Seven Thoughts on The Deepwater Horizon Disaster
Editor”s Note: On May 3, we revised this article, which was previously posted on April 30. The edits were made to the section on BP.
BP”s Thunder Horse platform in 2005. Photo by US Coast Guard
As the first oil from the massive oil spill in the Gulf of Mexico starts reaching the Louisiana coast, here are a few thoughts on the spill and what it will mean over the coming months:
1. This a “reputational disaster” for the entire US offshore business. That”s the assessment of David Pursell, a managing director at Tudor Pickering Holt and Company, a Houston-based energy investment banking firm. The results of that will likely be:
- Drastically higher insurance rates for all operators working in the Gulf of Mexico. Rates had gone up dramatically after Hurricanes Rita and Katrina. Now they”ll go yet higher which will mean higher costs for the whole industry.
- The spill also means less offshore drilling in US waters. The chances of the Obama administration approving more offshore leases in the wake of this disaster are slim and none. And as my father used to say, “Slim left town.”
- Those factors will mean increased oil imports in the future. Any decline in US offshore oil production (30% of US oil production comes from the Gulf of Mexico) will necessarily mean more imports.
2. The best experts in the industry still don”t know what happened. It may have been a bad cement job. No one knows why the blowout preventers didn”t work or why they still can”t be activated.
3. The environmental damages caused by the spill will almost certainly eclipse those of the Exxon Valdez disaster. The volume of oil spilled in the Gulf will almost certainly be far less than the 11 million gallons spilled by the infamous tanker, but the cleanup from the Alaska spill was largely contained within Prince William Sound which had rocky beaches that could be steam cleaned. The oil that is heading into the Louisiana marshes cannot be corralled or managed in anything like the manner used in Alaska. And the Valdez spill happened on the surface. This oil is emerging from leaks 5,000 feet below the surface, which means the oil can bubble to the surface long distances from the well. Once on the surface, it can now drift
4. What the hell is wrong with BP? Or is this just bad luck?
Just a few years ago, BP launched a hugely expensive ad campaign touting itself as “beyond petroleum.” The reality is that BP”s safety record leaves much to be desired. In March 2005, BP”s Texas City refinery was hit by explosion that killed 15 and injured dozens. That accident resulted in a record $87 million fine against the company by the Occupational Safety and Health Administration. A few months later, the company”s Thunder Horse platform, a $1 billion investment in the Gulf of Mexico, almost sank. Then came the problems with leaking pipelines in Alaska. Now the Deepwater Horizon disaster. And the entire oil and gas industry is being – pardon the pun – tarred with the same brush as BP. That’s not fair. But life isn’t fair.
The investigation into the disaster may ultimately absolve BP of blame. Perhaps the well hit a pocket of gas that couldn’t be controlled. Whatever the reason, the damage to BP’s reputation will last for decades.
5. What”s bad for the offshore oil and gas industry is good for corn ethanol and wind. On Wednesday, President Barack Obama was in an ethanol plant in Missouri singing the praises of ethanol. Here’is what he said:
I may be the President these days, but I want to remind everybody I was the senator from Illinois. I didn”t just discover the merits of biofuels like ethanol when I first hopped on the campaign bus. I was telling Steve this was not the first ethanol plant I visited. And I believe in the potential of what you”re doing right here to contribute to our clean energy future, but also to our rural economies.
The political signal is obvious: the Obama administration will soon approve a bailout for the ethanol industry courtesy of the EPA, which will agree to demolish the “blend wall” which will allow gasoline blenders to increase the amount of ethanol in the US gasoline pool from 10% to 15.% That same day, the Interior Department approved the Cape Wind project.
6. Last week, I wrote a piece about the risks of offshore drilling. I neglected what is probably the biggest risk: public relations risk. Those public relations risks are communal risks shared by the entire industry. The offshore industry is now being hammered in the court of public opinion due to the actions of one bad actor: BP. It”s not fair, but that”s just too bad.
7. Offshore drilling may slow in the US, but it won”t stop the global push for more offshore drilling. The reasons are obvious: global oil demand continues to grow, the deepwater offshore is where the available oil is, and tens of billions, perhaps even hundreds of billions of dollars in capital, has already been spent in the search for offshore hydrocarbons. Sure, there”s a disastrous spill in the Gulf of Mexico, but that won”t stop drilling offshore Brazil, Venezuela, Angola, Nigeria, or elsewhere.