If it can go wrong, it will, and Murphy's Law has been proven once more in the Gulf of Mexico where an unprecedented and catastrophic incident occurred on April 20. The Deepwater Horizon platform leased by British Petroleum (BP) sustained an explosion and caught fire due to a reported gas leak.

The platform suffered severe damage but, more importantly, 11 workers lost their lives and a massive oil slick is heading closer to land as 5,000 barrels a day is leaking from the well structure on the seabed.

It is difficult to estimate the consequences of this incident as it is certain it will have a big impact on future offshore oil development. Right now the concentration is on the damage it may cause to the fragile shores and marine life of Louisiana and Florida that may prove to be difficult to clean if large quantities of oil hit the shore.

Costs

BP is expected to shoulder the cost of cleaning up the spill but it is not clear who, if any, will shoulder the economic cost to the region where some estimates put it at $12 billion (Dh44 billion) in damages to the fishing industry, tourism among others. Lawyers are already considering cases and politicians may introduce legislation to raise oil companies' liabilities up to $10 billion.

BP's losses are already running in millions in lost oil, damaged equipment and cleaning and containment costs and the company may have lost about $25 billion in market value due to the tumbling of its shares. The same thing goes for Transocean, the oil services company that owned and operated the platform.

While BP is trying desperately to cap the well, the fact that the problem is offshore and as deep as 1,500 metres may take a long time and therefore the company is working in parallel on a number of solutions: simple ones that may take a few weeks and complex ones that may take months. The cleaning and containment of the oil slick is also under way by skimming and burning oil on the water surface or dispersing the oil using chemicals among other things.

The incident has not immediately affected the oil market because the loss of supply volume is small but in the long run, production from offshore resources is likely to be slowed down.

A review of regulation, safety procedures, codes and standards will be demanded by the public and governments alike. Projects are likely to be delayed not only by reviews but in the United States for instance no new drilling permits anywhere offshore will be granted until investigators determine the causes of the Deepwater Horizon accident and suggest changes for such incidents not to happen again.

Production in the Gulf of Mexico which is close to 1.3 million barrels a day was expected to increase by some half a million barrels a day by 2015 and this increase is now doubtful.

Inspection of operating platforms is going on right now in the Gulf of Mexico and there is no reason to believe that other offshore oil producers elsewhere are not doing the same. China, Brazil and the United Arab Emirates are expected to increase their offshore oil production in the coming few years and careful review is in order in these countries.

Some observers have compared the accident to the Chernobyl nuclear disaster of 1986 which severely delayed the development of nuclear power and this disaster is likely to do the same for the offshore oil industry.

The ground is fertile for even conspiracy theories as some suspected the timing of the incident occurring on the eve of Earth Day and just after President Obama's approval of new offshore drilling leases. Even President Chavez and the North Koreans are suspected of sabotage. Fox News claims the oil spill is not an accident and obliquely point to Cheney and Halliburton being the contractor who installed the underwater gear prior to the incident.

Offshore production is important in world oil supply but it should not drive the world into environmental disasters if cheaper and less expensive oil supplies on land are available. Going further into deep waters should be slow and in parallel with technological development and after the less costly resources are exhausted. This may not sound well for the energy security conscious countries such as the US and therefore such incidents will unacceptably add to the cost of security.

In our region, offshore production in the Gulf is probably close to six million barrels a day and therefore it is important for governments to review regulations, procedures and standards and to tighten supervision.

 

The author is former head of Energy Studies Department at Opec