House and Senate committees worked through the night last night to reconcile their two versions of banking reform legislation and announced this morning that their work was done. Based on the early reports, its not entirely clear what the full impact will be on bank-backed energy trading operations.

According to the Washington Post, here are the key provisions:

- New consumer protection bureau housed in the Federal Reserve with independent funding, an independent leader and near-total autonomy to write and enforce rules.

- Prohibit a banks from investing more than 3 percent of their capital in private equity or hedge funds.

Its clear that the new bill will not force financial firms to completely abandon their energy trading and commodities businesses as was the implication of the original Volker Bill. There will still be alternatives if a bank wishes to engage in energy and commodity trading, either through affiliated businesses or via limited investment in hedge funds.

However, as we see more and more with these mega-bills (like health care legislation), nobody, even those that write the legislation, ultimately know what’s in the bill that they are voting for; evidenced by one by of the bill’s chief architects, Connecticut Senator Chris Dodd, noting, “No one will know until this is actually in place how it works…". Terrific.

Given my operational background, I’m intrigued by the Gulf of Mexico disaster, because I know that it is an event that should have never occurred, particularly if all proper procedures had been followed. I’ve read and seen all sorts of theories about the cause from various experts and even a few nutjobs (the most interesting being that BP had actually drilled into an alien refinery buried beneath the sea). Setting the nutjobs aside, there are lots of sound ideas about what went wrong; with most of them, including my own early thoughts, centering on a catastrophic BOP failure.

However, after reading several internal BP documents and Transocean’s account of the event, I now think the BOPs did work briefly; that is, they tried to close, but they couldn’t because there was 9 7/8 inch casing blocking them, a pipe size for which they were not configured to handle.

BP had made several changes to the well design in the days leading up to the disaster, including changes to the casing program - making the decision to change from a liner which would be set from about midway down the hole to the bottom, to a long string of pipe running from the bottom of the well all the way to the well head on the ocean floor. Though the new design would be cheaper and faster to set, it did have additional risks in that, because it was made up of two different sizes of pipe, 9 7/8″ and 7″, and because of poor bottom hole conditions that had previously caused them to lose circulation, it was going to increase the risk of not getting a successful cement job. In fact, while contemplating the new design, BP personnel had exchanged a number of emails expressing concern that they may not be able to get the cement to flow up behind the pipe (in the annulus) to a level that it would completely cover the producing formation. Without this coverage, the formation would be exposed, allowing hydrocarbon flow that would be creating building pressure behind the casing. That pressure would then be pushing against the seal at the wellhead where the 9 7/8″ casing was connected, called the wellhead hanger seal assembly. Casing is essentially “hung” in the wellhead, meaning that it locked in the wellhead under tension, and that tension keeps it in place and also applies force that seals the joint where the casing and the wellhead meet.

I think what ultimately happened with this well is that the cement job failed to fully cover the hydrocarbon producing formation, and may have even failed to adequately set-up at the bottom of the hole because the decision was made to hang the casing off without allowing sufficient time for the cement to cure. According to Transocean documents, the the nitrogen foamed cement that BP used (because of the difficult downhole conditions) may have needed up to 48 hours to set. Records from the rig indicate that BP allowed only 18 hours before they set the casing in the wellhead hanger - meaning after they pulled tension on the casing and locked it in the wellhead, it may have broken free from the cement down hole, relieving some or all of the tension that had been applied. Adding to the problem, BP never ran a cement bond log which would have told them that the cement job was bad. They did have contingency plans to run the log if there were indications the cement job wasn’t successful, but because the cement job appeared to have proceeded pretty much as they planned it, they made the assumption that it had worked.

