IHS Global Insight Perspective | |
Significance | BP has once again had to downplay progress after new analysis shows that its frantic efforts to contain the month-old oil spill in the Gulf of Mexico are having less effect than previously thought. |
Implications | The spill is causing growing environmental and economic damage in the Gulf region, but the bigger implications are political and regulatory. While the administration is no friend of "Big Oil", its handling of the spill and willingness to countenance wider drilling have drawn growing fire. |
Outlook | It seems that the spill should be countered more decisively by measures coming into force later this week, but this comes too late to prevent enduring political fallout for both parties and significant regulatory overhaul. |
Spill Latest
BP and its partners' commitment to halting the oil spill that resulted from the 22 April sinking of the Deepwater Horizon drilling rig can be in no doubt. Nevertheless, BP has not helped itself with a media strategy that has tended to exaggerate progress and downplay the size of the spill. This has fed public mistrust and growing pressure on the government to take a stronger lead role. The government threatened to do just this yesterday as BP revised down its estimate of how much oil it is managing to syphon off. Interior Secretary Ken Salazar told journalists that, "If we find that they're not doing what they're supposed to be doing, we'll push them out of the way." He attacked BP for missing "deadline after deadline" to staunch the flow, although he acknowledged that the firm is not stinting in its efforts: "I have no question that BP is throwing everything at the problem to try to resolve it because this is an existential crisis for one of the world's largest companies. Do I have confidence that they know exactly what they're doing? No not completely." There is some scepticism that the government is actually in any position to "take over" the efforts given the great technical expertise required.
BP and its partners have tried a number of tacks to tackle the spill, including placing a dome over the leak and syphoning off some of the oil. The first approach failed, and the second is only thought to be diverting at most one-quarter of the flow. BP yesterday revised down the amount it said it was extracting with the insertion tube to 1,360 barrels per day (b/d) from the previous average of 2,100 b/d. The volume of the total flow has been the subject of heated controversy, with some scientists arguing that BP is under-estimating by a wide margin. BP has maintained that around 5,000 barrels of oil are being leaked each day, but some estimates point to a flow 20 times as great. Tackling the spill is made particularly difficult by the great depth of the well (1,500 metres below the surface). BP has expressed optimism that the next major strategy it is deploying—the so-called "top kill"—will succeed where previous attempts failed. This is expected to get under way later this week and involves injecting heavy drilling fluids into the well and then sealing it with cement. On the surface, meanwhile, a fleet of skimmers is removing oil and booms are helping prevent oil reaching coastlines. It is of course not only BP that is feeling the heat; Transocean (which operated the rig) and Halliburton (which was contracted to cement the well casing), as well as other service players are also heavily implicated.
States lining the Gulf are becoming increasingly anxious about the prospect of large-scale pollution of fragile coastal areas, and there has already been considerable disruption for the fishing and tourism industries. The Coast Guard has come under fire lately for failing to deliver enough protective booms. Oil has washed ashore in a number of locations, including along 106 km of Louisiana's coastline. States have threatened to take matters into their own hands if BP and the federal government fail to make sufficient progress, but their ability to do so is in question. Many politicians at federal, state, and local level know that their careers are potentially on the line (see section below for more on the political context).
Regulatory Pressure
Any disaster on this scale would feed pressure for a regulatory rethink, but the fact this has involved deep offshore oil drilling greatly magnifies the political sensitivity and economic calculations. For decades, offshore oil drilling opponents have warned of the environmental dangers, but with relatively few disasters and an ever-growing appetite for domestic oil, the industry has been allowed to boom. New technologies have allowed oil to be extracted from areas that were previously unreachable, and even the current "green" administration has been open to wider exploration.
The Deepwater Horizon's sinking has abruptly changed this landscape and now even the biggest drilling enthusiasts are calling for more effective regulation. The most withering criticism has been directed at the Minerals Management Service (MMS), whose dual role to encourage greater extraction and regulate its safety arguably resulted in dangerous conflicts of interest. The service had become increasingly reliant on (some would say beholden to) the oil industry. The administration has already announced that the MMS will be effectively broken up. A new ocean energy bureau will be responsible for conventional and renewable offshore energy development, including resource evaluation, planning, and leasing. A safety and enforcement bureau will meanwhile carry out oversight, inspections, and safety and environmental protection in all offshore energy activities. Finally, an office of natural resources revenue will handle both onshore and offshore royalty and revenue functions. Looking at the broader regulatory picture, last week President Barack Obama established a bipartisan national commission. This is being led by former Democratic senator and Florida governor Bob Graham and former Environmental Protection Agency (EPA) administrator William K. Reilly. The other five members of the panel will be announced shortly. They will have six months to come up with proposals to revamp federal regulation of oil drilling. Obama acknowledged that "a cozy relationship between oil and gas companies and agencies that regulate them has long been a source of concern.”
