BP spill may cause sea change for energy industry

Not long ago, federal officials were hailing the Gulf of Mexico as America’s best source of future crude oil and natural gas.

But the disastrous BP oil leak has complicated that view and may have a greater effect on the energy industry than any incident since the 1969 Santa Barbara oil spill, which led to the Environmental Protection Agency and a 27-year moratorium on most offshore drilling.

Experts predict that energy production will slow and regulation will increase along with the cost of drilling in deep water. Better technology will have to be developed. New projects may require rigorously tested emergency plans. Government oversight will be overhauled.

“The days of easy oil are over,” said Michael Klare, program director at the Institute for Policy Studies in Washington. “Only the tough crude remains, in unfriendly parts of the world or in difficult places where the technology and the regulations have not caught up. There are bound to be greater risks.”

The least powerful industry players have been the first affected by higher costs and added restrictions, such as the federal government’s temporary moratorium on new deep-water drilling, experts said.

“Small oil companies and drillers will go out of business, and insurance rates for companies will skyrocket faster than healthcare costs,” said Phil Flynn, an analyst for PFGBest Research.

Diamond Offshore Drilling Inc. has moved two deep-water drilling rigs out of the Gulf of Mexico to more hospitable waters, citing the uncertainty of continued deep-water drilling in the gulf. Industry experts say the Houston company was the first to act, but it won’t be the last.

As production from older, shallow-water wells continues to decline, what remains, according to federal government estimates, is the oil that drillers hope to find in waters as deep as 9,900 feet, or nearly twice the depth of the site of the current oil spill. Federal officials had expected that new wells would reverse the production decline and that records would be set for the amount of oil extracted.

“The Gulf of Mexico is one of the single largest suppliers of oil and gas to the U.S. market,” Lars Herbst, Gulf of Mexico regional director for the federal Minerals Management Service, said last year as he unveiled a report forecasting a bright future for gulf production. “With continued interest and activity in deep-water areas of the Gulf of Mexico, we anticipate that oil production will continue to be strong with a large portion of production coming from projects in deeper water depths.”

Since that optimistic assessment, much has happened, including an overhaul of the Minerals Management Service amid withering criticism of the agency’s failure to adequately oversee oil and gas drilling in federal waters.

Congress is considering far-reaching legislation that would impose new environmental safeguards on offshore drilling, repeal oil-industry-friendly provisions of energy policy, hit producers with a new tax to fund conservation programs and eliminate the $75-million liability cap on economic damages from oil spills.

The legislative push has the industry worried.

“The accident in the Gulf of Mexico has shown us that we need to focus on safety and environmental protection,” said Jack Gerard, chief executive of the American Petroleum Institute, an oil industry trade group. “But legislative proposals that would make domestic resources unavailable or uneconomic, instead of focusing on improving safety, must be turned aside. Millions of families, thousands of products and hundreds of industries across the country depend on reliable and affordable oil and natural gas every single day.”

Some oil executives, such as BP’s Robert W. Dudley, who will take over as chief executive of the company Oct. 1, say that the disaster has changed the industry forever.

“There’s no question, the company, both BP and the industry, will need to change and fully understand the capability of rig systems equipment to be able to operate in these areas, and I think that’s the area that you’ll see a changed BP and a changed oil and gas industry globally,” Dudley said.

New requirements and heightened costs will cover every segment of exploration and production, including the equipment used in emergencies, experts say. Drillers and regulators will demand better designed, more expensive equipment, with backup protections built in.

The gulf catastrophe also is expected to bring more rigorous safety rules and extensive emergency plans, including ways to remotely shut down broken wells. The Interior Department has already proposed a requirement of certification by a professional engineer and “at least two independently tested” blowout preventers “before beginning any new drilling operations using either a surface or subsea blowout preventer.”

Deciding to take the initiative rather than wait for federal regulators to set new conditions, Exxon Mobil Corp., ConocoPhillips, Chevron Corp. and Royal Dutch Shell have committed $1 billion to start an emergency oil spill program with strike teams and equipment that could be on the way to an accident within 24 hours.

Even without more accidents, insurance costs will escalate for any oil company not large enough — like BP — to self-insure, experts said.

“The oil industry did this kind of well hundreds of times without a problem,” said Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis, noting that BP’s Thunder Horse field is the biggest oil producer outside of Alaska and sits in even deeper gulf waters.

Youngberg worries that costs will rise so high that oil companies will look for less expensive opportunities for offshore drilling outside of the gulf.

“If that happens, it will be very detrimental to oil supplies here and it will push up the price of oil tremendously,” Youngberg said.

That increase, experts say, eventually would trickle down to motorists and other end users.

Another casualty of the BP accident was public confidence.

“The industry proved that they cannot be trusted,” said Tyson Slocum of Public Citizen, the Washington consumer advocacy group. “Not a single company operating in the gulf had a realistic plan for dealing with a catastrophic blowout. The industry failed to deliver. They can only blame themselves for what must come now.”

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