Once BP ordered the crew to start circulating the mud out of the hole, the seawater that was displacing the mud essentially lightened the casing, allowing it to float and start to move up hole (think of it as a very long bottle floating in a sea of mud - if the bottle if full of the same mud, it will sink. But, if you remove some of the heavy mud and replace it with lighter water, the bottle will start to float). Once the casing started to “float”, it released from the wellhead hanger, breaking the seal and allowing the hydrocarbons from the exposed formation to start flowing out of the well. In fact, I think the casing may have broken loose from the hanger with enough force that it was propelled up into the BOP, blocking or jamming the rams that could have shut in the well. At this point, the last line of defense would have been the annual BOP’s that set atop the BOP stack. However, for some reason yet unknown, they also failed to close, either due to mechanical failure or just lack of time. If the casing had suddenly released from the wellhead hanger, the flow up the riser pipe to the rig would have been almost explosive, allowing the rig crew little time to react.

If my theory is correct, it could be very difficult to kill this well. In order to kill a blowout via a relief well as BP is currently working toward, you have to ensure that you intersect the blown out well at the right point with the relief well. If you are too low, below the producing formation, you are not going to be successful. I believe that ideally, BP wants to intersect right near the top of the producing formation, allowing them to redirect the pressure up the new well and plug the old well from the top; or if its not possible to get into the old well due to trash or collapsed pipe, the can pump (under high pressure) large volumes of mud into the well and hope to overcome the formation pressure. However, if the well is flowing behind the casing, its going to be more difficult. If thats the case, I’m unclear how they would do it, but it would no doubt require massive volumes of mud pumped under high pumped pressure in order to kill this well.

BP is currently drilling two relief wells. I originally thought the second well a contingency - if something went wrong with the first well, they would still have a chance to kill the well as soon as possible with the second relief well. However, it now appears to me that BP is also concerned that the well could be flowing behind the casing and intend the other relief well to intersect the well bore up hole, ensuring that they will have a chance to kill the well regardless of whether the flow is coming up the casing from the bottom of the well, or from behind the casing, up hole from the bottom of the well.

We won’t really know what happened until the blowout is controlled and BP can re-enter the well to determine the cause. I do hope my theory is wrong because if I’m right, this could be a very difficult blowout to deal with.

Allegro issued a press release this week announcing that Repower (formerly known as Räetia Energie), an international energy company based in Switzerland, had purchased and successfully implemented Allegro 8 to manage its emissions trading activities. Further, the company also announced that they had extended their reach with Repower and will be implementing their system to provide coverage to Repower’s power and natural gas trading business, and in multiple offices across Europe.

As noted in the press release, “Repower is an international energy company based in Switzerland with operations throughout Italy, Germany, and Central and Eastern Europe. The company operates along the entire power lifecycle, from trading, production, transmission and distribution to sales. With power plants in Switzerland, Italy and Germany, Repower also trades electricity throughout Europe and supplies energy to thousands of customers, both directly and through electricity resellers.”

Though no official announcement has been made yet, Alan Gunn, Solarc's VP of Product Marketing has confirmed that the company has recently closed a deal with Lansing Trade Group in Overlandpark KS for Solarc's RightAngle product. Lansing will use RightAngle to manage the business of their newly established NGL trading group.

Additionally, Mr. Gunn tells me there are several other new deals they have recently completed that have not yet been announced.

Hollywood hotshot director, James Cameron, is PO’d. And why wouldn’t he be, after all he did volunteer to step in and solve the Deepwater Horizon blowout, but BP doesn’t seem to be taking him seriously. What the heck is the matter with BP, don’t they realize this is the guy that pioneered deep water drilling with his movie “The Abyss”. I had the opportunity to see that movie again this weekend on TV and I have to tell you, it was brilliant! As shown in the movie, instead of using a floating drilling platform like the Deepwater Horizon, Cameron’s big idea is to create a drilling submarine, in which you encase the drilling crew in a bunch of metal spheres thousands of feet underwater and resting on the sea floor. What a terrific idea.

What BP doesn’t seem to understand about the self proclaimed “King of the World” is that his brilliance is so great that even though he admits he knows nothing about how to cap a blowout, his underwater filming skills will somehow undoubtedly translate into a solution for what has proven, so far, to be an intractable problem for the some of the most experienced and skilled deep water drilling engineers in the world. His understandable frustration with BP having declined the use of his giant intellect lead him to say, "Over the last few weeks I've watched as we all have with growing sort of horror and heartache watching what's happening in the Gulf and thinking, those morons don't know what they're doing." Wow.

