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Insights 9 Sep 2010

Deepwater Horizon – The Beginning of the End, or More of the Same?

By Jeff Erikson

Yesterday I spent a few minutes on BBC Radio, as a guest on its World News program (the segment starts about 26:30 into the program). The question posed to me and my counterpart on the program, Professor Peter O’Dell of the London School of Economics, was how the BP Deepwater Horizon (DH) accident will affect the future of the oil and gas industry. This piece was a component of the broad coverage of DH on the day that BP published its own internal investigation on the causes of the accident.

At the risk of being somewhat repetitive for those who heard the broadcast, I’ll reiterate here some of what I said on air, and some that I didn’t get the chance to express (7 minutes is really short when you are sharing air time with two others).

So how do I think DH will affect the future of the oil and gas industry? While there most certainly will be some elements of the industry that will substantively change, DH will not turn the industry on its head – offshore drilling will be with us for a good while.

The way offshore drilling – particularly in deepwater – is approached, however, will change significantly in some, but not all, parts of the world. Regulations are certain to tighten in the US, Europe and other developed regions of the world, and companies will develop more robust internal EHS and operational integrity management systems. This is exactly what occurred in the aftermath of the 1988 Piper Alpha fire in the North Sea (in which 167 people died on an explosion on an oil rig), and after the Exxon Valdez spilled 11 million gallons of oil into Prince William Sound in Alaska. Piper Alpha dramatically changed industrial safety in the North Sea, and the Valdez resulted in big changes to shipping and environmental protection. But neither incident signaled the beginning of the end of the oil industry.

Tougher regulatory oversight and longer permitting processes will be implemented, especially in the US. And redundancies in equipment and controls, and other risk reduction measures related to exploration and production wells will increase. Some countries, states, provinces and territories will impose larger buffer zones off their shoreline, to reduce the likelihood that their beaches and marshlands will be spoiled. All of these changes will add to the cost and effort of extracting oil from beneath the sea.

DH has raised the issue of acceptable risk, and how we look at and manage low probability/high impact events. This concern will spill over into other energy issues, including hydraulic fracturing in deep shale deposits which is accelerating rapidly in the US. It will also impact how governments think about what the oil industry euphemistically calls “frontier oil”. The term conjures up images of the pioneering spirit, rugged individualism, can-do optimism. But a more accurate term is “difficult oil”, or better yet “risky oil”. As we move into more difficult environments to extract oil, the risk of another disaster is ever increasing. Is this the future we desire?

(By the way, it’s distressing to me – and I know to some of my colleagues at SustainAbility – that much of the debate about where we source our energy focus on where the oil comes from and not how we transition away from oil altogether. The debate is teed up as Gulf oil vs. Middle East oil, or arctic oil, or tar sands oil. Largely missing is the solution that we feel is key to a shift to a low-carbon economy: transport electrification.)

In order for alternatives to oil (and coal and gas) to be viable – to have a significant share of our energy mix – the economics of energy must change. And for the economics to change, the full costs of oil extraction must be borne by those who also benefit, namely oil companies and ultimately consumers of petroleum products. In other words internalizing what are now externalized costs. And that will require public policy changes which enable the market to behave in the way it was intended.

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