Oil Industry Leaders Try to Avoid Regulatory Fallout From BP's Gulf Oil Spill

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The leaders of the three largest U.S. oil companies will testify before Congress today (Tuesday) about the Gulf oil spill's effect on U.S. energy policy, hoping to convince legislators to be cautious about introducing new regulations on the industry.

Chief Executive Officers Rex Tillerson of Exxon Mobile Corp. (NYSE: XOM), John Watson of Chevron Corp. (NYSE: CVX) and James Mulva of ConocoPhillips (NYSE: COP), are scheduled to appear before a House Energy and Commerce Committee panel examining offshore drilling safety and energy policies.

The review comes after a blowout at BP PLC's (NYSE ADR: BP) Deepwater Horizon drilling platform in the Gulf of Mexico caused a massive oil spill.

The executives will press lawmakers to delay making any changes to offshore drilling rules that could discourage exploration in U.S. territorial waters without making meaningful contributions to safety, Gianna Bern, president of Brookshire Advisory & Research Inc., which advises oil companies on strategy and risk management, told Bloomberg News.

Drilling on more than 30 deep-water rigs off the coasts of Louisiana and Texas has been ordered to stop for at least six months while federal officials conduct a review of offshore safety practices. The Gulf accounts for 30% of U.S. oil production, according to the Energy Information Administration (EIA).

The hearing presents the U.S. oil CEOs with an opportunity to distance their companies from BP. BP has lost 43% of its market value since the disaster and has been heavily criticized by President Barack Obama for failing to cap the leaking well. The company's shares yesterday plunged another 9.7% to close at $30.67 a share.

"A crucifixion of the whole oil industry for the sins of BP in the form of a ban on deep-water drilling isn't a good idea because look at all the people it's going to put out of work," Anthony Sabino, who teaches oil and natural-gas law at St. John's University in New York, told Bloomberg. "Exxon and ConocoPhillips will stress their own safety records to make that case."

Chevron chairman and CEO John Watson told The Wall Street Journal he accepts the need for tighter drilling regulations in the wake of the spill, which he called a "humbling experience for the industry." However, he also said the six-month moratorium on deep-water drilling imposed by the Obama administration is unnecessary.

Even before the current disaster, Chevron had in place policies and procedures that might have avoided the blowout that caused the spill, Watson said.

"This incident was preventable," he told The Journal.

Watson also noted that industry's overall safety record is strong and that both industry and government panels have drawn up new safety recommendations in light of the spill.

"We favor rapid adoption of those recommendations," Watson said.

However, environmental groups oppose a quick return to drilling, saying the spill has closed as much as 37% of the Gulf of Mexico to fishing, killed countless wildlife and polluted 140 miles of shoreline from Louisiana to Florida.

David Goldston, director of government affairs for the Natural Resources Defense Council, said drilling shouldn't resume until a presidential commission appointed to investigate the disaster finishes its work.

"We don't really understand a lot about what happened here," Goldston told The Journal. "We don't really understand how endemic the problems are, and that all needs to be sorted out before drilling is resumed."

Lawmakers may ask the executives from Exxon, Chevron, ConocoPhillips and Royal Dutch Shell PLC (NYSE ADR: RDS.A) to describe safety measures they have used offshore to avoid the sort of disaster BP faced, Brookshire Advisory & Research Inc.'s Bern, a former BP crude trader, told Bloomberg.

In 2007, Exxon abandoned a deepwater exploration project in the Gulf called Blackbeard rather than risk a blowout. The company mothballed the project, which was designed to drill more than six miles beneath the sea floor, after repeated pressure surges indicated the well was unstable, Bloomberg reported. And BP engineers notified federal regulators at the Minerals Management Service that they were having difficulty controlling the well drilled by the Deepwater Horizon six weeks before the disaster, according to e-mails released by the Energy and Commerce Committee.

