The crude oil exploitation platform, Deepwater Horizon (leased by the oil major BP and operated by Transocean (RIG)), which exploded in the Gulf of Mexico on 20 April, is currently spewing crude oil at the new, estimated rate of 12,000 to 19,000 barrels per day.
Crude oil being a heavily-traded, international commodity, the consequent moratorium by U.S. President Barack Obama, on specified offshore drilling operations, has rekindled arguments about energy security and the environment. The result could determine global crude oil prices as well as supply, and by extension, the dynamics of global trade. For example, stricter production requirements, especially for deep wells, may limit access to acreages or significantly add to production costs and therefore influence the provenance and prices of crude oil.
The U.S. consumes by far more crude oil than any other country in the world. According to data from the U.S. Energy Information Administration, EIA, over the past two decades, total U.S. consumption of petroleum products has been rising and domestic crude oil production sliding. The shortfall has been met in the main, by increased importation which sometimes implies a dependence on the precarious supply from politically unstable or volatile regions. In the country’s bid to stem this gap, parts of its offshore resources were opened up for exploitation and now the Gulf of Mexico reportedly accounts for about seventy-five percent of all U.S. offshore crude oil production.
There are however two oft-bandied arguments which, here and again, need be quickly addressed:
First, the argument that a specified quantity (often in the billions of barrels) of crude oil is waiting to be discovered in U.S. offshore acreages is so fatuous. It is such an assault on reason. Estimates of offshore oil reserves are simply those – estimates; until proven, they cannot and should not be adduced as certain. These estimates in addition, often differ widely because they are based on different probabilistic models.
Secondly, save for a highly improbable U.S. government “decree” or requisition, it is unlikely that oil-producing companies (and which are commercial entities) in the U.S. will sell their cargoes below global market prices, if the latter were to increase significantly. In this regard therefore, while such increased domestic production may bolster supply, it is unlikely to offer any price relief, a point in consonance with an EIA assessment.
The Deepwater Horizon disaster is the latest in a notorious series exposing the shocking failure of industry regulators to enforce operational standards; and the seemingly, contemptuous disregard by industry operators (perhaps picking up the regulators’ cue), for sound operational guidelines. A recent internal memorandum from the Office of Inspector General at the U.S. Department of Interior for example, reveals that federal officials with oversight duties for Gulf of Mexico drilling, used illegal drugs, watched pornography at work and accepted gifts from oil companies. The latter were the same companies they were supposed to oversee. The rather poor enforcement regimes for industry standards should therefore be of no surprise.
A new report citing internal documents from BP indicates that there were problems with, and safety concerns at that Deepwater Horizon rig:
The problems involved the well casing and the blowout preventer, which are considered critical pieces in the chain of events that led to the disaster on the rig.
Another also reveals that critical cement lining tests (which reveal inconsistencies or possible leak paths for gas or oil) at the well were omitted, and that, just before the explosion. There have since been mutual accusations redolent of schoolyard squabbles, among the three (stooges?) parties (BP, Transcocean and Halliburton (HAL)) to the failed operation. Including the supervisory agency, the Minerals Management Service, MMS, the befuddled quartet clearly lacked proper contingency plans even as operational standards were seemingly skimped on. Sadly, if a total “kill” of the discharging well is successful (and that would take about two months), it would never produce again, and all investment poured into it would have died with it.
According to the Center for Public Integrity, CPI, the oil major BP has a “systemic safety problem” and accounts for 97% of all “egregious willful” citations issued by the Occupational Safety and Health Administration, OSHA, since 2007.
The case for Upper Big Branch-South Mine disaster in the U.S. state of West Virginia is disturbingly similar. With a death toll of 29, it was the country’s worst mine disaster in about four decades. The Mining Safety and Health Administration, MSHA, of the U.S. Department of Labor details citations, orders and safeguards for the mine. According to a recent publication, the mine shows a pattern of safety violations and has racked up 3,007 citations and US$2.2 million in fines since 1995. The mine, according to MSHA is currently controlled by Massey Energy Company.
About another fire outbreak which claimed two lives, The New York Times reports that
In 2008, the Aracoma Coal Company, a subsidiary of Massey, agreed to pay $4.2 million in criminal fines and civil penalties and to plead guilty to several safety violations related to that fire.
A mine inspector who tried to close down a portion of that mine on safety concerns was reportedly ordered by superiors to “back off”.
These breaches are not limited to the extractive industries. Many economic analysts consider the recent financial crises as the worst since the Great Depression more than seven decades ago. They blame improper risk analyses by credit rating agencies, sharp financial practices and an archaic financial regulatory regime for the melt down. In addition, the bungled federal response to Hurricane Katrina in the U.S. is still fresh in the minds of many.
Current regulatory regimes have demonstrably failed; and included here are the notoriously indulgent hoax of “self regulation” (a somewhat laissez faire approach) as well as the farcical U.S. federal institutions. Most in the financial and extractive industries, especially in the U.S. agree on the need for proper reforms but are not quite on the same page in terms of the scope.
All said then, a profound re-evaluation of the regulatory concept is indicated. A new set of transparent, regulatory protocols which will close operational loopholes must be drawn up. Admittedly, it would take strong political will in a democracy where special interest groups or lobbyists with large financial war chests are active; but then recent disasters such as the Deepwater Horizon case (which has now become the U.S.’s worst oil spill with the potential for political, economic and ecological damage) would provide a good platform. The protocols must provide for contingencies, clearly lacking in the recent case and which technology has evidently lagged that of production.
Effective penalties far beyond the worthless slap-on-the-wrist must also be provided for; both the regulator and the regulated must come within the purview.
Quite often, the short-term gains from skimping on due processes pale in comparison with longer-term losses.
Disclosure: No positions
