Peak Oil Era: Why the Cost and Risk of Oil Exploration Will Keep Rising

Last Updated Apr 23, 2010 8:45 AM EDT

Transocean's Deepwater Horizon oil rig -- which exploded and subsequently sank this week -- was pushing the bounds of offshore oil and gas exploration in every possible way. The massive ultra-deepwater semisubmersible oil rig is a feat of engineering that has the ability to operate in 8,000 feet of water. Just last year, the rig drilled the deepest oil and gas well ever -- more than six miles in depth -- into BP's Tiber field in the Gulf of Mexico. As a result, BP made a giant oil discovery that could hold up to 3 billion barrels.

Rigs like Deepwater Horizon will continue to push drilling depths merely because the company has to. The days of easy-to-access oil are gone. Now, companies like BP are faced with oil and gas exploration projects that require operating in politically unstable regions or working in technologically complex areas like the deep waters of the Gulf or offshore Brazil. Protectionist measures from countries like Russia have forced companies to look at friendlier, albeit more difficult and costly, areas including the Canadian oil sands.

BP's Gulf of Mexico activities are an example of how far technology has come and how costly it's getting to reach oil reserves. Leasing the Deepwater Horizon rig cost BP some $458,000 a day in March 2008. The adjustable rate was set to reach $517,000 a day by September 2010 before a new three-year contract between BP and Transocean began.

And now with the Deepwater Horizon oil rig sunk into the Gulf, an oil slick 1-by-5 mile long, and 11 workers still missing and feared dead -- the costs are suddenly much larger.

The oil rig explosion also will affect BP CEO Tony Hayward's ambitious plan to increase annual profits by more than $3 billion over the next several years. Hayward's strategy included controlling project costs, something the company has struggled to do in the past. And it included a big push to increase oil and gas production, an area where it surpassed rival Exxon (XOM) for the first time last year.

But now BP will have to grapple with the consequences of yet another accident. Just last year, the Occupational Safety and Health Administration fined BP $87 million for failing to correct safety violations at its Texas City refinery, where an explosion and fire killed 15 people.

Photo of the Deepwater Horizon oil rig from Transocean via GlobeNewswire Photo of the Deepwater Horizon oil rig on fire from the U.S. Coast Guard