Thursday, July 15, 2010

Moratorium Follies

This week Secretary of Interior Salazar reissued the administration's deepwater drilling moratorium, with a few new twists and a notional six month limit. This happened in spite of loud protests from the states most affected by the spill, some of their representatives in Washington, and even some skepticism from the heads of the President's own drilling commission. The old ban is still in court, and the new one probably will be soon, but this is really all moot, because whether the Salazar moratorium is technically in force or not, the legal battle over it has created a moratorium limbo that few companies would be willing to test, given the costs involved. One irony of all this is that in addition to the obvious indirect winners in OPEC, there's at least one direct winner in this hemisphere: Brazil, which will be quite happy to export to us their deepwater oil that we're inadvertently helping them to develop quicker and cheaper.

When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge's objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary's statement that he "remains open to modifying the new deepwater drilling suspensions based on new information", he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with "companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf," the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government's implied standard--as seems self-evident--then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.

When you parse through this document and examine the evidence that's been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it's hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to "an abundance of caution"--that lovely phrase we have heard several times this week--if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I'd be tempted to eliminate any possible risk of another blowout between now and November 2, too.

The problem with that approach is that the administration won't pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry--a vital national asset, not just a bunch of corporations--and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration's request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That's not BP's responsibility; it's the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.

Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I've noted before, it's the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.

I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it's about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we're going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US--unless we're happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.

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