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BP spill clouds future of U.S. drilling

The full impact isn't clear, but it’s certain now that the offshore drilling industry will be operating under a stricter regulatory environment than it has enjoyed for the past decade.
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Just weeks after the Obama administration was on the verge of loosening the nation's policy on offshore oil drilling, the massive BP oil spill in the Gulf of Mexico has caused an abrupt reversal.

The full impact won’t be clear until the scope and causes of the Deepwater Horizon disaster are discovered, but it’s certain now that the offshore drilling industry will be operating under a stricter regulatory environment than it has enjoyed for the past decade.

“I continue to believe that domestic oil production is important,” President Barack Obama told reporters at a Thursday news conference. “But I also believe we can't do this stuff if we don't have confidence that we can prevent crises like this from happening again.”

Just as the financial crisis is yielding new rules for the banking industry, the Gulf Coast oil spill will produce new safety measures and federal oversight that will likely slow drilling considerably. But those measures will not stop the drilling because the need for oil is too great.

The changes have already begun.

For now, the spill has brought new offshore drilling to a virtual standstill.  On Thursday, the Obama administration announced a six-month moratorium on deep water oil and gas drilling and ordered the shutdown of offshore exploratory wells already operating until they meet new safety requirements.

He also said he was suspending planned exploration drilling off the coasts of Alaska and Virginia and on 33 wells currently being drilled in the Gulf of Mexico. And exploratory wells already operating in deep waters will have to stop operations and implement new safety measures, a government official said. Companies operating wells at depths lower than 1,000 feet (305 meters) will have to stop at first safe opportunity.

Supporters of expanded drilling argue the country can’t afford to stop looking for new domestic oil supplies.

"If the delay is for a season to ensure we have the highest levels of protection in place, that's one thing," said Sen. Lisa Murkowski, R-Alaska, the senior minority member of the Senate’s Energy and Natural Resources Committee. “But if it means that existing permits are allowed to lapse … that's not acceptable to me or Alaska."

Some have likened the spill to the 1979 partial meltdown of a nuclear reactor at Three Mile Island — turning point in U.S. energy policy that has effectively capped expansion of nuclear power for decades.

But just as Three Mile Island didn’t put an end to nuclear power production, the BP disaster won’t put a stop to deepwater drilling in the Gulf. For at least the next decade, the need for oil is just too great.

The war over offshore drilling has been under way at least since 1990, when President George H.W. Bush imposed a moratorium on new offshore drilling after the Exxon Valdez spill in Alaska’s Prince William Sound, the worst in U.S. history until now.

In 2008, with the U.S. increasingly dependent on foreign oil, President George W. Bush lifted the moratorium, part of a policy to encourage more drilling that included tax breaks for deepwater projects. But opposition from state officials and congressional delegations, along with a federal lawsuit seeking to block the expansion, effectively stalled approval of new areas for drilling.

In March, to help win support in Congress for a broader climate and energy policy, the Obama administration offered up a new five-year plan that would have opened new areas for possible development. Those included allowing exploration in two new areas in Alaska and the first sale of exploration leases in the Atlantic off the coast of Virginia. The move was just the first step in a lengthy review process required before any new drilling could begin.

“I think (the decision to expand drilling) continues to be the right one,” Obama told reporters Thursday. “Where I was wrong was in my belief that the oil companies had their act together when it came to worst-case scenarios.”

Support for expanded offshore drilling was dealt a further setback by reports of widespread abuses at the government’s primary oil industry overseer, the Minerals Management Service. The Obama administration has decried what it calls a “cozy relationship" between regulators and oil producers. Some MMS employees have been fired and others referred for prosecution as part of an effort to “clean house” as the agency move its functions to other departments. On Thursday, The White House announced that the head of the agency had resigned.

The debate over expanding drilling is further clouded by the lack of hard data over just how much oil may lie under the seabed of U.S. coastal waters. When the 1990 moratorium stopped new exploration, it also put a halt to the collection of seismic data that would help petroleum geologist determine how much oil may be available.

Since then, the technology available to seismologists has made enormous strides, allowing them to assemble 3-D maps of oil formations miles underground. Much of the Outer Continental Shelf outside the Gulf of Mexico is largely terra incognita.

“The information on what is out in the Atlantic is very old, more than 30 years old,” Interior Secretary Ken Salazar said at a hearing last week. “So this Congress may have been waging a war about Atlantic resources without knowing at all what it is that we are waging a war about.”

One thing is all but certain: the catastrophe will bring tighter regulation of the oil industry and new operational procedures, including more detailed plans to cope with blowouts and other disasters. Rig inspections will be more frequent. Permits will be subject to more thorough review.

That will likely create a longer timeline for future exploration projects. With deepwater rigs approaching $1 million a day to operate, the new procedures will also raise the cost of finding and producing more oil.

“In the past you might have a made decision – well, this hasn’t caused us a problem in the past, so we’re going to press on,” said Phil Weiss, an oil industry analyst with Argus Research. “Now it’s not going to be as easy to do that.”

The industry faces other higher costs, including a proposed an increase in the per barrel tax that would go to boost reserves of a federal oil spill cleanup fund. Insurance premiums for rig operators also are expected to rise.

Higher costs and tighter regulations may deter some smaller players from the high stakes game of deepwater drilling. Major oil producers, though, aren’t likely to retreat for the simple reason that deep-sea exploration represents some of the richest new prospects for fossil fuels.

No one doubts that drilling at sea depths that would crush a submarine presents huge costs, risks and technical hurdles. At every disappointing turn of the current disaster, BP has been quick to note that the spill is occurring at unprecedented depths and pressure in the murky waters of an ocean canyon 5,000 feet below the sea surface.

But most of the world’s onshore oil already has been tapped; many of the vast onshore “super major” fields that have fueled the carbon economy for a century are in decline.  Deepwater discoveries in the Gulf have been matched with promising underwater finds off the coasts of Brazil and West Africa.

As a result, global offshore oil output has tripled over the past decade — and is forecast to double again in the next five years.

The risks made apparent by the BP spill point out the high cost of relying on oil as an energy source.

“As we are moving forward, the technology gets more complicated, the oil sources are more remote," Obama said Thursday. "That means that there’s probably going to end up being more risk. And we as a society are going to have to make some very serious determinations in terms of what risks are we willing to accept.”