I’m actually surprised that BP hasn’t taken him up on his offer. After all, a giant engineering problem could probably use a giant tool…like James Cameron.

A CommodityPoint CommodityAlert
By Gary M. Vasey, Ph.D.; Managing Director, Europe and AsiaPac

The announcement by Triple Point this week that Su-Raj Diamonds had selected it’s Commodity Trading and Risk Management (CTRM) software to manage its Precious Metals sourcing and operations is the latest in a series of announcements by the CTRM vendor community of licensing deals in what might be loosely termed the "end user" market. The "end user" market segment comprises firms that utilize commodities in their operations and wish to reduce their exposure to price volatility. It includes companies in the food and beverage, agricultural, transportation, and manufacturing areas, and it is rapidly growing in importance as a source of new clients and revenues for CTRM software vendors.

A Growing Market?
The "end user" market segment has, in fact, historically sourced a number of deals each year. SolArc, for example, has gained a solid foothold as a solution of choice among airlines managing their aircraft fueling operations. But recently, the licensing activity in this segment appears to have surged as Triple Point has signed companies in a number of industries including the explosives business and counts Unilever, North China Shipping, ST Shipping Nidera, General Mills, IFFCO, Campbell Soup Company, and Incitec Pivot amongst its installed base. Recently, Abacus Solutions announced its selection by Walmart Texas Retail Energy which manages the energy supply for Walmart and Sam’s Club stores and distribution centers including over 300 stores in Texas and over 400 stores in the United Kingdom, and vendors like Eka and Brady, amongst others, have also had success in the "end user" segment. SunGard Kiodex and Aspect Enterprise have also had successes in the segment with their Software as a Service (SaaS) delivery model.

To some extent, the increasing activity in the "end user" market segment is the natural consequence of how commodity markets have, and continue to, develop. Commodity prices have become increasingly more volatile while access to commodity trading has become easier. In fact, ease of access to commodity trading via very transparent and quite liquid Exchange-traded instruments may be one of the reasons as to why commodity prices are now more volatile. It is no real surprise that companies exposed to commodity price volatility in agricultural feed stocks, fuels, chemicals, metals and elsewhere should start seeking to manage that price volatility and exposure. In doing so, they naturally find that they require a CTRM solution to track and account for their trading activities and to insure compliance with various regulations and standards such as hedge effectiveness testing, for example. This trend has naturally been a boon for CTRM software vendors.

Helping Change Deployment Models?
In parallel with the uptick in "end user" CTRM software procurements, non-traditional CTRM deployment models such as SaaS and hosted have increased in popularity too. Again, these two trends appear to be related as a company seeking to manage its commodity supply side will often naturally gravitate to a SaaS or hosted solution to minimize its upfront software and IT investment while obtaining a good trading and risk platform for its activities. As the financial crisis continues to bite into budgets, SaaS and hosted CTRM solutions often appear to provide a better value solution.

CTRM Market Maturity
CommodityPoint’s model of CTRM adoption discussed in detail in Chapter 2 of our book, "Trends in Energy Trading, Transaction and Risk Management Software - A Primer">1 suggests that historically periodic dislocation events such as the Merchant collapse a few years ago help shift market requirements and therefore the pace of licensing deals. Since the Merchant collapse however, we have observed an expansion of the market across commodities (ETRM to CTRM), the entry of hedge and other funds and banks (despite the temporary reversal of this trend as investors pulled funds and commodity prices collapsed, the funds are back) and now a rapid expansion of the market into the end user segment.

Potential market dislocators such as the collapse in commodity prices last year and the impact of the financial crisis appear to have had more limited negative impact on market growth indicating to us that the CTRM software category has long since moved from the early majority phase and is now mainstream. The, at times, rapid development of commodity markets has allowed broader and greater participation across many commodities for a broader group of participants beyond the producers and marketers of those commodities. At the same time, technical developments such as SOA, for example, have allowed vendors to respond to the twists and turns in market development faster as well as access via hosted or SaaS delivery, much more of the potential market.