Obama has not backed away from his commitment to expand offshore oil drilling, however, which will come as a major relief to the sector. He indeed portrayed the regulatory overhaul as a means to enable this to happen safely: "Because it represents 30 percent of our oil production, the Gulf of Mexico can play an important part in securing our energy future. But we can only pursue offshore oil drilling if we have assurances that a disaster like the BP oil spill will not happen again." This will of course disappoint environmentalists, who have hoped that the spill will lead to much tighter restriction on drilling in future. A moratorium was announced after the Deepwater Horizon's explosion on permits for new offshore oil wells, and a halt was also called to the controversial environmental waiver that the Deepwater Horizon rig benefited from. Nonetheless, the New York Times reports that new permits for various types of drilling, as well as environmental waivers, are still being granted. The Interior Department has said that this is not inconsistent with its position as only the drilling of new wells is covered by the moratorium. The situation has nonetheless fed suspicions that it is more-or-less business as usual for oil exploration behind the scenes.
Complex Politics
The disaster is bad news for politicians on all sides, but everyone is rushing to ensure that their opponents take more of the flak. Republicans have tended to be the biggest enthusiasts for oil drilling and light-touch regulation (witness the "drill baby drill" refrain often heard), but they have made hay criticising the Democratic administration for acting too weakly and by criticising the regulators. Having witnessed the furious condemnation of the last administration for its response to Hurricane Katrina, President Obama has made great efforts to show that the federal government is doing all it can. However, there are still many who argue that he should not have taken BP at its word so readily at the beginning. States facing the Gulf have meanwhile alleged that the federal government has not mobilised promised resources. The administration has directed much of its own fire at BP, underlining that it (and its partners) are legally responsible for combating the spill and its effects.
In the longer run the administration faces a greater struggle to sell wider offshore oil drilling to its own supporters. Many Democrats were dismayed when the plan was announced as part of the wider energy policy overhaul, and their position will have hardened. The administration hoped that by supporting greater drilling it could persuade enough Republicans to acquiesce with bold goals to promote green energy and tackle climate change. This ambition is not dead as a result of the disaster, but an already daunting political challenge is even more so. Obama can certainly use the disaster to advocate his environmental goals, and Republicans may find it harder now to reject these. In a sign of this strategy, Obama cited the disaster in recent days when unveiling stricter fuel efficiency standards for vehicles. The public image of hydrocarbon energy sources has certainly suffered in the wake of the spill, as well as the recent coal mine disaster in West Virginia.
For Republicans, it remains to be seen whether their tactics manage to deflect criticism that it was their gung-ho support for drilling and hostility to environmental regulation that set the context for the disaster. The last Republican administration was notorious for its efforts to reduce the power of regulators and influence their stance with political appointees. One politician in particular who is associated with fierce support for drilling is former Alaska governor Sarah Palin. This was one of her major campaign messages while running for vice-president, and now she faces a big dilemma over how to rework her "drill baby drill" message. She is one of the likely contenders for the next Republican presidential nomination. Other Republicans who are eyeing the situation nervously include those who represent Gulf coast states. Most have been big supporters of offshore drilling, but now they find themselves forced to attack the industry under pressure from other sectors in their home states that are suffering, including shrimpers and hotel owners.
Outlook and Implications
It is hard to overstate the implications of the oil spill. As described above, there are the direct implications for BP as a company, for the wider energy industry, which has pinned many of its hopes on offshore drilling, and for politicians of all colours. There are also mounting economic costs in the Gulf area, even if some of the estimates of damage to the fishing and tourist industries appear to have been overstated. These states have also been among the hardest hit by the economic downturn—Florida for instance needs a strong revival of its tourist industry to offset the effects of the sub-prime meltdown. No oil has yet washed ashore on that state's beaches, but perception is that it might have already reduced tourist bookings sharply. The Gulf region is moreover faced with the start of the hurricane season on 1 June. In terms of the wider economic picture, the volume of oil extracted offshore could fall in coming years if regulations are tightened. So far, however, it seems that the administration is sticking to an energy strategy that encourages greater domestic oil production alongside an ambitious renewables push.