"I don't think this would have happened on Exxon's watch," Tom Bower, author of "The Squeeze: Oil, Money and Greed in the 21st Century," said in a June 11 interviewwith Bloomberg. "They'd be much more careful and much more conscious of the need to supervise subcontractors."

About 80% of the oil and 45% of the natural gas in the Gulf comes from deepwater exploration according to the American Petroleum Institute. Delays in new drilling projects would lead to another 20% reduction in deepwater production by 2015 according to API.

Analysts warn that less production in the Gulf would eventually deplete domestic reserves and possibly lead to higher prices for energy in the future.

"These executives need to explain to the politicians that if you permanently shut us down in the deep water it's going to wreak havoc with energy production and put the United States even more at the mercy of foreign oil producers," told Bloomberg.

Oil sector expert Dr. Kent Moors told Money Morning on June 3 that the oil spill is bound to result in more regulation. The spill "is going to summon the heavy hand of government in a way that will cost American consumers dearly while also keeping regular U.S. investors from reaping green."

New regulations which hamper drilling will mean "energy-sector profits will be much tougher to come by, both for companies, and for investors," said Moors, a well-connected international-energy-industry consultant who is also the editor of the Oil and Energy Investor advisory service.

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  1. Angie | June 15, 2010

    AHHH !!! HOW STUPID ARE THESE OIL COMPANIES ANYWAYS !! How greedy of them to look after their financial interests right now !!

    Better to have people loose jobs then to ruin the planet for crying out loud !! Anyhow, people are loosing jobs BECAUSE of them !!

  2. Austin | June 15, 2010

    Dear MM,
    Please remedy one of the glaring ills of the mainstream media: Please provide some retrospective by way of comparison, showing the damage to Texas beaches and fishing done by the Ixtoc blowout.

    The Fourth Estate is all too often a Fifth Column, and is obsessed with the Exxon Valdez spill. Well, let's see. Prince William Sound's waters are just a teensy bit above freezing. I wonder how their salinity compares to the Gulf of Mexico, but I expect very little oil evaporated up there. The very nature of North Slope crude differs radically from Gulf crude.

    So I expect that Ixtoc, with a crude much more similar to that now fouling parts of the Gulf coast, provides a much more reasonable, scientific yardstick for predicting how things will turn out.

    Another point left completely undiscussed is the relative pressure differential between the fluid flow out of the casing/riser/BOP and the pressure of the sea level down there. The video that the Television Savants expect us to fixate on tells nothing definitive, but does not look like flow from a pressure washer. Rather, it looks as though the right kind of a collapsible plug might effectively stanch the flow enough to allow a combined top-junk killl to pave the way for cementing the well–Envision stuffing a metal umbrealla into the BOP and then unfurling it. Yes, it WOULD be a trick to make it stay put, but a fixture welded on the outside of the POB could probably accomplish this.

    I get the distinct feeling that BP has the "not invented here" disease, at least evidenced by the paucity of credit given to any outsiders for their ideas. From the number of excellent ideas for sorbents and microbial agents featured on MSNBC's stock market show, I'd say that Governor Jindle and other officials of the affected states also have a responsibility to take the ball and run with it.

    Finally, I saw some footage of a "crew" of laborers cleaning up a Louisiana beach, and must say that they much more resembled slouching slugs than people motivated both by pay and pride to clean their beaches. Some genius had suited them up in Tyvek coveralls, and I have no doubt that their motivation had evaporated along with the gallons of extra sweat that wind-proof Tyvek induces. I conclude that the President of the United States does not want to stop oil in the Gulf by means of boom, dispersant, or even capping the well, because if it hits the beaches, he can generate an entire army of cleaners at the public expense.

  3. Dave R. | June 15, 2010

    I wholly second Austin's comments. During the 1980s I worked nearly 6 years for a subsidiary of BP and during that time they definitely displayed a not-invented-here syndrome, but that was not unique to their corporate organization, then or now. We are seeing it played out today by our government as well.

