The Federalization of Energy

BP announced it has already spent $2 billion managing the GOM oil spill and compensating its victims ($105 million to 32,000 claimants). Well, in a laissez faire capitalistic environment where a company like BP announces 2009 total profits of $14 billion and $66 million per day in the 1st quarter of 2010, does anybody really give a damn what it costs BP to make this catastrophe right?

BP is the third largest energy company and fourth largest corporation in the world, but its safety record in the US, to say the least, has been wholly unacceptable and the Deepwater Horizon debacle is just the latest incident in a corporate culture of ‘profits first.’ In 99’, the company settled illegal dumping of hazardous waste on the Alaskan North Slope for $22 million. In 05’, an explosion at its Texas City Refinery killed 15 workers and injured 180 people. Investigations of the refinery explosion offered a scathing review of the company’s safety policies, which included assessments from the US all the way to BP’s London boardroom. In 06’, BP had to shut down its Prudhoe Bay operations due to spilling about 5,900 barrels on the North Slope and, in 07’, the state of Alaska said BP admitted to spilling methanol onto the frozen tundra pond. Methanol, which is used to clean the insides of pipelines, is highly poisonous to plants and animals.

Since the April 20th rig explosion, BP’s stock has now tumbled to half of its previous value, trading in London at around $5.00. And, its U.S. receipts have dropped 49 percent, wiping out nearly $93 billion in market value. Additionally, the company may lose control of its US oil and gas and be barred from doing business with the federal government. The Interior Department tracks each oil and gas operator’s performance and could very well “disapprove or revoke” a company’s status as an operator based on accidents, pollution or for non-compliance of federal regulations.

Remember, BP also operates two of the largest producing wells in the Gulf of Mexico. The platform “THUNDER HORSE’ produces about 300,000 barrels per day and the platform “ATLANTIS” produces about 200,000 barrels per day, and sanctions by the US government could severely cripple the company’s ability to pay for its responsibilities in the GOM. The company also has six contracts with the Pentagon to provide fuel, worth $2.1 billion.

This is the end, my only friend, the end……

Over the last 15 years, crude output from the Gulf of Mexico (GOM) has become a major part of the total US oil production. In fact, the US Energy Information Administration expected the GOM to supply almost 30 percent of US crude this year. But, as the government begins its 6-month moratorium on the issuance of drilling permits, cancellation of lease sales, and the suspension of work on 33 deepwater wells, it is estimated to impact US 4th quarter production by 26,000 barrels per day and by 70,000 barrel per day in 2011.

As BP faces thousands of lawsuits and possible fines of $4,300 for each barrel of leaked oil under OPA90, which could reach tens of billions of dollars, the company is arguing that its partners in the Macondo well, Anadarko Petroleum (25%) and a subsidy of Mitsui & Company of Japan (10%), share the financial burden.

However, Anadarko says its joint operating agreement makes BP responsible for any damages due to gross negligence or willful misconduct. And, Mitsui flatly denies having any say in the operations and asserts BP is simply grasping at thin air. Anadarko’s CEO, Jim Hackett, said that BP’s “reckless decisions and actions” caused the accident and that BP failed to heed “several critical warnings during drilling.” Therefore, his company is looking at BP to pay all claims filed against it.

Meanwhile, as Steve Westwell, BP’s global chief of staff, spoke to an industry conference in London (he was standing in for BP CEO Tony Hayward), said the explosion and subsequent death of workers and environmental disaster should not deter offshore drilling. This consensus is currently being shared by oil companies, offshore energy support companies and others being financially impacted by the moratorium of drilling in the US Gulf of Mexico.

And, as the Macondo spill continues with no relief in sight or any prognosis of what the final environmental disaster might end up looking like, there were efforts to repeal $35 billion in tax breaks for the oil industry. But, the repeal of tax breaks were met with strong resistance. In fact, 22 Senate Democrats have crossed over to join the GOP to defeat the measure. Does anyone realize that the oil companies have reported about $750 billion in profits in the last decade?

Federalizing The Addiction to Oil

The fact remains, no matter how painful the devastation in the Gulf is to witness, Americans are addicted to oil. The US gets 85% of its energy from oil, gas and coal, and the Energy Information Administration (EIA) said by 2035 these sources of energy will increase by 14%. Meanwhile, energy from wind, solar and biomass is expected to grow to 11% of the energy supply by 2035 (up from 5% in 2008), but there are physical limits to its ability to replace oil as the primary energy resource.

By 2035, there will be more people in the US (391 million vs. 305 million), more households (147 million vs. 113 million) and more vehicles (297 million vs. 231 million). So, with the math clear, it’s obvious the US cannot move from its reliance on fossil fuels to power the economy.

The consequence of the GOM disaster and the nation’s reliance on fossil fuels will be a federalization of drilling and production through oversight and regulation. While having the government in charge of exploration and production may be distasteful to many, the people cannot have it both ways. The days of demanding the federal government stay out of the auto industry, financial markets and national health care are over. The government had to bail them out just to keep some semblance of order in American society and the global economy, and the government will ultimately have to bail out the Gulf of Mexico, because BP, as a known entity, resembles a “dead man walking.”

While human error and cost-cutting by BP may be the primary reasons for the spill, US dependence on oil will not change overnight. Nor, can the wave of the legislative pen make alternative energy a viable resource in the immediate future. The government is now going about its business of federalizing energy, and it will be a fact of modern life. The days of offshore exploration and production by record breaking profit oil companies are over.