At this point, it would seem that CTRM has finally come of age.

A CommodityPoint CommodityAlert
Patrick Reames - Managing Director, The Americas

The Deepwater Horizon disaster is clearly a human tragedy and ecological catastrophe. The impacts of the event are being felt along the fishing grounds of the Gulf Coast, in the board rooms of the various companies that drill for offshore oil and gas, in the halls of government in Washington, D.C. and of course, and most deeply, in the homes of the families who lost loved ones in the tragedy.

As with every disaster, there is vigorous finger pointing by all parties involved, each attempting to apportion and/or deflect blame. BP, Transocean, Cameron (the manufacturer of the blowout preventer), Halliburton, the Minerals Management Service (MMS), the Coast Guard, and even President Obama will be forced to assume some level of responsibility for at least some portion of this unfolding event, from the initial blow out, to the continuing and unabated release of crude into the Gulf waters, and ultimately the clean-up and remediation efforts.

Based upon the information that has been released to date, it would appear that this disaster was entirely avoidable. BP and Transocean have both indicated that anomalous pressure test data indicated that the cement job performed by Halliburton had not been successful, not an entirely uncommon occurrence. Despite this information, it now appears that the BP company representative made the decision, over objections by the rig crew, to move ahead with displacing the drilling mud, the first line of defense against a blowout, with seawater in preparation for temporarily plugging and abandoning the well. As the mud was circulated out and replaced by seawater, the hydrostatic pressure was reduced at the bottom of the well, allowing gas and fluids enter around the faulty down hole cement and rise in the well bore, a situation known as a “kick.” After the kick was noted, whatever actions the crew took (actions which are still unclear at this point) to bring the well back under control were ineffective. Once the gas and fluids in the well neared the surface, it would have been too late to do anything other than to close the blowout preventer, or BOP—the last line of defense. Tragically, the BOP failed to shut-in the well despite multiple and redundant safety systems. There is evidence that indicates that the emergency hydraulics that would have provided the back-up energy to close the rams (in the event of an otherwise complete hydraulic failure) had been disabled for some inexplicable reason. Additionally, BP has reported that records indicate that the BOP was not even properly configured with the right type of rams that could have sealed around the drill pipe and prevented fluid from escaping from the annulus, the space between the well casing and drill pipe. If the pipe rams could have been closed around the drill pipe, the flow could have been contained to that drill pipe and the blow out could have most likely been controlled; and the Deepwater Horizon, and eleven of its crew, would not have been lost.

There is little doubt that this disaster was the result of a series of human errors, errors that most likely began occurring prior to the well being spudded. If the right decisions were made and the proper actions taken prior to and during the blowout, the events of that day would have gone relatively un-noticed and the well would have been counted as just another successful effort in the Gulf, just like the more than a hundred other deepwater wells that are drilled in the region every year. Unfortunately, it didn’t happen that way and now there are cries for something, anything, to be done to prevent this type of event from ever occurring again. Clearly, the MMS must exercise improved oversight of offshore operations and new regulations may be necessary if it’s found that industry standard (and hereto now proven) procedures were either not effective or were not properly followed. Additionally, after a complete and thorough investigation of the accident, every avenue of legal recourse must be pursued against those individuals or companies that were ultimately responsible.

Unfortunately, every industrial process has inherent risks, though oil and gas exploration is certainly on the high end of the scale of in terms of potential impacts should something go wrong. However, wells are drilled and completed everyday and without incident in the waters of the Gulf Mexico and across wide swaths of the continental United States and Alaska. These drilling activities contribute to meeting the needs of an energy hungry country and reduce our dependence on foreign sources of oil. Of the total U.S. production of more than five million barrels a day, about a third comes from the waters of the Gulf of Mexico, California and Alaska. These offshore reserves are vital to the United State’s energy security and, despite this tragic accident, must continue to be exploited until economically viable alternative sources of energy are perfected and available.