    If Congress and President Obama are interested in getting accurate information regarding the causes of the blowout, they should be interviewing the people who actually operated and worked on the rig, the people who supplied the pressure monitoring and blowout prevention equipment, separately and individually, then comparing their stories and information to one another and other technical information. Instead, they focus on questioning CEOs of BP and other oil companies, in order to appear to the public that they are doing something. Were any of them present on the Horizon One rig when it blew-up and sank? Are any of them experienced in or technically trained in oil well technology? I doubt it. These CEOs get all their information regarding this blow out second hand or even more remotely.

    Re the media, today I saw a report on TV describing how BP had scrimped on the number of casing centering devices prior to cementing of the well casing, leaving viewers with the impression this might have contributed to the blow out. Is the well leaking around the casing? Has the casing blown out of the subterranean formations into which it was cemented? If the answers to both of these questions are negative, then the obvious answer is that the use of fewer centering devices did not prevent an adequate cementing job.

    And why are the records from the US government relating to the permits and inspectors' reports not being made available to the public media?

    This all smells of a cover up and purposeful delay by the Obama Administration for the purpose of advancing other items on his political agenda.

  4. Lance Lyons | June 15, 2010

    Instead of President Barrack Obama taking reasonable inspection and risk evaluation measures to ensure that the Deepwater Horizon incident is never repeated, he has taken advantage of yet another crisis by resorting to the "Cloward-Piven Strategy". The "Cloward-Piven Strategy" seeks to hasten the fall of capitalism by overloading the government bureaucracy with a flood of impossible demands, thus pushing society into crisis and economic collapse.

    The 6-month moratorium on drilling will have dire consequences on the continuity of oil and gas industry and result in 20,000 – 50,000 or more jobs lost in the offshore, marine, service, supply, engineering consultant, not to mention restaurants, grocery stores, tourism, etc. The majority of the 33-floating drilling rigs, leased at $250,000-$500,000 per day, will unboubtedly find other homes in Brazil, West Africa, Indonesia or even Cuba putting the United States on the waiting list for up to 2-years before drilling will gradually restart once again. In the interim, the experienced personnel will have already moved on to other professions or departed overseas, leaving the work to either unqualified or less experienced personnel who will undoubtedly need extensive training.

    While the investigation continues, it is apparent that BP drilling engineers made changes to the drilling plan and took unnecessary risks that had consequences not fully understood. If personnel would have taken time to fully engage in a risk assessment as typically mandated by management of change, this tragic incident would have undoubtedly been avoided.

    Oil drilling in shallow waters offers only moderate environmental risks. But deepwater drilling is an altogether different animal. It involves much higher pressures, and much greater risks – both to the environment and to companies in the business. However, prior to the Deepwater Horizon incident, there were no reported incidents of significance in the 4,000 deepwater wells drilled in Federal OCS waters at water depths greater than 1,000 feet; 700 of which were drilled in water depths greater than 5,000 feet.

    Even though the offshore oil and gas exploration and production has a safety record considerably better and less tragic than coal mining, for example, other than nuclear, the President has never used his executive power to shut down those other operations on an industry-wide basis.

    From 1964 to 2009, 17.5 billion barrels of oil have been produced in Federal OCS waters generating lease bonuses, fees and royalty payments to the Federal Government in the $200 billion range. In this same timeframe, it is estimated that 532,000 barrels of oil were spilled from OCS activities.

    By comparison, research in the Gulf of Mexico (GoM) indicates that over 5,000 barrels of oil a day seeps out from vents in the earth into the ocean. Hence, for the same 1964 – 2009 time period, ~84 million barrels of oil have naturally seeped from the seafloor of the GoM, considerably more than the 532,000 barrels spilled due to OCS activities during the same time period.

    Since the oil seepage is not concentrated in one location, this seepage may not be obvious to the eye and certainly cannot be compared to the concentrated spill of the Deepwater Horizon. But it is part of the natural cycle. Oil is a natural substance. It’s part of the earth, and obviously ocean life continues every year despite nearly two million barrels of oil escaping in the Gulf of Mexico alone—a very small body of water compared to the Oceans, which experience the same phenomenon. If the Gulf can survive nearly two million barrels a year, just think how much seepage takes place in any of the oceans. It would probably be enough to make an environmentalist sick.

