More on the Deepwater Horizon

From Peter Coy and Stanley Reed in Bloomberg:

Should the heaviest portion of the spill come ashore, it may cause damage rivaling the 1989 wreck of the Exxon Valdez in Alaska’s Prince William Sound, despoiling the breeding grounds of species in the fragile coastal-buffer zone that provides hurricane protection.

Already, the oil is threatening some of the most productive and profitable shrimping and fishing grounds in the world, part of a Gulf industry that provides a quarter of the seafood in the U.S. A sheen of oil was confirmed on the Chandeleur Islands off Louisiana by the Coast Guard.
Should efforts to seal the well go awry, they could cause even larger volumes of oil to spill. In some scenarios, the Gulf of Mexico loop current could even carry the oil around Florida and up the East Coast. The unfolding environmental disaster might yet become the worst in U.S. history.

This is a very informative article. I found all sorts of interesting tidbits. One elicited some nostalgia, if it can be called that:

The Deepwater Horizon accident occurred at the final stage of the job, as the rig crew was preparing to put a temporary seal on the well and move on to another site. The exact circumstances aren’t likely to be known for months, though it’s clear that pressurized natural gas was able to infiltrate upward, meaning the seal was imperfect. A 2007 MMS study found that cementing was a factor in 18 of 39 Gulf of Mexico blowouts over 14 years. The pressure surge from a gas bubble has a nickname: the kick.
Although there are procedures for recementing, those take time and money. Each extra day of leasing the drilling rig costs about $500,000. Halliburton Co. was in charge of cementing, under BP’s direction. Robert MacKenzie, a former cementing engineer who is now a securities analyst for FBR Capital Markets Corp., said he wants to know whether BP ordered a so-called cement bond-log test to evaluate the cementing. Such a test would have determined whether a remedial cement job was necessary. BP declined to comment.

When I see the word “Halliburton”, well, I think back to 2001 and spending time sitting on (low level) staff level meetings related to the Vice President’s (Cheney) task force on energy development policy. From the report:

Concerns over the potential impacts of oil spills have been a major factor behind imposition
of the OCS moratoria. For areas that are available for possible development, it is projected
that with advanced technology, we could recover 59 billion barrels of oil and 300 trillion cubic feet of natural gas. This type of exploration and production from the OCS has an impressive environmental record. For example, since 1985, OCS operators have produced over 6.3 billion barrels of oil, and have spilled only 0.001 percent of production. Naturally occurring oil seeps add about 150 times as much oil to the oceans. Additionally,
about 62 percent of OCS energy production
is natural gas, which poses little risk of pollution.
For those areas that are available for potential coastal zone and OCS exploration and production activity, businesses must comply with a variety of federal and state statutes, regulations, and executive orders. Aspects of these, under the Coastal Zone Management Act and the Outer Continental Shelf Lands Act and their regulations, attempt
to provide for responsible development
while considering important environmental
resources. However, effectiveness is sometimes lost through a lack of clearly defined
requirements and information needs from federal and state entities, as well as uncertain
deadlines during the process. These delays and uncertainties can hinder proper energy exploration and production projects.

Not sure how the spill-to-production calculation is affected by recent events to date. In any case, here is one of the recommendation from Vice President Cheney’s report:

- The NEPD Group recommends that the President direct the Secretary of the Interior to consider economic incentives
for environmentally sound offshore
oil and gas development where warranted by specific circumstances: explore opportunities for royalty reductions,
consistent with ensuring a fair return
to the public where warranted for enhanced oil and gas recovery; for reduction
of risk associated with production in frontier areas or deep gas formations; and for development of small fields that would otherwise be uneconomic.

Regarding the rate of spill, the Economist notes the degree of uncertainty:

The United States Coast Guard has estimated that 5,000 barrels of oil are being added to the slick every day. Ian MacDonald, a marine biologist at Florida State University who studies oil that comes out of natural seeps on the sea floor, estimates on the basis of pictures and maps from the coastguard that the rate may be as much as five times that. The largest accidental oil spill in history, which was also in the Gulf, was due to a 1979 blowout on a Mexican rig called Ixtoc-1 (see chart). Between June 1979 and March 1980 it released around 3.3m barrels. For comparison, the Exxon Valdez fiasco in Alaska in 1989, America’s most infamous oil spill, released just 260,000 barrels. At the coastguard rate the Deepwater Horizon leak would take years to match Ixtoc-1; at Mr MacDonald’s rate, months.

A key research agenda should be developing methodologies to measure the externalities associated with domestic versus foreign oil production, as well as the externalities associated with oil consumption.


