Big Oil's New Self-Regulatory Investment (BP, CVX, XOM, COP, RDS-A)

The continuing disaster in the Gulf of Mexico is partly due to the lack of a coordinated response plan in the event of a well blow-out deep below the surface. The oil companies, and the federal government, adopted a ‘What-me-worry?’ attitude to the possibility of a blow-out. But that attitude has changed now as a result of BP plc’s (NYSE:BP) response to the Macondo well blow-out.  Chevron Corp. (NYSE:CVX), Exxon Mobil Corp. (NYSE:XOM, ConocoPhillips Corp. (NYSE:COP), and Royal Dutch Shell plc (NYSE:RDS-A) have agreed to pitch in $250 million each to build and deploy a rapid-response system that would contain and capture the oil if there is another deepwater well blow-out in the Gulf of Mexico. BP, arguably the company with the most experience dealing with leaking oil from a deepwater Gulf well, is not part of the consortium. Go figure.

Developing this system is intended to convince the Obama administration to lift its temporary ban on deepwater drilling in the Gulf more quickly than might otherwise be the case. The companies are effectively admitting that they had no plan in place to deal with a disaster like Macondo.

The timeline for construction and deployment of the system is estimated to be six months. The plan calls for a system that is capable of containing leaks in water up to 10,000 feet deep by capturing up to 100,000 barrels of oil/day. The system will be designed to be deployed within 24 hours of an incident and to be able to stop the flow of oil within weeks.

Congress is considering several bills to deal with similar incidents, including one which would require drillers to drill a relief well along a new exploration well. That would essentially double the cost of exploration drilling, something that all drillers would like to avoid.

Gulf oil and natural gas is critical to US supplies, and the industry which provides that supply has decided that it had best get out in front of the parade that is forming to put new, stiffer regulations on the industry. About 30% of US crude oil production comes from the Gulf, supporting more than 170,000 jobs.

The hapless Minerals Management Service, now renamed the Bureau of Ocean Energy Management Regulation and Enforcement, has said that the new rapid response plan is a “move in the right direction,” according to The New York Times.

Both the deepwater drilling industry and the federal regulators have taken a severe, and well-deserved, beating over the lack of preparation for such disaster as we’re now seeing in the Gulf. Whether or not Congress will, or should, leave these two entities to their own devices in fixing the problem is arguable. The rapid response system only deals with problems after they happen, and Congress may be willing to let the experts deal with that.

Regulations for making exploration itself safer are not likely to be left totally to the new Bureau and the industry. A disaster of the scope of the Macondo well blow-out invites political meddling from every direction.  Local and state governments will want a say, and so will the feds and environmental groups, and the list could go on. A quick solution that leads to lifting the moratorium is unlikely.

Don’t you just feel safer already?

Paul Ausick