Gulf Oil Feeding Frenzy

Remember when the Exxon Valdez supertanker struck a reef in 1989 and spilled 11 million gallons of crude oil into Alaska’s Prince William Sound? If so, your first thought was “How could this happen?” After being inundated with images of oil-drenched seabirds, you likely thought, “This can’t happen again.”

Four years ago this month it indeed happened again.

Deepwater Horizon replaced Exxon Valdez as the worst offshore oil spill in U.S. history. And this time it was personal. In April 2010, practically in Alabama’s own backyard, the Deepwater Horizon rig exploded and sank in the Gulf of Mexico, unleashing a gusher a mile down at the seabed. Eleven workers were killed and for 87 days more than 200 million gallons of crude oil leaked into the Gulf from the Macondo blowout.

During the past year or so, oil companies have headed back to the Gulf with gusto, grabbing up oil leases and drilling permits with the same zeal as pelicans diving for fish.

The number of drilling permits last September hit a record high of more than 800. One of the largest deepwater drilling projects slated for 2014 is Chevron’s Jack and St. Malo fields in water depths of 7, 000 feet, with a maximum daily capacity of 177, 000 BOE (Barrel of Oil Equivalent, a term used to summarize the amount of energy found in a barrel of crude oil).

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Finding domestic sources to gain energy independence is a top priority with the Obama administration. Other factors, such as federal energy initiatives, improved technology and tighter safety regulations, have helped revive deepwater drilling in the Gulf.

Part of President Barack Obama’s energy strategy is a lease sales program administered through the Bureau of Ocean Energy Management (BOEM), an agency in the U.S. Department of the Interior responsible for managing development of the nation’s offshore resources.

BOEM’s 2012-2017 Five-Year Program focuses on expanding domestic oil and natural gas production. The program includes 15 potential lease sales in six Outer Continental Shelf planning areas in the Western and Central Gulf of Mexico, along with the portion of the Eastern Gulf not under Congressional moratorium. (The program also includes areas of offshore Alaska). Lease approval takes about two and a half years and requires an environmental impact statement.

Philip Johnson, a petroleum engineering professor at the University of Alabama, calls the Gulf of Mexico “a monster reservoir, ” but points out that drilling deep into the Gulf is a costly venture — so costly that few oil companies can drill on their own, instead forming joint ventures.

Johnson notes that deepwater platforms can cost $3 billion, and no oil company will risk losing such an investment. Since the BP spill, there have been significant technological advances in stopping a spill. When the Deepwater Horizon rig exploded, he says, “They went down a whole bunch of blind alleys, and it’s unlikely a spill today would last three months.”

In July 2010, ExxonMobil, Chevron, ConocoPhillips and Shell formed the Marine Well Containment Co. (MWCC) to provide stronger containment response capability in the Gulf of Mexico. Today, MWCC has grown to 10 member companies who say they are committed to being ready to respond to Gulf accidents.

CEO Marty Massey says the company is developing an expanded containment system, which will increase response capabilities in the Gulf. It is expected to be available this year.  Last year, MWCC selected Theodore, on the west side of Mobile Bay, as one of its two shore base locations used to house the company’s system equipment.

Despite the ongoing debate over offshore drilling, Johnson says it’s unlikely to ever lose support in Alabama. Even with Alabama’s short coastline, the Gulf of Mexico is part of its DNA and economic lifeline. A Pew Research Center survey in September 2013 found that a majority (58 percent) of Americans favor more offshore oil and gas drilling, a somewhat smaller majority than in 2012, when 65 percent supported increasing offshore drilling.

“The Gulf states depend on offshore drilling, and no one would tolerate an end to it, ” adds Johnson. “Fishermen work on the rigs so they can pay for their fishing boats. California doesn’t allow new offshore drilling, but their economy doesn’t depend on it.”

Energy consultants estimate by 2020 the deepwater Gulf — comprising about half of the Gulf’s 252, 000 square miles of federal waters — will produce an average of 1.9 million barrels a day. The U.S. Department of the Interior estimates the Gulf has 48 billion barrels of oil yet to be discovered. Offshore Gulf oil production accounts for 23 percent of total U.S. crude oil production, according to the U.S. Energy Information Administration.