    Aside from the fact that it is impossible and impractical to correlate climate change (global warming) to the less than 1% natural greenhouse gases in the atmosphere, 380 ppm of which is carbon dioxide, the solution to stop natural seepage is responsible and safe drilling and energy recovery to relieve the pressure under these underground fissures where the seepage occurs, which would have the additional benefit of reducing our dependence on foreign oil.

    For the alternative that all you anti-oil/green energy advocates are looking for, please be prepared for the cost consequences. Four points should be considered when accounting for the costs of green energy.

    1. Green energy such as solar and wind technologies require huge amounts of land to deliver relatively small amounts of energy, disrupting natural habitats; energy sprawl includes tens of thousands of miles of high-voltage transmission lines needed to carry the electricity. By the way, the high-voltage transmission lines are made from petroleum products
    2. United States will be increasingly dependent on China for elements known as lanthanides. China controls ~95% of the lanthanum, neodymium, dysprosium and other rare earth elements used in high capacity batteries, hybrid-electric vehicles, wind turbines and oil refinery catalysts.
    3. In a global market, wind turbine manufacturer will be restricted in job creation due to high domestic labor costs.
    4. Electric cars will not reduce demand for oil because gasoline contains ~80 times as much energy, by weight, as the best lithium-ion battery and most homes do not have access to an outlet near their vehicle at home.
    5. The estimated economic effects of the national renewable electricity standard (RES) that mandates a percentage of our nation's electricity production from wind, solar, biomass and other renewable energies to increase from 3% today to 37.5% by 2035 are as follows:

    -raise electricity prices by 36% for households and 60% for industry;
    -cut gross domestic product by $5.2 trillion between 2012 to 2035;
    -cut national income by $2,400 per year for family of four;
    -reduce employment by more than 1,000,000 jobs; and
    -add more than $10,000 to a family of four's share of the national debt.

    The reality is that if electricity created by wind and other renewables were cost competitive, consumers would use more of it without a federal law to force consumption.

    The fact is that the government has been enforcing statutory environmental regulation onto oil and gas, refining, coal, nuclear, and other industries since the 1970s. Instead of enforcing compliance by rewarding performance, the government has enforced compliance by fines and punishment making the businesses more costly to operate. Accordingly, there has been a moratorium on drilling in the vast majority of US land and water, no new refineries built since 1981, and no new nuclear power plants built since 1979. It is no wonder why the United States is ever so more dependent upon foreign oil.

    Finally, because drilling was taking place in federal waters, oil and gas companies are dependent upon the contracts they have with emergency spill response companies to respond to the clean up. It is the oil companies responsibility to stop the source of the oil spill. Ultimately, the EPA has only one dispersant approved (Corexite) whose use is banned in the UK and Europe, and the USCG and Corp of Engineers were not on the same page in terms of building the sand berms.

    It appears to me that the environmentally driven, federal government is not focused on technological solutions for containment and clean-up. For example, the EPA has known about genetically engineered micro-organisms that feed on spilled oil since the 1980s, but draconian federal regulations discouraged their testing and commercialization and ensured that the techniques available for responding to these disasters remain low-tech and marginally effective. Large oil tankers with skimmer pumps, sand berms, hay, centrifuge oil-water separators and other viable technologies have been introduced since the oil spill first occurred. Instead of responding to crisis management, the government beaurocrats dragged their feet on the approval for using each of these options because of contract litigation.

    This feet dragging by the draconian federal agencies to approve viable oil clean-up and containment technologies, and the 6-month moratorium as mandated by President Obama exposes the government's real goal. The real goal is to rip the guts out of our private economy and transfer wide swaths of it over to the government to control. They will ultimately make matters much worse and this is by design to create a yet another crisis.

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