National Commentary

Deepwater Horizon: The Aftermath

With BP’s oil well close to being permanently sealed, we are beginning to gain more insight into the effects the blowout will have on oil production in the years ahead.

Government scientists are now saying that the leaking well started out spewing some 62,000 barrels a day (b/d) of oil soon after the explosion but that number fell to about 53,000 b/d just before the well was capped 87 days later. This tells us that not only were some five million barrels of oil released into the Gulf, but gives some credit to the concerns of those who believe that deepwater wells will only produce some 10 to 20 percent of the hoped-for lifetime production. I have no idea what a normal rate of decline for a deepwater well should be, but a 14 percent drop after just three months “production” would have left the well spewing only some 20,000 b/d after a year, were it not stopped first.

As U.S. law requires that BP pay a fine of $1,100 for each barrel spilled if there was no negligence and $4,300 a barrel if the government finds BP grossly negligent. This means that BP could have to pay a fine of anywhere from $5.4 billion to $21 billion depending on how negotiations with the government go. Needless to say fines of this size would do bad things to BP’s future. Most believe the fine will be negotiated down to a level that will keep the company afloat. BP has already announced that it is setting aside $32 billion to pay for the spill and is busy selling off assets around the world to pay for its liabilities. By selling assets rather than paying for the spill from earnings, BP retains the hope that it can continue to pay dividends, thus keeping thousands of pension funds solvent.

BP’s troubles do not stop with money, however, for the U.S. House of Representatives has already passed a bill to ban bad, oil-spilling, companies from continuing to drill in U.S. waters. Passage of similar legislation by the Senate is seen as unlikely, so BP may be safe for a while.

The impact of Deepwater Horizon goes well beyond the fate of BP.

BP of course is not alone in liability for the oil spill. Mitsui and Andarko that owned shares in the run-away well, and Transocean that owned the ill-fated drilling rig, are saying the whole affair is BP’s fault and are refusing to pay for the cleanup. All this will be litigated for many years – or decades.

The impact of Deepwater Horizon goes well beyond the fate of BP, as a highly controversial Obama administration ban on deepwater drilling in US waters has been in place since right after the explosion and is due to continue until November. Not only is this drilling ban costing the oil industry billions of dollars, it is inflicting severe damage to economies of the Gulf Coast states where it has left thousands unemployed. Pressures to rescind or modify the ban are building and some change is likely before November. In the meantime some Gulf oil production will be lost in the second half of this year and at least through 2011 due to delays in the completion of wells.

No matter how the arguments over the deepwater drilling bans come out, it is almost certain that major and costly changes will be made in the U.S. regulations governing offshore drilling.

Earlier this week, the new head of the U.S.’s offshore-drilling oversight agency vowed to undertake “aggressive investigations of oil and gas companies.” The upshot of all this is that the offshore-drilling is going to be much more strictly regulated than before which means slowdowns in exploratory drilling and likely much higher costs for the industry. Legislation making its way through Congress would require offshore drilling rigs to use much more elaborate and redundant blowout preventers that would not be compatible with existing drilling rigs. Currently only half the rigs working in the Gulf have modern blowout preventers. Some of the older drilling rigs would have to be replaced to accommodate the new safety devices. While the oil companies can handle the expenses involved, sorting all this out will take time and could delay the return of Gulf drilling activity to levels seen before the explosion for quite some time.

In the Gulf of Mexico, there is so much drilling activity that help is readily at hand to cope with an emergency. If industry plans to maintain a set of standby equipment to deal with a future Deepwater Horizon type blowout come to fruition, then any future blowouts in the Gulf could in theory be contained in days rather than months. More remote drilling sites are another story. In the U.S., Canadian, and European Arctic, help is likely to be a long-time in coming. The U.S. and Canada already have a hold on most Arctic drilling and the EU is talking about following suit.

If stringent and expensive rules are eventually promulgated for drilling in U.S., Canadian, and EU waters, there will be pressure to take the same measures in other areas, particularly off the coasts of Africa and Brazil. Should the global offshore drilling industry eventually become subject to the new and stricter rules and procedures mandated by the U.S. government, costs are likely to increase and there will be delays in bringing in future offshore production.

From the perspective of peak oil production all this suggests that in a few years global oil production is almost certain to fall faster than if the Deepwater disaster had never taken place. While it is too early to quantify just how much slower, more costly offshore drilling will contribute to pace of the decline, the quantities of oil that will not be produced in the next decade are likely to be significant.


Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.