The US Drilling Moratorium: The Economic Impact

The September 16, 2010 US Inter-Agency report on the economic effects of the deepwater drilling moratorium on the Gulf Coast economy begins by stating there has been little impact. This is based on conversations with rig companies and review of unemployment insurance claims (UI) that show only about 2,000 rigworkers have lost their jobs.

The Department of the Interior (DOI) estimates there were a total of 80,000 offshore oil production, construction and drilling workers in the GOM, and fewer than 10,000 of these workers were employed on rigs affected by the moratorium. Additionally, the report goes on to say the six-month moratorium may temporarily result in about 8,000 to 12,000 fewer jobs in the Gulf Coast and that rig operators have reduced spending by $1.8 billion.

Needless to say Louisiana Governor Bobby Jindal flew off the handle saying his state alone could lose about 20,000 existing and potential new jobs because of the moratorium He went on to point out that the workers still employed in the GOM have had their hours severely cut, which has had an impact on state revenues and has reduced economic activity, which has had a rippling effect throughout the state.

Meanwhile, Senator Mary Landrieu (D-LA) said the administration was aware that their actions might eliminate nearly 23,000 jobs, but proceeded anyway. She attacked the report saying the “the heavy hand of the federal government” has placed thousands of jobs in the GOM at risk. Additionally, Senator David Vitter (R-LA) challenged the accuracy of the report saying “its upbeat analysis was at odds with reality in the gulf.”

Furthermore, a number of regional economists have calculated the GOM region has already loss at least 8,169 jobs, $2.2 billion in economic activity and $98 million in revenue from the lost of state and local taxes. While the report claims to have focused on the direct impact of the moratorium, officials from the Gulf States have called the administration’s drilling moratorium an unnecessary job-killer, which has failed to recognize the wider economic impacts on fishing and tourism and local economies of Gulf Coast cities.

However, DOI’s rebuttal is to point out that federal regulation 43 U.S.C. 1334(a)(1) allows it to “suspend or temporary prohibition any operation or activity, including production, pursuant to any lease or permit….if there is a threat of serious, irreparable, or immediate harm or damage to life including fish or other aquatic life, to property …or to the marine, coastal, or human environment.”

Even though the initial moratorium was struck down by a federal judge and DOI’s appeal to the Fifth Circuit was denied, what the court did say is that the administration could seek emergency relief against offshore drilling. Consequently, on July 12th, Secretary Salazar imposed a second suspension based on “equipment configuration used in conduction deepwater operations.” Meaning all operations using subsea blowout preventers (BOPs) or surface BOPs on a floating facility must have certified inspections before continuing its activities.

Essentially, while the administration cannot get the courts to support its moratorium, it is doing an end run by imposing a “moratorium via technicalities.” Prior to the Deepwater Horizon explosion on April 20th, which killed 11 workers and injured 17 more, the MMS agency granted 14 permits a month for the previous 11 months. Since the explosion, the Bureau of Ocean Energy Management (BOEM) has granted only four permits in the 500-foot “shallow GOM.”

Government versus BP

BP has suspended all dividends to its stockholders and is in the process of selling $30 billion of assets around the world. Additionally, it has set up a $20 billion escrow fund over the next four years to pay damage claims and government penalties and has agreed to contribute $100 million to a foundation to support rig workers who have lost their jobs due to the moratorium. Furthermore, the company has donated $32 million to Florida’s tourism marketing fund as well as providing $15 million each to Louisiana, Mississippi and Alabama to assist in their tourism efforts.

However, on July 30th, the House passed a bill to bar any company from receiving drill permits on the OCS if it has had more than 10 deaths occur at an offshore or onshore facility and bans permits to any company with fines of $10 million or more under the Clean Air and Clean Water Acts in a seven-year period. While BP was not mentioned specifically, it doesn’t take a fourth-grader to figure out whom Representative George Miller (D-CA) was targeting when he wrote the provision. And, while the senate version does not specifically have the same language, it does allow regulators to deny leases to companies with safety or environmental problems.

BP operates 89 production wells and shares in a stake in 60 other wells in the GOM. It produces 400,000 barrels per day, which accounts for about 20 percent of total production in the deepwater GOM. The GOM to BP is worth around $5 -$7 billion annually in profits, which is about 25 percent of the company’s total. So, if BP is not allowed to operate in the GOM, it will not be able to meet its financial obligations and the US tax payer will be on the hook. Considering the massive US deficits already impeding the American recovery, the administration should do everything within its power to ensure BP gets back on its feet.

Higher Costs in the GOM

As US lawmakers impose stringent regulations on the industry to ensure another catastrophe won’t happen again, they would be wise to recognize the long term economic ramifications. Drilling and production costs are projected to skyrocket in the near-term with legislative proposals such as raising the financial responsibility for an oil spill to $10 billion or possibly removing the cap altogether.

Future insurance cost will surely be off-the-charts for operators meaning only companies with the financial wherewithal will be able to do business in the GOM. From here on out corporate boards will be reassessing the financial opportunities against the onerous liabilities.

The Department of Energy (DOE) statistics show more than 36,000 wells have been drilled sine the 1950s. Other than the Macondo blowout, the only other accident took place in Mexico when the Ixtoc well blew in 1979. Small companies and independents will have to form consortiums and merge in order to do business in the offshore GOM because it is estimated that BP has spent $6 billion on the spill cost as well as its overall liability being $32.2 billion, and who knows what costs compliance will bring.

DOI Convenes Town Hall Meeting and Webcast

On September 21st, the DOI held a meeting of scientists, government and industry stakeholders at its headquarters in DC. And, while there weren’t any surprises about lifting the ‘technical moratorium’ or getting oil production back to work in the GOM. Secretaries Salazar and Chu made it clear that the DOI and DOE would continue its investigation of the causes for the explosion, and that more science and oversight was required before haphazardly allowing drilling in the deepwater to continue.

The science they are speaking of will come from DOI’s Bureau of Ocean Energy Management, NOAA, and the EPA, because the old approach of depending on information from the oil industry is passé and unreliable. Remember, the US government is to blame for the lack scientific data provided by the old MMS, because during the 80s and 90s and throughout the 96’ to 06’ moratorium scientific budgets were cut to the bone. The DOI is considering appointing an independent science director to work with federal agencies to analyze deepwater drilling data. Also, the meeting made it clear that more government oversight is required, along with more inspectors and bureaucrats, but the obvious question is where will the money come from? Well, we all know where it’s coming from, the oil companies and, ultimately, you and I.

Zero Failures, No Accidents, No Fatalities, and No Spills

During testimony before Congressional hearings about the Macondo spill, oil company executives made it clear the BP operation was an aberration of normal well management operations. In response to DOI’s moratorium, which is impacting industry revenues, coastal communities and employment, Chevron, ExxonMobil, ConocoPhillips and Shell have announced a rapid response company.

The oil majors have formed the Marine Well Containment Company in the event of future underwater well blowouts in the GOM. The new company will be capable of mobilizing within 24 hours and can capture and contain oil rapidly. The company will engineer equipment that can be used in 10,000 feet of water and have the initial capability of handing 100,000 barrels per day. More importantly, the companies have committed $1 billion in funding for the organization.

With less than five weeks before the moratorium (that doesn’t’ exist) comes to an end, the administration should deal with the reality that the Gulf Coast economy is truly in distress. It is being propped up by the cleanup and artificially being infused by BP’s dwindling assets. When BP is broke and the boats and men come home, Gulf Coast economies and its way of life will be in absolute shambles and an American asset and paradise will resemble the unemployed and decaying industrial north.