The Beginning of the End?

The Leak Appears to be Sealed

Today comes news that there is light at the end of the tunnel over the leak in the Gulf of Mexico: Allen: ‘High confidence’ no more oil will flow into Gulf

Retired Coast Guard admiral Thad Allen said Wednesday he has “high confidence” no more oil will leak from BP’s Gulf of Mexico well. Hours earlier, BP announced that the well had reached “static condition” after heavy drilling mud was pumped into it.

This is without a doubt good news. However, the longer term ramifications remain the same in my mind:

  • BP is going to have a very difficult time repairing their brand. I still believe that a substantial fraction of their assets — if not all of them — will eventually be operated under a different brand than BP. (More details on my reasoning at The Demise of BP).
  • BP has a very long and unpleasant series of fines and lawsuits ahead of them (Mexico is now planning to sue), which will keep them in the news for years to come.
  • The backlash against offshore drilling will have real implications with respect to slowing and killing drilling projects as stricter regulations are implemented.
  • Some promising areas will never be developed because the risks will be deemed to be too high.
  • The decline curve for global oil production will almost certainly be steeper as a result of this incident.
  • The long-term environmental implications won’t be clear for a number of years. (An estimated quarter of the oil spilled — over a million barrels — is still lurking in the environment).

New Rapid Response System

As a result of the incident, a number of U.S. oil companies, including my former employer ConocoPhillips, recently announced a $1 billion investment in a containment system to mitigate against this possibility in the future: New Oil Spill Containment System to Protect Gulf of Mexico Planned by Major Oil Companies

WASHINGTON, D.C., July 21, 2010 – A plan to build and deploy a rapid response system that will be available to capture and contain oil in the event of a potential future underwater well blowout in the deepwater Gulf of Mexico was announced today by Chevron, ConocoPhillips, ExxonMobil and Shell.

The new system will be flexible, adaptable and able to begin mobilization within 24 hours and can be used on a wide range of well designs and equipment, oil and natural gas flow rates and weather conditions. The new system will be engineered to be used in deepwater depths up to 10,000 feet and have initial capacity to contain 100,000 barrels per day with potential for expansion.

The companies have committed $1 billion to fund the initial costs of the system. Additional operational and maintenance costs for the subsea and modular processing equipment, contracts with existing operating vessels in the Gulf of Mexico and any potential new vessels that may be constructed will increase this cost commitment.

I don’t know whether BP chose to opt out, or the companies didn’t want BP to be associated with this new system. (Update: I was just informed by e-mail that BP was tied up with the leak, and would have an opportunity to join the effort). Of course the cynic in me thinks this is a bit like buying homeowner’s insurance after your house burns down. On the other hand, sometimes we just don’t realize how much risk mitigation we need until disaster strikes. In a society where houses had never burned, we might not think we needed insurance against fire until one did burn.

I don’t mean to make light of the investment in the new system. After this disaster it became painfully obvious to all that rapid response to a deepwater leak wasn’t something for which the oil industry was equipped. So hopefully this new rapid response system can minimize the consequences should such an event take place in the future. However, I am sure the industry will also spend a lot of time addressing the root causes of this incident (and looking for other hidden risks) to make sure that rapid response system is never called into action.

After all, the very survival of the U.S. oil industry is at stake. Their access to oil around the world is becoming more restricted year after year, and offshore was one of the bright prospects for the industry. This incident dimmed that bright prospect, so the industry has to be proactive in order to win back confidence that they can safely develop offshore resources.

As oil prices climb, I do suspect we will start to hear “Drill, baby drill” once more. People have a short term memory of these sorts of things when their pocketbooks are impacted. But states will look after their self-interests. I can’t see Florida or California opening up new areas to drilling for the foreseeable future, no matter how much the rest of the country might scream for it.

The Fear Mongers

I was amazed throughout this incident at the number of people willing to listen to the fear mongers. I specifically addressed Matt Simmons with a couple of posts, but there were lots of others like Mike Ruppert spinning incredibly doomerish scenarios:

I believe that the leaks are devastating for all life in the Gulf and that large portions of the Gulf will be dead zones from seabed to surface within maybe six months. I believe that an announcement of a pending nuclear detonation will come within a week to ten days. I predict that US Continuity of Government provisions will be activated and that FEMA will, before end of summer, be placed in complete control of the Southeast United States… limited martial law.

That was from May 29th. I think people should be held accountable for the things they say and write (myself included), particularly when it impacts large numbers of people. To my knowledge, there has been no mea culpa for just how silly these particular predictions were, but then again you can’t get Ruppert’s nuggets of wisdom for free any more. Shortly after making that prediction he started charging people $10 per month for this stuff.

Gulf Coast residents were terrorized by some of the far-fetched claims, and the media was complicit by continuing to bring people like Simmons on because they could count on him to say jaw-dropping things. But that is irresponsible journalism. Once Simmons started to make some of these claims, the media should have gone out to look for sources to back them up or discredit them. Instead, they continued to bring Simmons on and he continued to make claims that got ever more outrageous.

Speaking of Simmons, I do want to clear up one item. The article that I wrote on Simmons was called Is Matt Simmons Credible? I chose that title for a very specific reason. In that essay, what I did was point to other incidents in which his credibility had been suspect because he was shooting from the hip. It was not my intention to debunk his specific claims in that essay (although I did debunk some earlier claims in a 2008 essay). However, that essay was picked up far and wide and reprinted, and yet that was the complaint some had: “You didn’t actually debunk Simmons’ claims.”

That wasn’t the purpose of that particular essay. I was saying “There is a history here, so treat those claims skeptically.” It was a general warning against some of the things that were being said — or might be said in the future. On the other hand, the article that I co-authored at The Oil Drum — A Critical Examination of Matt Simmons’ Claims on the Deepwater Spillwas a debunking. The following claims of Simmons were addressed:

  1. The real leak is seven miles away.
  2. Oil is flowing at 120,000 barrels/day.
  3. The real spill has caused a lake of oil larger than Washington state.
  4. Methane is lethal and toxic.
  5. Use of a small bore nuclear device is the “only option” to stop the flow of oil.

In my opinion, each claim was thoroughly debunked. Some were of course errors of fact and didn’t require a lengthy rebuttal: Methane is not toxic, and it is certainly not more toxic than hydrogen sulfide (which is highly toxic) as Simmons claimed. Yet some still wanted to give Simmons all benefit of the doubt based on his history as a popular peak oil spokesmen. My view on that matter is simple: Sacred cows are for religions, and they impede fact-based discussions.


This story will continue to play out for years, and there are many lessons learned. Some are obvious, but there is one that I hope we won’t soon forget: The reason that companies like BP develop oil reserves in such extreme environments is that consumers demand the cheapest gasoline they can find. The oil industry does what they do to make money, but as long as we continue to line up for the product they provide, we all bear responsibility for oil-related externalities.