“Gulf of Mexico oil production is among, if not the most, profitable of any region in the world, ” says Fadel Gheit, managing director of oil and gas research for Oppenheimer & Co. in New York. “This is because of existing infrastructure, oil field services, and a stable and attractive fiscal regime. Oil production is much more profitable than gas production, because of high oil prices and low gas prices.”

Gheit says unit profit in the Gulf of Mexico is probably the highest in the world, in the $25 to $30 BOE, or 50 to 100 percent above the industry’s world average of $12 to $18 BOE.

Dana Wallace, assistant professor of accounting at the University of Central Florida in Orlando, has researched shareholder wealth effects and environmental disclosures after the BP oil spill, along with Frank Heflin, accounting professor at Florida State University. They found that for the oil and gas industry as a whole, share prices were not significantly different from expectations in the aftermath of the spill.

Yet they found a significant decline in shareholder wealth in the eight-day period following the spill for those oil and gas companies with U.S. offshore drilling operations. “So our evidence suggests the BP spill did create a lot of uncertainty among investors for oil companies drilling offshore, ” notes Wallace.

Wallace says environmental accidents can affect share prices of companies within the related industry. Specifically, those firms involved in the environmental accident or those firms with similar operations are more likely to be impacted. Investors worry that Congress or the EPA or the president might increase fines, impose sanctions or require new safety procedures throughout the industry.

“In other words, environmental accidents increase the potential for various regulatory costs, ” Wallace says.

“There must be significant deterrents in place to make it more expensive to spill than drill carefully, ” says Casi Callaway, executive director of Mobile Baykeeper.

Photo by Laura Courtney

Of course, the environmental ramifications of another oil spill in the Gulf are more far-reaching than monetary concerns for oil company shareholders. Casi Callaway, executive director of Mobile Baykeeper (a nonprofit group protecting the Mobile Bay watershed), believes the key to preventing another major spill is a commitment from oil companies to protect the public’s health, the environment, natural resources and livelihoods rather than their bottom line.

“There must be significant deterrents in place to make it more expensive to spill than drill carefully, ” says Callaway, noting that Mobile Baykeeper is not opposed to offshore drilling, if managed properly, to reduce the nation’s dependence on imported oil.

Mobile Baykeeper reviews every coastal consistency permit that is put forward in Alabama’s waterways, Callaway says. “We don’t always comment, but we are aware of each permit that goes through and commenting when we see problems. We are also working to be included in the creation of the next Area Contingency Plan that outlines how response moves forward.”

In addition, Mobile Baykeeper is both following and working on dispersant studies to determine whether dispersants should be used to diffuse spilled oil and if so, when. The environmental organization also supports removing dispersants on the EPA approved list if they are found to be toxic.

According to the BOEM, offshore oil and gas lease sale supports continued growth in safe and responsible domestic oil and gas production. Sean Dixon, coastal policy attorney for the Highlands, N.J.-based Clean Water Action, isn’t so sure and believes that the total impact of the BP spill is yet unknown.

“Regarding the ongoing offshore oil and gas production, there is no such thing as ‘responsible’ or ‘safe’ offshore fossil fuel extraction, ” Dixon says. “Our reliance on fossil fuels continues to further disrupt our climate, and a suite of basic changes called for by the BP Deepwater Horizon Commission Report have been categorically ignored for years.”

Dixon doubts that improved drilling technology and the newly formed Bureau of Safety and Environmental Enforcement are enough to prevent another oil spill. “Human error, natural disasters and aging infrastructure, especially coupled with chronically underfunded oversight – as we saw in West Virginia – could all lead to catastrophic oil disasters regardless of how technologically advanced offshore oil rigs claim to be.”

Callaway says if local, state and federal agencies continue to ignore critical monitoring and enforcement, there could be significant problems with the resurgence of offshore drilling in the Gulf. Mobile Baykeeper monitors where rigs are placed to protect grass beds and open bottoms needed for shrimp and other seafood harvest.

With heightened offshore drilling in the Gulf of Mexico, Callaway believes the challenge is to make certain that oil companies comply with regulatory standards. If they rise to that challenge, she says, “They could save lives and livelihoods, namely our tourism, seafood, shipping and other water-dependent industries in Alabama.”

Jessica Armstrong is a freelance writer for Business Alabama. She lives in Auburn.

Text by Jessica Armstrong

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