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Our Insights 18 Jan 2011

Deepwater Horizon: A Great Depression for the Industry?

By Kyra Maya Philips

This hasn’t been a good month for BP. First the presidential commission investigating Deepwater Horizon released its damning and much anticipated 380-page report, stating, bluntly, that BP and all others involved (primarily Transocean and Halliburton) underwent a “failure of management,” materializing in what could otherwise have been an “avoidable” spill.

Next came the forced closure of the company’s Trans-Alaska pipeline system following the discovery of a significant leak on January 8th, driving up the price of oil and forcing BP shares to slide nearly 2.5% the following Monday morning. Then came the claim, just a day later, by a group of Colombian farmers that work by BP Exploration Company (Colombia), together with the country’s national oil company and other multinationals, caused substantial soil erosion, contaminating key water supplies and leading to the perishing of both crops and livestock.

These developments made me reflect on the days and weeks following Deepwater Horizon, when other oil industry giants sat on their high horses, proclaiming that this kind of catastrophe is an aberrance, accorded solely to BP’s lack of self-regulation and disregard for safety.

Is it, though? The scale and impact of Deepwater Horizon were indeed unprecedented, but the nature of such disasters isn’t particularly a novelty. BP itself suffered a spill in Prudhoe Bay in Alaska as recently as 2006. We all remember Exxon-Valdez. What about the Ixtoc I blowout in the Bay of Campeche in Mexico in 1979, which spilled nearly 140 million gallons of crude oil? We’re told all the time that events like these are just anomalies, that the technology – never mind the actual track-record – is better than ever. But the very fact that the rest of the industry rushed to shape the narrative that BP and its partners were just a few bad apples likely belies a much larger crisis for the industry as a whole.

The fact is that oil and gas companies have been gradually exploiting more risky, difficult-to-extract oil reserves, making disasters of this kind far more likely with every passing year, especially as this shift has not been accompanied by equally stricter and more robust attention to safety. All in all, Deepwater Horizon arose due to the troubling levels of complacency with regard to safety from both the US administration and the oil and gas industry. This complacency is illustrated in the National Oil Spill Commission’s report, which describes clearly how BP, prior to the disaster, chose riskier alternatives that saved the company’s time, and therefore money. During the hearings on Capitol Hill following the spill, congressman Ed Markey of Massachusetts revealed BP’s allocation of resources: over three years, the company spent $39bn for the exploration for new oil and gas, whilst the average investment in research and development for safety, prevention and spill response was a comparatively meagre $20m per year.

This isn’t the full picture either. Only a cursory glance at the US regulatory body entrusted with the job of overseeing the industry reveals cracks sufficiently large enough to drive a Hummer through them. The US Minerals Management Service (MMS) – pitifully underfunded and troublingly close to the industry itself – sits in stark contrast to the regulatory bodies of other countries with extensive offshore oil activity, namely Britain and Norway. While the MMS merely requires companies to complete box-ticking safety audits, the UK model obliges them to individually evaluate the risks for each and every operation and illustrate how, in the case of an emergency, they would respond.

It is when everything falls apart that we have a chance to re-build. The most courageous financial regulation in the United States came as a response to the Great Depression. Deepwater Horizon is not just BP’s problem, it is the Great Depression of the entire oil industry. Major players industry-wide should, instead of isolating one culprit, look to change those aspects of the system which came together to engender the worst man-made environmentally and socially devastating spills in US history. Only then will a Deepwater Horizon not recur.

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