I suppose it was inevitable that we would arrive at the moment in the ongoing oil spill crisis at which the baby would be thrown out with the bath. That moment came at about 7 minutes into President Obama's press conference on the spill Thursday, May 27. After announcing the suspension of offshore drilling in Alaska, the cancellation of planned lease sales for the Gulf of Mexico and Virginia, and the extension for six months of his administration's moratorium on new drilling permits for deepwater wells, he ordered a halt to 33 exploration wells currently being drilled in the Gulf, excluding the two relief wells for the leaking Macondo prospect. Everything up until that point could be considered as reasonable, prudent, and expected responses by an administration faced with an unprecedented and still-unfolding environmental and economic disaster. But while stopping work on the 33 projects already underway might look like prudence to some, it could ultimately have economic consequences rivaling those of the spill.
The President's order is based on the recommendations of the 30-day investigation of offshore drilling carried out at his request by the Department of Interior. The report recommended a number of new standards for equipment and procedures for use in deepwater drilling, and it follows that it will require some time to implement all of these changes, both on the part of the drilling industry and in the government agencies charged with regulating and inspecting these activities. Absent from this report and from the President's order is any path for companies with rigs already drilling wells in deep water to quickly demonstrate that they are already sufficiently in compliance with these recommendations--which I must add have been issued without the final results of the various investigations into the actual causes of the accident, and thus must make significant assumptions concerning the relative importance of equipment failure, procedures, and human error.
I understand that the President has an obligation to protect the residents, businesses and environment of the Gulf Coast region from further harm. Another blowout or leak could turn disaster into total catastrophe. Yet the safe drilling record of the other firms operating in the Gulf does not give us any reason to expect that allowing the projects in question to continue would constitute such an unwarranted risk. It's also worth recalling that all of the drilling projects now required to suspend operations have already passed the emergency inspections the President ordered in the immediate aftermath of the Deepwater Horizon explosion and sinking. These inspections were completed on May 9.
What does this order mean on a practical level? A number of companies that paid for leases conveying the right to explore for and develop hydrocarbons in the Outer Continental Shelf, and that subsequently invested significant effort and expense in planning and obtaining permits for the exploration of these leases--instead of other leases offshore Angola, Brazil, or elsewhere--and that signed contracts with drill-ship operators and many other suppliers must now abrogate those contracts, declare force majeure, or pay off their suppliers and abandon these wells as if they were all dry holes. It is simply not realistic to imagine that any of these companies can afford to leave these rigs and crews in place for six months, waiting for the government to either show them a way forward or deliver another moratorium extension. Instead, the companies will scramble to redeploy this equipment and some of these workers to projects outside US waters, while arguing urgently with the government--and probably in court--that they should either be allowed to complete these projects or awarded substantial damages.
Please don't imagine that I'm inviting you to a pity party for the oil industry. While some of the firms involved, particularly those with minority, non-operating stakes in these projects, are smaller players, most are big international firms with global operations and multi-billion dollar capital budgets. This move will be a financial setback for them, but they will recover and shift their efforts elsewhere, to the extent they can. When the moratoria end--if they do under the current administration--they will step back into the Gulf of Mexico OCS, but probably much more tentatively, as appropriate for the significantly higher "above-ground risk" involved--essentially a measure of the relative reliability or capriciousness of the legal and regulatory system in which they're dealing. They will not be the big losers from this decision. That honor is reserved for many of the individuals and businesses along the Gulf Coast that have added jobs and made investments to serve this growing market. In other words, the President's decision will compound the economic damage to a Gulf Coast already reeling from the impact of the spill.
We should take some consolation that the President didn't shut down the 591 deepwater wells that are already producing oil and gas in the Gulf. The mere fact that this was reported suggests it had probably been under serious consideration. As I've noted on numerous occasions in the last several weeks, the oil and gas we produce from the Outer Continental Shelf is a crucial source of domestic energy and vital to our energy security. However, that importance also extends to our offshore drilling capacity, which was put at risk by this decision.
After an event like this spill, no one should expect things to continue exactly as they were. However, the New York Times is right to call the President's response "partly a political exercise aimed at showing that his administration is on top of the unfolding disaster in the Gulf of Mexico." Instead of singling out the companies that were directly involved in the Deepwater Horizon accident for this time-out to prevent further spills, he has chosen to punish the entire industry and all its stakeholders in the region, including the most safety-conscious and diligent operators with unblemished records. Halting all of BP's projects, or even all projects involving Transocean, could have been defended as a sensible precaution. Freezing everything looks like the act of an administration that is so out of its depth in this situation that its fundamental instinct is to eliminate any possibility of another problem from this source on its watch. Unfortunately, American energy consumers will be paying for years for this extreme level of risk aversion.
Disclosure: My portfolio includes investments in Chevron, which appears to be the operator of several of the projects affected by this order.
By Geoffrey Styles
Source: Energy Tribune