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Time for a quick reality check

Published: Sept 2, 2009 3:34 p.m. ET


Commentary: BP's latest oil discovery is still a long way from the gas tank

SAN FRANCISCO (MarketWatch) -- BP's announcement Wednesday of a "giant" oil field deep beneath the Gulf of Mexico is the kind of story that raises all sorts of breathless expectations and dire predictions. See full story.

Time to take a deep breath and look at what we've got.

First of all, BP's BP, -0.43% discovery, dubbed the Tiber prospect, does not prove or disprove the "peak oil" theory. For all those out there who still believe the center of the earth is full of crude oil, they should revisit a basic textbook on geology.

Better still, they should talk to a petroleum geologist. One at BP, for example, might offer some valuable insights on how hard it is to find oil, even with all the amazing 3-D seismic and drilling technology now available.

As for those who believe this discovery will somehow meet the nation's energy requirements, a visit to the Energy Information Administration's Web site for a crash course in supply and demand might provide some useful perspective.

It's also worth remembering that BP and it partners don't yet know how much oil is down there. They have a pretty good hunch, but to get a better handle on it requires appraisal wells. Drilling down six miles from a rig bobbing around in the Gulf of Mexico takes months, costs many millions of dollars, and completion hinges on weather delays and the kind of rock encountered deep in the hole being drilled.

Some of those appraisal wells are probably going to come up dry. Those are called delineation wells and are part of the long, complicated process necessary before even beginning to stake out a strategy for how best to bring the oil to the surface.

Then there's the engineering that goes into designing and building a production platform, deepwater production manifolds, gathering and export pipelines, (etc., etc...).

In short, while BP is no doubt thrilled by its discovery and pleased with the 4% pop its shares are getting from the news, any hydrocarbons in the Tiber field are still a very long way from anyone's gas tank. Development of deepwater fields is enormously expensive, and oilfield economists still have a lot of forecasting and number-crunching ahead of them before they can say with any certainty whether the field is commercial.

Meanwhile, economic and political conditions back on the surface can change quickly and dramatically. Even the technology that makes oil so valuable could change. There are plenty of folks working very hard to make oil obsolete. Who knows when their big breakthrough will come?

So before declaring BP a savior or a villain for finding what at first blush appears to be a big new field, investors should take a moment to remind themselves why oil commands the price it does and take a dispassionate look at the ever-changing man-made conditions that affect its value. That's what BP is doing this very moment.

-- Jim Jelter

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  • BP
    -0.17 -0.43%

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