 1990. You have bigger, better rigs. You have more powerful 
rigs. You have far better positioning, far better station keeping. You 
got much stronger steel. You've got better pipe. The way they do these 
risers is just astonishing. Risers are not just pieces of steel pipe. 
These risers are an entire, complex mechanical and hydraulic system that 
connects the drill ship on the surface with the workings on the sea 
floor 2 miles down. These things are incredible specimens of engineering.

Keeping with the risers, they're wrapped in this stuff called syntactic 
foam. THis foam is super high-tech stuff. It keeps the risers buoyant. 
So you have riser sections that, in the air, weigh many, many tons. But 
in the water, it's essentially buoyant. You can push the risers around 
with a little remote operating vehicle with a couple of little 
propellers on the back of it. So this stuff is really astonishing.

*Gary**:* OK, so all this new technology is needed. The risks seem 
great. They obviously wouldn't be doing this if the reward of finding 
new oil wasn't great. But with the recent disaster in the gulf, the 
question on everyone's mind is... what happens when that technology 
fails? So can you shine a little more light on the disaster itself. 
Starting maybe with all the players involved? I know you've recommended 
a lot of these deep-sea oil companies in your paid /Outstanding 
Investments/ newsletter...

*Byron:* I'll tell you more about what I'm telling /Outstanding 
Investments/ readers in a second. But first, lets talk about the players...

Transocean owned the rig, and they were under contract with BP. In the 
world of offshore drilling, the leaseholder or the operator -- in this 
case, BP -- really is driving the bus. It's like chartering an airplane 
to go from here to there, but you have to file the flight plan and you 
have to work the airline to decide what is it that you want on the 
airplane. From the looks of it, Transocean was doing what the BP people 
wanted them to do. BP basically lost control of the well.

> From what I've seen and heard from the witnesses, BP was trying to make 
up for lost time, with a well that was behind schedule and over budget. 
During the drilling, the BP guidance was to put extra weight on the bit. 
OK, so they drilled faster. But then they wound up cracking and 
fracturing the rock on the way down, This made it more difficult to 
complete the well and cement it.

Ultimately, when the investigators recover all the data, the blowout 
preventer, examples of the down-hole pipe and cement... when they get it 
all torn apart and figure out what happened, there's going to be just a 
huge amount of human error in there.

So right now, when they say "Oh, you know, this piece of equipment 
failed or this piece of technology didn't work or whatever", that's just 
not the whole story.

Sure maybe some piece of equipment failed or the technology didn't work, 
but that's because there was some sort of human control or human 
intervention or human oversight that let things progress from one bad 
situation to another bad situation. And from bad to worse to the 
absolute worst. That's what we're seeing.

Again, though, it's because offshore development is the future of oil. 
The oil industry wouldn't be taking these risks if cheap oil was still 
with us. We're just starting to scratch the surface of this deep-sea 
stuff. The cheap stuff's gone. Gotta go offshore...

*Gary**:* Right. So there's BP and Transocean. Who else is involved...? 
Or, said a different way, what other technologies are needed?

*Byron:* Well, then there are the blowout preventers. And in the 
particular case of the gulf disaster, it was a Cameron product...

And you know, Cameron builds good blow out preventers. They *invented* 
the blow out preventer. There would be no blow out preventers if it 
weren't for a guy named Mr. Cameron. And so they know what they're doing.

But the thing to keep in mind is that now you're taking this onshore 
blowout technology, and adapting it to the oceanic environment, and more 
recently, to do it in a deep water environment. So you've got these blow 
out preventers working under miles of water.

Now what happens with the blowout preventers is that when somebody 
builds a deep-water rig or a deep-water drilling vessel, they usually 
buy two blow out preventers, and they put them on the drilling ship or 
the vessel. And they install one of them when they're drilling the well. 
The other is a backup.

When they're finished drilling the well, the drilling people uninstall 
the blowout preventer and haul it back to the surface. One way or the 
other, these blowout preventers are on the ship or they're on the sea 
floor doing their thing. And when they're back on the ship, that's when 
people do maintenance on then.

Now what apparently we've seen over the years is Transocean working with 
its client, which in this case is BP, and making certain modifications 
to the blowout preventer. And that's troublesome to me. Not that they 
made the modifications; it's more the way that the modifications were 
made. It's the system under which people can modify these blow out 
preventers.

