BP will carry on regardless of massive Gulf of Mexico spill

Govts have shown repeatedly they are prepared to accept the collateral environmental risks

Specific drilling and emergency response procedures are likely to be modified after investigators determine what caused the Deepwater Horizon accident, and regulation will surely be tightened, particularly in the US, where interior secretary Ken Salazar last week announced that federal oversight of offshore drilling would be revamped. Political pressures may mean less exploration in sensitive waters, and BP could be subject to special scrutiny of its safety measures, which critics say have been lacking.

But one central fact is unlikely to change. The world — particularly the US — needs the oil that BP and other companies pump, and governments have demonstrated again and again that they are prepared to accept the collateral environmental risks. Deep-water wells are among the most promising new sources of oil, particularly since many are in politically stable regions.

“If we want to have oil, there are risks involved,” said Dieter Helm, a professor of energy policy at the University of Oxford. “You can’t expect in the global oil business that there won’t be such instances every 10 years or so. Given the number of oil wells there are, given how much is offshore, it’s impossible to imagine a world where it’s 100 per cent certain that there won’t be such disasters.”

“The Exxon Valdez has not stopped people sailing around with tankers full of oil,” although controls in environmentally sensitive areas are tighter than they were, he added, referring to a tanker that ran aground and dumped 2,57,000 barrels of oil into Prince William Sound in Alaska in 1989.

It’s too early to predict the cost of the cleanup and claims against BP and its contractors, but even if they exceed $10 billion, as many analysts expect, it’s unlikely to sink such an enormous company. BP’s profits in the first quarter of 2010 alone were $6.1 billion, on revenues of nearly $75 billion.

Beyond petroleum

With its slogan ‘Beyond Petroleum’ and its sunflower logo, BP has tried to portray itself as environmentally conscious. The slick will smear that image but the damage is unlikely to be fatal, said Pierre Noel, an energy expert at the University of Cambridge’s Judge Business School.

“If the financial penalties do not kill them, and it would have to be very big to kill them, then they will recover,” said Dr Noel. “They will do what it takes to manage the image problem. Exxon Valdez did not kill Exxon.”

Still, the April 20 disaster, which killed 11 people, is a big blow to the British company in a market, the United States, that accounts for 40 per cent of its total business. It follows two other big accidents at BP facilities in America: an explosion at a refinery in Texas City, Texas, which killed 15 workers in 2005, and a pipeline rupture that released 2,00,000 gallons of oil in Alaska’s North Slope the following year.

“Something that is so conspicuous in such a major market has a significant impact on the company,” said David Elmes, academic director of the global energy MBA at Warwick Business School in central England.

Increased scrutiny from regulators could hamper BP’s ability to expand its deep-water drilling operations in the Gulf of Mexico, a big potential growth area that already accounts for 10 per cent of its global production, Elmes added.

BP has defended its safety procedures and said in a written statement that it would be judged by its response to the disaster. “We are determined to succeed in containing this spill and stopping the leak,” it said. “If we do so and are viewed by stakeholders as having done everything in our power to support the affected region and local communities, we see no reason why we should not emerge with our reputation intact.”

President Barack Obama had proposed before the accident to open vast new areas of US waters to drilling, partly, Dr Noel said, in hopes of winning some Republican support for his wider energy and climate change policies. With new public and congressional scrutiny of offshore drilling, that political calculus is sure to change, and the administration has placed a moratorium on new leases until a report on the Deepwater Horizon accident is in.

Still, says Dr Helm, the US must get its oil somewhere. Despite the environmental risks, mining its own waters is more appealing than increasing reliance on producers like Iran, Iraq and Saudi Arabia, particularly as technological advances have made deep sea reserves more accessible.

Deep water mining

“If you choose to say, ‘We don’t want to continue developing deep-water Gulf of Mexico,’ you’re taking out a significant portion of America’s energy supplies,” Elmes said. “I’m sure there will be debate, we shouldn’t do this, deep water is risky and so on. Well, ok, what sorts of energy does the US want to use?”

The industry itself sees deep-water drilling as central to its future, with some of the most promising remaining reserves located far beneath the deep seabed, often off the coasts of stable, western-friendly countries like Brazil and Norway.

The spill, however, may mean real changes to the way oil companies and regulators approach underwater drilling. One big shift is likely to be a reversal of the trend in recent years toward contracting out much of the work involved in oil exploration, Dr Helm said. The Deepwater Horizon rig working on the BP well was owned and operated by Transocean, while key services were provided by Halliburton.

Attention has focused on the safety valves known as blowout preventers. They and the rest of the underwater apparatus may need to be modified to ensure that their default position in case of trouble is to seal a well, said Geoff Maitland, professor of energy engineering at Imperial College London. Companies might also have to keep more specialised emergency equipment on hand, including items like the giant dome that took days to build — and then failed to work — as oil spilled into the Gulf, he said.

Regulators might even demand that relief wells, which can finally stop an underwater spill, be drilled alongside every new well, an expensive but potentially effective solution, Dr Maitland said.

But while the accident has sparked a fresh wave of anti-oil rhetoric, fundamental changes to the industry are unlikely as long as politicians refuse to take the one step — imposing a tax on gasoline — that would reduce US dependence on oil, Dr Noel said.

“When Washington starts an energy debate, it’s usually several years where you discuss everything except the only solution which will have a meaningful impact,” Dr Noel said. “It’s off the table because it’s politically explosive.”