Wednesday, October 20, 2010

Once more to the Deep?

On 19 September 2010 BP’s ill-fated Macondo 252 well was declared “effectively dead”, almost five months since it began to gush oil into the Gulf of Mexico. The world’s largest accidental oil spill followed an explosion on the Deepwater Horizon drilling rig on 20 April which resulted in 11 fatalities. It is estimated that of 4.9 million barrels of oil vented from the stricken well, around 4.1 million barrels were released into the Gulf of Mexico (the remainder being captured for example with containment caps). To provide a sense of perspective, the latter figure is equivalent to around 16 times that which spewed from the stricken tanker Exxon Valdez off Alaska in 1989.

The disaster has meant that deepwater drilling for seabed hydrocarbons appears, momentarily at least, to have lost its allure. Several governments have imposed a moratorium (wholly or partially) on deepwater drilling activities. Perhaps unsurprisingly the U.S. led the way. Opposition to offshore energy exploration and exploitation, especially on the part of environmental and community groups, has by no means been confined to the U.S. however, with events ranging from a chain-of-hands protest on the Thai island of Koh Samui over drilling activities in the Gulf of Thailand to the occupation of a drilling rig off Greenland by Greenpeace activists. That said, investment in deepwater drilling was already in decline prior to the Deepwater Horizon accident – global upstream oil and gas investment budgets were cut by US$90 billion in 2009 compared with the previous year.

So is deepwater drilling firmly off the agenda? Hardly. The present pause in activity is likely to prove to be no more than a brief hiatus. The key reason why investment in deepwater projects slowed is the same reason why investment in other expensive, unconventional oil sources such as tar sands slowed, and that is the GFC. In essence, the business case for developing tar sands and deepwater oil went out the window when demand fell with economic activity, causing oil prices to collapse back to around US$35 (from a peak of US$147) per barrel.

It appears highly likely that the oil price is set to become more volatile, especially in the context of peaking oil production and growing demand. In theory this should ultimately lead to a shift away from oil as the prime source of our energy requirements and a compelling case for the need to do so can be made. Indeed, it is no co-incidence that, at the time the moratorium on deepwater drilling in US waters was introduced, President Obama framed this as a call to reduce America’s reliance on oil.

The reality, however, is not so straight forward. There is precious little sign that on a global scale we are moving away from our reliance on oil in a meaningful way. Oil remains critical not only for the transport sector but for manufacturing, agriculture, defence, health, and just about every aspect of our daily lives. We are addicted, and to some extent we are locked in. ‘Lock in’, however, is more of a political barrier than a technical one. Vehicle fleet turnover times are longer than election cycles. Short-term political interests are therefore served by keeping oil cheap. In Southeast Asia, for example, many countries subsidise oil, whereby encouraging its inefficient consumption in the face of scarcity.

Such policies further entrench dependence, increase emissions and will ultimately cost more in the future. They will also tend to increase geopolitical supply risk as sources of oil supply are concentrated to countries characterised by very poor political stability and regulatory quality indicators as defined by the World Bank. Ironically, prior to the Deepwater Horizon disaster, deepwater developments in the Gulf of Mexico were being portrayed as critical from a U.S. national, albeit myopic, energy security perspective. For example, five deepwater wells came on stream in 2009, boosting Gulf production by 400,000 barrels/day (b/d), equating to about 4% of US imports.

As oil prices rebound in response to plateauing and declining production coupled with increasing demand, deep and ultradeep water drilling for seabed hydrocarbons will become attractive once again and in all likelihood will increase significantly in the future. We already depend on offshore sources for over 60% of global oil supplies (though not, it should be emphasised, reserves). There has also been notable ‘pushback’ against restrictions on drilling from those with an interest in letting such projects proceed. Perhaps counter-intuitively this has included opposition to a ban on offshore drilling emanating from the southern US states whose coasts on the Gulf of Mexico have been worst impacted by the spill. After all, the oil industry is a big player in the economies of these states and numerous jobs and livelihoods depend upon it. Such arguments were deployed by the UK government when it approved the first deepwater drilling to take place in the North Sea since the Gulf spill on 1 October 2010, in defiance of EU opposition and the protests of environmental groups.

Until we are able to wean ourselves off oil, demand is likely to be increasingly met by more costly, dirty, and technically challenging resources that carry increased environmental and political risks. Recent examples of oil exploration in such ‘frontier’ provinces include activities off Greenland, in the Arctic, and in the vicinity of the disputed Falkland Islands. This is the case even though the development of such resources does not offer a ‘silver bullet’ solution to the peak oil challenge. It is notable that since US oil production peaked in 1972, no advances in extraction technology or additional discoveries have managed to restore production rates. This is also true for the overwhelming majority of post-peak countries. Developing unconventional oil resources (whether deep water or tar sands) is a case of running faster to stand still, or more accurately, to slip backwards.

The good news is that, as with any such calamity, the Deepwater Horizon spill is likely to lead to enhanced regulation of deepwater drilling, the imposition of additional safeguards, coupled with technological advances designed to minimise the possibility of a similar accident occurring in the future. Nonetheless, accidents do happen and there are likely to be far more deepwater wells operating in considerably more remote and hostile marine environments in the future which must be a significant cause for concern. As production concentrates to unstable countries, most Government’s want to find other solutions, including options that don’t include the pursuit of unconventional oil from fragile marine environments. Unfortunately, it seems that a bigger shove than the Gulf of Mexico disaster is needed.

Nick Owen and Clive Schofield

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