In this case, it got to the point where, when they went to try to shut 
off the blowout preventer in the first couple of days after the well 
blew, *the BP people were trying to do things that were physically 
impossible to do. That is, the drawings that they had for how the 
blowout preventer works weren't the same as the real blowout preventer 
down on the seafloor*.

*Gary**:* Yeah, more of the finger pointing was about the newer drawings 
and where they were and why they weren't available when they should have 
been. BP said a lot of time was wasted trying to operate blowout 
preventers on the ocean floor that didn't match the drawings they had. 
But whatever accusations BP and Transocean want to hurl back and forth, 
Cameron is looking pretty good. They built good blowout preventers, like 
you said, and they're not the ones who modified them or were trying to 
use them with plans that didn't contain the modifications.

*Byron:* It would be like an airline company buying a jet from Boeing, 
and then doing its own modifications to the airplane and not having FAA 
approval or not working with Boeing to record the modifications. And 
then the mechanics go to work on the aircraft, and it's kind of like, 
"Wait a minute! What we're finding here -- this isn't the Boeing spec 
and this isn't what left the factory."

Another analogy would be, you buy a car from Ford or General Motors, and 
then over the years, you swap out a different engine. You swap out the 
transmission. You put in different suspension. You do most of your own 
maintenance. You buy your own parts. And you drive that car really hard. 
And maybe you even drive it into the dirt. And then years later, you 
have a traffic accident -- you have a motor vehicle accident with that 
car. And now you're going to go back and sue Ford or General Motors. 
Well, that's kind of strange.

I guess that's a way of moving to Cameron as an investment idea. I mean, 
Cameron stock fell really hard in the couple of weeks after the Gulf of 
Mexico blow out. But I think Cameron is going to come out of this 
looking pretty good. They are not going to come out as blameworthy, 
because they didn't build a bad or defective product. The problem with 
the blowout preventer came long after this particular item left the 
Cameron factory. So I think Cameron has been way over sold in that.

*Gary**:* OK, we normally don't talk specific stock stuff in /Whiskey/, 
but since you brought it up, readers may like to know a little more 
about the opportunities...

So lets talk more about that for a second. You're saying Cameron's a 
good "value" play in that way? And you're not worried about Cameron at 
all? You're thinking they're going to come out of this looking 
absolutely fine and that people will pile back into it because they made 
a good profit?

*Byron:* I think that Cameron is going to come out of this looking a lot 
better than many people think right now. There will surely be a lot of 
emotional finger-pointing as the Gulf blowout progresses. But I think 
that when people point the finger of blame at Cameron, they're pointing 
the wrong finger at the wrong outfit.

*Gary**:* Right.

*Byron:* Really, it's so emotional that some people are pointing their 
middle finger at the companies involved. We need to keep in under 
control, and follow the facts.

*Gary**:* I mean, these guys, they invented the blow preventer. You said 
without them there would not even be this technology in the first place.

*Byron:* There are really only a couple of companies in the world that 
make these blow out preventers. One of them is Cameron, and another one 
is General Electric Oil and Gas, and those are the two I'd say largest 
suppliers. It's a very small industry. And there just aren't a lot of 
people, a lot of good companies out there building these items. And they 
are super high technology items.

Anybody who thinks that a blowout preventer is just a big steel valve 
with a couple of pistons and some pipes and a few knobs and levers and 
bells and whistles and stuff... Man, you don't understand what goes into 
these babies.

The steel that goes into these blowout preventers gets traced back to 
the iron ore in the mill. I mean, the, the quality is so, so high. And 
the engineering and the testing that goes into these things... All 
because they're intended not to fail.

But in this case, the blowout preventer appears to have not "failed," 
but not "worked as intended" because it was damaged in some way. There 
are claims that a rubber annular device was damaged several weeks before 
the blowout. And if that's true, that explains a lot to people who 
understand how these blowout preventers work.

But it doesn't make Cameron a bad idea for the /Outstanding Investments/ 
portfolio. Cameron is still a fantastic company to own. What's happened 
here is a tragedy, of course, but as far as good investments like 
Cameron, it just makes them cheaper for a little while.

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