The Heritage Foundation has already drawn some early conclusions here:

Many activists and politicians are using the spill to push a pre-conceived agenda. For example, some are clamoring for increased alternatives like wind and solar or are cranking up the global warming rhetoric. But an offshore spill does not change the fact that alternative energy sources have a host of problems of their own or that cap and trade or similar measures to address global warming are a costly solution to an overstated problem.[1]
Nor should the offshore spill affect onshore drilling, where there is no risk of oil being dispersed into the water. And it certainly should not impede promising alternatives like shale oil, which currently being delayed by this Administration.

This appears to be an argument for this policy option; I am happy to see that Heritage is not over-reacting.


6 thoughts on “More on the Deepwater Horizon

  1. Steven Kopits

    Externalisties of oil production from the Gulf:
    - 11 deathes, probably $2bn loss of property; environmental damage in the multiple billions, probably in the $10-20 bn range all in.
    - CO2 to the atmosphere; value that as you will.
    On the other hand:
    - US offshore oil production is forecast at 31.4% (1.58 mbpd) of US crude production for 2010 by the EIA
    - Deepwater Gulf of Mexico is about 25% of US crude production.
    Loss of these volumes, assuming no offsets from increased production by Saudi Arabia, would result in a price increase of probably $10-20 / barrel, and would increase US imports by $150-300 mn per day, or approximately $50-100 bn per year. So the payback on allowing drilling at an environmental cost of $20 bn as opposed to higher imports on an annual basis of, say, $60 bn per year, is about four months.
    No one wants an oil spill, but on a coldly calculated cost-benefit basis, the math appears a no-brainer.
    Let’s add to this dependence on OPEC. French oil major Total sees dependence on OPEC rising from 43% in 2008 to 54% in 2020. (See slide 3; I asked Total CEO de Margerie what he felt about this forecast, and he described it as “optimistic”. Reducing US production would simply hasten and exacerbate this situation. And I need hardly mention the externalities of dependence on Middle East oil; estimates the cost of the Iraq war at $700+ billion to date.
    Now, there are legitimate questions about whether we want to use our oil resources today or save them for the future. “The Optimal Timing of the Extraction of Non-Renewable Resources” would make an interesting econ doctoral thesis. Someone’s probably written it already.

  2. RicardoZ

    It is goulish how many just seem to hover over statistics from the BP oil problem. Certainly it is a problem and everything that can be done should be done, but to compare it to the Exxon Valdez spill is absurd.
    The Exxon Valdez spill was 10.8 million gallons all at once in an area of 11,000 sq. miles. The BP spill is 210,000 gallons per day over an area of 600,000 sq miles. The Exxon Valdez was almost 1,000 gal per sq mile while the BP spill is less than 1/2 gal per sq mile per day. After 20 days it is only 7 gallons per sq mile.
    I am not saying that this is not a problem and that we should just ignore it, but it has to have some perspective. Remember, every crisis is an invitation to government to expand its power and intervention, and the more severe the crisis the greater the government grab for power.

  3. aaron

    I lean toward now is better as far as the extraction timing question is a concern.
    Reposted from Hamilton’s thread on Offshore drilling (slightly revised):

    I think we’d be suprised how much a serious drilling initiative affects oil prices. Signaling that we are serious about cashing in on our reserves would spur competition. Right now many producers are operating at low efficiency and aren’t expanding production because they believe the price will stay high or go up. They are relying on price changes to generate income instead of good operations.
    See Krugman’s 2001 paper on multiple equalibria in oil prices.
    I think the key is that we need to announce that we believe that alternatives will drive down the value of oil, and invest heavily in them, and that we need to sell it now while it’s worth something.
    Not seriously persuing drilling says we have no confidence in alternatives. It suggests that our current policies are little more than trasfers of wealth and there is no prospect of actually generating value.

  4. Expat

    Mr. Klopitz’s argument is facile and shallow. The estimations of environmental costs are not reasonable given that they don’t take into account very long-term and accumulated effects of oil pollution. Of course, the estimate for the rise in price associated with the loss of US offshore production is as equally unfounded; my gut feeling is the price would rise more than $20 per barrel.
    But, what of the local effects on fishing and fishermen, tourism, and general well-being. Does your cost-benefit analysis really taking into account the long-term changes to coastal life and economies. How many spills before the proverbial camel’s back is broken?
    Or, for a crass and cheap retort and assuming you have children, how much national economic benefit would you accept for exchanging the life of one of your kids in order to build a factory in your town? And, yes, that is a deep, fundamental part of this question.

  5. GNP

    Steven Kopits: Does it really matter who produces the largest share of global oil in the decades to come? Is so-called US dependence on Mid-East oil really a problem? And if so how?

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