The Oil Rig Fire's Costs Are Mounting Fast

Oil rig fire in Gulf of Mexico
Oil rig fire in Gulf of Mexico

As the smoldering remains of offshore drilling contractor Transocean's (RIG) deep-water oil rig sank into the waters of the Gulf of Mexico on Thursday, the financial fallout from the massive explosion that burned for nearly two days and left 11 oil platform workers missing is also about to sink in.

While the U.S. Coast Guard continues search-and-rescue efforts to find the missing workers, Transocean acknowledged that the rig, which was doing exploratory drilling for oil giant BP (BP), is likely a total loss. The Wall Street Journal quoted Transocean spokesman Guy Cantwell on Thursday, saying the company has made several unsuccessful attempts to shut off the flow of oil using underwater robots. Other reports say about 8,000 barrels of oil a day could have been fueling the blaze. Now, if that oil flow isn't capped, it could create a major spill in the Gulf.

The costs to Transocean and BP are likely to be significant. On Wednesday, Credit Suisse downgraded Transocean to neutral from outperform, with a target price of $94. It's trading now around $90.30. Since Tuesday, when the explosion took place, BP shares have dropped 1.6% to around $59.50. Transocean shares are down by 1.89% since the disaster.

A Pricey Cleanup Ahead?

The shares could fare much worse if financial losses multiply as the investigation into the explosion continues and the status of the containment of any oil spill becomes clearer. Right now, the calamity's cause is unknown, but fear is growing that oil spilling from the submerged rig could trigger a major environmental disaster. In one of the most expensive oil spills, the Exxon Valdes Alaskan oil spill in 1989 cost Exxon $2.5 billion for the cleanup and another $5 billion in fines.

Analysts project the cost to replace the oil rig will be in the $600 million to $700 million range. The Deepwater Horizon rig was one of the most advanced of its kind. Reports say it had drilled through about 5,000 feet of water and another 13,000 feet under the seabed before the explosion. Since the Transocean has a good track record for safety, insurance should cover much of the expense.

However, the accident now means delays, which means Transocean will lose the $450,000 per day it was charging BP for drilling at the site, which is about 50 miles off the coast of Louisiana. BP will have to shoulder the cost of the accident cleanup. In a statement, the company said it has already dispatched a group of 32 spill-response vessels to the site and has set aside other resources "for protection of environmentally sensitive areas."

"We are determined to do everything in our power to contain this oil spill and resolve the situation as rapidly, safely and effectively as possible," the statement said.

Lawsuits and Perhaps Lost Lives

As is always the case when a workplace accident costs lives, the markets suffer a bit of uncertainty over the impact of fines and increased regulation on the affected industry. In a note to investors, Morningstar equity analyst Stephen Ellis said: "We do not anticipate any significant changes in the regulatory environment or fines as a result of the incident. However, we wouldn't be surprised to see adjustments to industry safety practices to reduce the chances of a similar accident occurring in the future."

Transocean's reputation for safety-consciousness had a lot to do with that conclusion.

However, both Transocean and BP will likely face many lawsuits from the families of the missing rig workers, as well as from some of the 111 workers who were evacuated safely. The Associated Press reports that one missing worker's family filed a lawsuit in New Orleans on Thursday, alleging negligence by both companies. Such settlements will clearly add to the total cost of this potentially fatal tragedy and likely environmental disaster.