April 20 marks the fourth anniversary of the Deepwater Horizon disaster which saw millions of gallons of crude oil leak into the Gulf of Mexico. The spill easily exceeded that of the 1989 Exxon Valdez debacle, the previous worst US oil catastrophe, and resulted in the death of 11 people, affected large stretches of the coastline, and killed or maimed many thousands of birds, sea turtles and marine mammals such as dolphins.
The disaster received global attention, and the subsequent regulatory and political backlash was, in some respects, a watershed moment for the industry. Afterwards, several countries — including the US, Canada and Norway declared moratoriums on deepwater drilling.
However, almost half a decade later, significant concerns continue to be voiced about safety of deepwater drilling. And the environmental legacy of the Deepwater Horizon debacle remains a key source of concern and controversy.
Only last week, the US National Wildlife Federation (NWF) released a report which asserts that long-term ecological damage caused by the oil and the large amount of chemical dispersants used on the spill may not be known for years. However, it claims that it is already clear that 14 wildlife species in the Gulf of Mexico are clearly suffering serious consequences.
For example, it asserts more than 900 bottlenose dolphins have been found dead or stranded since April 2010. In 2013 alone, it claims the death rate of these dolphins was in excess of three times the normal rate.
The report also asserts that around 500 dead sea turtles have been found in the affected region every 12 months for the past three years. Again, NWF claims that this represents a significant increase over normal mortality rates for these turtles.
While the NWF’s study has been disputed, at least some evidence from other major spills indicates there can be long-term legacy on local ecosystems. This month, for example, also marks the 25th anniversary of the iconic Exxon Valdez disaster (when millions of gallons of oil was spilt in Alaska) where some species, including herring fish stocks, have still reportedly not fully recovered.
In this context, voices of disquiet continue to be raised about the safety of oil drilling. Here the broad-ranging concerns of environmentalists and other stakeholders are at least twofold.
Firstly, the huge international focus that was devoted to the 2010 disaster can obscure the fact that significant spills also occur elsewhere in the world on a relatively regular basis, including in countries where environmental protections are weaker than in the US. In Nigeria, one 2006 report by environmentalists reportedly reached the staggering conclusion that the oil-rich Niger Delta region of the country has experienced the equivalent of an Exxon Valdez leak every year for almost half a century.
Secondly, much environmental concern remains specifically focused on deepwater drilling locations where, over the last five years, it is estimated that some 60 per cent of new international hydrocarbon reserves have been discovered. It is asserted that, despite ongoing reviews to safety measures, and better technology, the prospect of future disasters, potentially akin to Deepwater Horizon, remains significant owing in part to the remoteness and depth of some of these locations, and the resulting challenges posed by recovery of oil.
Deepwater Horizon itself is a good example here. The well was reportedly drilled in approximately 5,000 feet of water to a depth of around 18,000 feet below sea level.
This was an enormously impressive engineering feat. However, the immense challenge of shutting off the oil leak in 2010, after the blowout preventer malfunctioned, was made harder by the deep waters.
While scientific and technological innovation can enable greater safety in the future, ‘risk-free’ drilling is unrealistic. Moreover, modern technology can also be a double-edged sword for oil companies.
This factor was emphasised in a report last week by reinsurance broker Willis Group. The study asserted that too much of the energy sector has no insurance against major cyber attacks and that this could threaten ‘a major energy catastrophe — on the same scale — as Exxon Valdez or Deepwater Horizon’.
As the report noted, modern technology now allows oil and gas networks to be operated remotely. However, this provides scope for hackers and/or computer viruses to potentially target the electronic infrastructure meaning oil pipelines or refineries could be placed at new risk.
According to the study, the US Department for Homeland Security asserts that over 40 per cent of attacks on US critical national infrastructure were targeted on energy firms in the year to September 2012. Willis claims that this situation represents a “time bomb” and that energy companies need to enhance their cyber defences.
Despite these conventional and unconventional challenges, the post-2010 appetite of major oil firms to operate in deepwater areas remains strong. Firstly, and perhaps foremostly, despite the risks associated with deepwater drilling, these locations are proving a rewarding frontier for oil exploration.
And given rising global demand for energy, not least in emerging markets, governments are generally permitting firms to operate in deepwater locations. In the Gulf of Mexico, for instance, the US government awarded the first new post-disaster deepwater drilling permit in March 2011, less than a year after the spill began.
Indeed, earlier this year Washington also, controversially, lifted its suspension on BP securing new leases in the Gulf of Mexico in exchange for an agreement whereby the company must comply with specific corporate governance, ethics, and safety procedures. Following this decision, BP was the highest bidder last month on 24 of 31 new leases for exploration in the Gulf valued — collectively — at over $40 billion.
Another key reason why offshore drilling will continue apace is the resilience of leading oil firms, like BP, ExxonMobil, Royal Dutch Shell and Chevron, to wide-ranging international risks. The scale and profitability of these giants typically equips them to respond quickly to new opportunities, as well as withstand major setbacks.
Thus, despite costs of many billions of dollars (including from fines, a damages fund, oil worker compensation, and clean-up operations), plus the threat of ongoing litigation, BP is emerging from the Deepwater Horizon debacle more strongly than some anticipated. And, this is despite the initial blunders, including by former CEO Tony Hayward, in managing the crisis in 2010 which saw its share price almost halve at one point.
This is not to underestimate the impact that Deepwater Horizon has had on BP, including to its reputation and finances. Nor the potential scale of the future challenge, including from unsettled Deepwater Horizon-related litigation, and enhanced stakeholder scrutiny, including from environmental groups like NWF. However, worst-case scenarios for the firm have been avoided.
Taken overall, the legacy of Deepwater Horizon therefore remains intensely controversial for the oil industry. Nevertheless, in the absence of further major disasters in the near future, deepwater drilling will continue apace, driven in large part by continuing increases in global demand for energy that may only intensify in coming years if emerging markets continue to grow robustly.
— The writer is a former special adviser in the UK Government and an associate at LSE IDEAS.
