How Gulf Accident Hampers Offshore Drilling

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It'll be years before we know the full extent of the damage caused by the Deep Horizon oil spill. But as thousands of barrels continue to leach out of the ocean floor, and with no way of stopping it anytime soon, the magnitude of the disaster has become clear: this is the worst oil spill in U.S. waters since the Exxon Valdez spilled 11 million gallons of crude into Alaska's Prince William Sound. The economic and environmental impact will likely be catastrophic.

But the bigger impact could be on the future of offshore oil production. At a time when the oil industry had seemingly conquered the extreme challenges of offshore drilling, the spill raises serious questions about our ability to safely tap what's seen as the final frontier of U.S. domestic oil reserves: the deepwater Gulf of Mexico.

Last September, the news surrounding Transocean's Deep Horizon drill rig was that it had successfully drilled the deepest vertical well in history, tapping BP's giant Tiber field 40,000 feet down, 250 miles southeast of Houston. The announcement was hailed as a huge step for deepwater drilling in the gulf, a moon shot of sorts, and something to be applauded even by BP's competitors. "We're happy about Tiber because it upgrades the prospects we have in that same vicinity," Chevron President Gary Luquette told NEWSWEEK at the time.

Seven months later though, with the Deep Horizon destroyed and 11 people dead as a result, we're reminded of the dangers of deepwater drilling. "I think we forgot just how dangerous drilling for oil in the deepwater really is," says Jeff Rubin, a former chief economist at CIBC World Markets, a Canadian investment bank, who has spent the past 30 years studying oil markets. Rubin points out that the spill comes just as the industry was regaining its footing in the Gulf of Mexico, which holds an estimated 70 billion barrels of oil. Half of that remains undiscovered, trapped beneath thousands of feet of muck, mud, rock, and, to top it off, an ancient layer of salt that has sealed off the oil for millions of years.

Oil companies have known it was down there since the mid-'90s. Getting to it was the problem. Huge investments were made in computer technology to create three-dimensional maps of the deepwater Gulf, and new drilling equipment was developed to withstand the heat and pressure of drilling three and four miles into the earth's crust. By 2000, a handful of successful deepwater wells had been drilled, and by 2002, they'd pushed overall Gulf of Mexico oil production to 1.6 million barrels a day. Pumping 2 million barrels a day seemed only a few years off.

But then the hurricanes started coming, big ones. From 2002 to 2008, eight Category 4 and 5 storms plowed through the Gulf of Mexico, including Ivan, Dennis, Katrina, Rita, Dean, and last year, Ike. They shut down production of millions of barrels of oil, delayed dozens of projects, and in some cases left billion-dollar, thousand-ton platforms listing in the water. In 2005, images of BP's flagship Thunder Horse platform tilted at a 45 degree angle in the wake of Hurricane Dennis were met by immediate spikes in the price of oil. A month later, Thunder Horse was in the direct path of Katrina. It would be another three years before it started producing oil. Some began referring to the Gulf of Mexico as the Dead Sea, where oil companies go to die.

But as the price of oil continued to rise, peaking in the summer of 2008 at $147 a barrel, oil companies plowed more and more of their windfall profits into the deepwater Gulf of Mexico. Their persistence and investment paid off. In 2009, a handful of new deepwater projects reversed seven straight years of declining oil production.

Even the Deep Horizon disaster won't impact that: oil out of the deepwater Gulf of Mexico this year is still likely to power the first year-over-year increase in total U.S. domestic production since 1991. President Obama's decision to halt all new drilling projects in the Gulf will almost certainly decrease the amount of oil. But since it takes years to bring online a field like the one Deep Horizon was drilling, that won't show up for a while. The 3,500 platforms producing oil in the Gulf of Mexico are pumping just as much oil today as they were before the Deep Horizon exploded.

Continuing to develop the Gulf of Mexico is predicated on our ability to venture farther out, and drill deeper down. But this spill destroys—at least for the near term—the notion that the oil industry has conquered the technological challenges posed by deepwater drilling. And as history shows, all it takes is one big disaster to alter the future of an entire industry. "This could be the equivalent of Three Mile Island for offshore oil," says Rubin, referring to the nuclear plant meltdown in 1979 that essentially halted the nuclear industry's growth for 30 years.

At the very least, the cost of operating in the Gulf of Mexico will likely go up. Stiffer regulation from the Minerals Management Services will make sure of that. So will higher insurance premiums. The spill will likely cost BP several hundred million dollars, and tarnish its safety reputation. In 2005, 15 workers died in a Texas refinery explosion. BP will surely face fines for the Deep Horizon accident. Its stock price is down 17 percent since the accident occurred. Transocean, the company that owned the Deep Horizon rig, has seen its stock price fall 22 percent.

Beyond the economic losses, the real question is whether this changes public opinion on domestic drilling. Approval ratings have climbed in recent years, upwards of 70 percent, as imported oil has been cast as a national security threat. The "drill, baby, drill" crowd isn't likely to change their tune. The movement's political leaders tend to hail from places like Indiana, Kentucky, and Ohio (See Rep. Mike Pence, Sen. Mitch McConnell, and House Minority Leader John Boehner), hundreds of miles away from any oil-soaked marshland. A spokesperson for Boehner said that the spill "does not change his position on the need for deepwater energy exploration." More relevant, it seems, is whether the accident changes the opinion of his constituents—and the rest of the country.