Rejecting oil is not an option, says report

Rejecting oil is not an option, says report
ByEd Crooks in New York and Sheila McNulty in Houston
Published: January 11 2011 19:36 | Last updated: January 12 2011 01:08

The conclusions of National Commission on the Deepwater Horizon disaster
are based on one inescapable fact: the US needs oil.

The commission's report, 306 pages plus appendices and an index, is
extremely well-written, including some gripping narrative of the
disaster and some lucid explanations of the complex procedures of
deep-water drilling.

In its assessment of the future of offshore drilling in the US, the
National Commission on the BP spill agrees with the oil industry about
the ends but disagrees on the means.

The commission's report, 306 pages plus appendices and an index, boils
down to one conclusion: US offshore oil and gas reserves will inevitably
be exploited, and the only issue is how to minimise the risk of that
development.

Weaning the US off oil, the report says, "would take decades to effect
even if we agreed on the course of action tomorrow".

More than half of US oil consumption is already imported, exposing the
economy to threats of disruption of foreign supplies, and creating a
trade deficit for oil and gas that, as the report points out, typically
exceeds the much-publicised deficit with China.

With oil production onshore and in shallow water in long-term decline,
although now being boosted by the development of "unconventional"
resources such as the Eagle Ford shale in Texas, the US will have to
exploit its deep-water and Arctic reserves if it is not to become even
more dependent on imports.

As William Reilly, one of the co-chairmen of the commission, put it: "We
simply cannot walk away from these resources."

That much the industry agrees on. Marvin Odum, the head of the Americas
oil and gas production business of Royal Dutch Shell, said oil and gas
from offshore areas, including Alaska, where Shell wants to drill, were
"a fundamental part of the US energy supply and economy".

Where the commission and the oil industry part company is over the
regulation of those resources.

Mr Reilly said "years of industry and government complacency and
carelessness regarding safety" led to the Deepwater Horizon disaster as
an "almost inevitable result".

The commission was particularly critical of the organisation and funding
of the Minerals Management Service, the former regulator, saying it
tried to deliver "safety regulation on a starvation diet".

With its budget lower in real terms in 2009 than in 1984, but offshore
activity booming, "MMS regulators could not possibly keep pace", the
report says. As the hazards of the industry increased, with the push to
deeper water, regulatory scrutiny faded. There was a steep fall in the
number of unannounced inspections, and the most recent analysis of
accident data was in 2000.

The MMS has been broken up, with offshore supervision moving to the new
Bureau of Ocean Energy Management, Regulation and Enforcement, but the
commission believes that the changes have not gone far enough.

It called both for more institutional change, such as creating a new
safety regulator, and for increased funding.

The regulator's budget in 2009 was about the same in real terms as in
1990, even though US oil production in the Gulf of Mexico had risen from
275,000 barrels per day to 567,000 b/d, and the proportion coming from
deep water had risen from 4 per cent to more than 80 per cent.

The commission highlights the role of the American Petroleum Institute,
the industry body that produces technical standards used in the US and
around the world, saying it "favours rule-making that promotes industry
autonomy from government oversight".

The commission also recommends a new private sector organisation, along
the lines of the Institute of Nuclear Power Operations. Set up after the
Three Mile Island accident in 1979, the INPO is an industry-backed body
that sets and enforces safety standards for US nuclear plants,
complementing the work of government regulators.

Some industry representatives have already started to push back against
those ideas.

Erik Milito, upstream director for the API, said the report "does a
great disservice to the thousands of men and women who work in the
industry and have the highest personal and professional commitment to
safety".

The API was already working towards a safety programme for deep water,
he said, adding: "We hope that the administration recognises the work
already done and the need to rapidly restore vibrancy to the nation's
offshore oil and natural gas production ­programme."

Deepwater drilling in the Gulf of Mexico was suspended after the
Deepwater Horizon disaster and has not yet resumed, because of delays in
securing permits from the BOEMRE.

Rex Tillerson, the chief executive of ExxonMobil, the largest US oil
group, did not comment on the commission's findings but has previously
cast doubt on whether the INPO model would be appropriate for the oil
industry.

The commission was also attacked over its suggestion that the $75m cap
for oil companies' liabilities resulting from a spill should be raised,
to an unspecified amount.

Bruce Vincent, chairman of the Independent Petroleum Association of
America, said the $10bn or $20bn cap proposed by some politicians would
be prohibitive to smaller oil companies.

"Such proposals would empower multinational and foreign oil companies
while creating an impossible financial challenge to America's
independent producers who compete with these corporations offshore,'' he
said.

Political and industry opposition has repeatedly blocked past attempts
to reform offshore regulation. But it is in the industry's interest to
make the new system work.

Mr Reilly pointed out that the consequences for oil exploration of
another spill, even if much smaller than the Deepwater Horizon disaster,
would be severe.

"The confidence that the American people had in the safety of offshore
drilling has been shattered, and the fallout has affected every company
drilling in the Gulf, no matter how excellent their safety record," he said.

However, the Commission also recognises that the powers of the US alone
to control the threat of an offshore spill to its coastline is limited.

Cuba and Mexico are looking at deep-water drilling in the Gulf of
Mexico, and countries with Arctic waters such as Greenland and Russia
are pressing ahead with plans to develop their reserves.

The drive to raise standards in the US may also need to be backed by
more international agreement.

http://www.ft.com/cms/s/0/55501ab4-1db4-11e0-aa88-00144feab49a.html#axzz1D10dqzlF