'Elephants' are a gamble, especially when there are hurricanes around

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The Independent Online

The world's largest platform, which was due to open next year, is supposed to pump 250,000 barrels of oil per day - two and a half times more than the average deepwater platform, or 4.5 per cent of BP's total production.

Analysts at Goldman Sachs estimated that the flagship project could be delayed by several months. If the platform sank, they said it could cost the company $4bn.

It had initially been thought that Hurricane Dennis, which hit the coastline near Florida last Sunday, was to blame. But the Minerals Management Service, which oversees the US's natural resources, said other nearby oil platforms only suffered minor damage, such as bent rails. Its regional director for the Gulf of Mexico, Chris Oynes, also pointed out that the eye of Hurricane Dennis passed 120 miles to the east of Thunder Horse.

So why was it so badly hit? "I will have to refer you to BP," he answered diplomatically.

In London, some analysts speculate that the damage was done when a 10-ton winch dropped on to the deck. A BP spokesman admitted this accident had happened, but said it did not cause the listing.

Any schadenfreude felt privately at Shell over BP's discomfort will have been erased on Thursday after it admitted that a flagship of its own had run into trouble. Costs for Sakhalin Energy, a huge gas project in Siberia, had doubled to $20bn, it said. Shell added that Sakhalin, its biggest exploration project and crucial in rebuilding its depleted reserves, is now expec- ted to come on stream in mid-2008, six months later than expected. The company blamed dollar weakness, soaring commodity prices and the technical problems of operating in sub-Arctic conditions.

Whether oil companies are up against hurricanes, errant winches or freezing temperatures, Thunder Horse and Sakhalin Energy highlight the technical and logistical challenges of the search for oil.

Thunder Horse, which analysts say is potentially the most profitable oil-production facility in the world, is in water 1,800 metres deep. Over the past 10 years, as oil companies' reserves have dwindled, they have been forced to drill further and further down, said Andrew Strachan, North America upstream analyst for energy consultancy Wood Mackenzie. And because of the high costs, they have tended to go for large projects - known in the trade as "elephants".

It's a high-risk, high-reward business. With oil prices hitting a new high of more than $61 for a barrel last week, the odds look more attractive.

Wood Mackenzie and research firm Fugro Robertson say 65 per cent of oil and gas reserves found in 2002-03 were in deep water, against 40 per cent in 1996. An executive for a small exploration firm operating off the coast of West Africa said: "You are drilling for big targets. Five hundred metres used to be deep, now it's barely getting your ankles wet. Extra deep is 1,500 metres."

It might cost $18m to drill a single exploration well in deep water, he said, but this can escalate to $35m if there are delays.

Deepwater rigs are often hired out, and with a current going rate of $400,000 per day - in some cases, double that of a year ago - companies hope to find oil quickly. These costs compare with $10m to $12m to drill an exploration well in shallow waters of 100 metres.

Groups like Saipem, Wood and Galaxy Drilling, which provide the platforms, cannot keep pace with demand. "One of the big problems is availability. You book rigs two years in advance," the executive said.

So one answer for oil groups is to build the platforms themselves, sharing the cost by leasing them out to other com- panies. But as BP and ExxonMobil, which owns 25 per cent of the platform, have learnt to their cost, building them is not simple. A Goldman Sachs note on Thunder Horse said: "The problems faced here highlight the risk that the industry is taking in the development of larger, riskier and more complex production facilities."

Insurance can present another problem for such expensive and exposed pieces of kit. BP does not have cover for Thunder Horse as the premiums would be huge, while platforms in calmer seas such as those off the West African coast are easier to insure. The UK Offshore Operators' Association says that not all companies insure their platforms and rigs.

In the Gulf of Mexico at least, weather conditions seem to have deteriorated over the past decade. The National Oceanic and Atmospheric Administration forecasts that this year's hurricane season, like every one since 1995, will be more severe than average. Felix Carabello, the associate director of environmental products at the Chicago Mercantile Exchange, provides companies such as drinks retailers with financial products that hedge against unfavourable weather. He would like to develop similar products for oil companies so they are insured for lost production caused, say, by hurricanes. So far, there appears to be little appetite for this. But Mr Carabello said that as markets become more aware of the economic impact of extreme conditions and climate change, "blaming the weather for losses will no longer be acceptable".

Companies are getting better at minimising such effects, said Mr Oynes from the Minerals Management Service. Oil groups will meet in Houston later this month to share lessons learnt from last year's Hurricane Ivan. You can bet that representatives from BP will be attending. Shell may now want to hold its own conference in Siberia.