Growing Challenges of Energy and Environment – Part I

Emerging economies have joined developed nations in the wild scramble for energy, all taking greater risks in drilling for oil and gas supplies while largely shrugging about effects on climate, the environment or public health. Nations and corporations go to great lengths to explore and drill, but repairs are not so easy, as seen with a broken well gushing oil into the Gulf of Mexico since April 20. This two-part series examines governments’ failure to end dangerous dependence on fossil fuels. The first article analyzes what the Gulf oil spill reveals about the intricate global connections and entrenched interests of the energy industry. Good governance and regulations protect the environment, livelihoods and investor interests both near and far. Political leaders can use the entangled nature of such oil operations to evade responsibility – or they can use the same complexity to plan for the long term, harnessing global efforts to devise sustainable energy policies. – YaleGlobal

Growing Challenges of Energy and Environment – Part I

BP unleashed the oil spill disaster, but all Americans are complicit
Susan Froetschel
Tuesday, June 22, 2010

Out of the blue: Oil spill from broken BP well threatens human and aquatic life

WASHINGTON: An unrelenting gush of oil into the Gulf of Mexico with no end in sight is a globalization nightmare – a dark spill killing marine life and livelihoods along the US coast. But when the crisis abates – and hopefully it will someday – it will have transformed energy, environment and trade politics in places far from the Gulf coast.  

The disaster – known as the BP spill in the US and the Deepwater Horizon oil leak in the UK – divides two longtime allies, sparking fierce populist anger on both sides of the Atlantic. As corporations and multiple layers of government fumble to control the oil, US citizens blast BP, known as British Petroleum before 1998.

Meanwhile, investors confront paying up for distant disasters, the energy industry anticipates new regulations and costs, neighboring nations wait for oil to wash up on their shores and developing nations review drilling arrangements with foreign firms.

The US already negotiated a plan with BP, the world’s fourth largest company, to withhold dividend payments until the end of the year, set aside $20 billion in escrow as a starting point to pay for damages and hustle more clean-up equipment to Gulf.

As the crisis continues, charges and countercharges fly across the Pond thick and fast. British politicians and commentators have charged that the US, seeking discount prices for oil, cuts corners on oil-drilling safety regulations, paving the way to the current disaster. The fact is, as of December 2009, US and UK investors held roughly equal shares of BP stock, about 80 percent in all. So the suspension of dividend hurts investors on both sides of the Atlantic. Contrary to impressions created in the media, the impact on British pension funds is negligible. BP represents less than 2 percent of the typical UK pension fund portfolio.

Still, investors and policymakers scrutinize prices, habits and regulations around the globe. For example, a gallon’s worth of BP petro costs about £4.50 in England, or more than US$6.50. US consumers pay less half that price.

The oil spill catastrophe highlights how good governance and vigilance protect the environment and safeguard the interest of investors. Neither US nor UK regulators require the state-of-the-art remote equipment for deep sea drilling that might have stopped the flow of oil after the explosion. The BP experience suggests that other oil firms can anticipate similar punishment by foreign governments for future mishaps. Exxon-Mobil Corporation, the world’s second largest firm, claims a “diverse” geographic portfolio in its 2007 annual report: Two-thirds of its projects are beyond the “Americas” – and the bulk of “key exploration captures” listed that year are offshore in Australia, Greenland, Canada, Libya, Indonesia, New Zealand and the Gulf of Mexico.

Spread of oil along the Gulf Coast.Enlarge Map

The disaster demonstrates how oil is a global affair. The Deepwater Horizon drilling rig was built in South Korea for drilling firm R&B Falcon, based in Texas, which was purchased by Transocean, based in Switzerland, partly for tax reasons. The rig was insured for $560 million – and major insurers are based in the US, Switzerland and the UK. Costs for insuring drilling vessels and operations, let alone neighboring properties, could rise by as much as 50 percent, some analysts predict. Europe sent gear to aid in the clean-up and technology behind robots and autonomous underwater vehicles that attempt repairs was developed by researchers in Norway, Scotland, Japan, Singapore, the UK and the US.

The crisis spotlights the oft-mentioned US addiction to oil. The US economy depends on oil, using 25 percent of the world’s supply for more than 40 percent of its total energy demands. The country has one fourth of China’s population, but uses nearly three times more oil.

“For decades, we have talked and talked about the need to end America's century-long addiction to fossil fuels,” Obama noted in his Oval Office address

Yet, development of alternative fuels is far on the horizon, hardly keeping pace with economic growth in the developing world. The International Energy Agency reports a wide range in the 2004 share of renewables, warning of varying calculations: 40 percent, Brazil; 15.6 percent, China; 4.2 percent in the US; and 1.5 percent, UK.

In the meantime, despite rhetoric about ending dependence on foreign oil, about 57 percent of petroleum used in the US is from foreign sources, reports the US Department of Energy. Top countries supplying the US include Canada, Mexico, Saudi Arabia, Nigeria, Venezuela, Iraq, Angola, Algeria, Colombia, Brazil, Russia, Ecuador, United Kingdom, Kuwait and Congo.  The DOE website promises “Our dependence on foreign petroleum is expected to decline in the next two decades,” but that depends on “the increase in crude oil production in the Gulf of Mexico and elsewhere.”

Ocean waters remain a lucrative target for oil companies. Six years ago, BP’s deepwater facilities technology team estimated that more than half of its field development would be in deep water by 2012. “It’s therefore imperative we get our technology right, and that it works first time,” David Brookes foreshadowed in 2004, labeling depth, pressure and temperatures as challenges. “Intervening to remedy problems in these water depths is a very costly business.”

Reliance on foreign oil, deep-sea domestic drilling and fossil fuels is unsustainable. Business leaders, including Bill Gates, have called for a US energy strategy on June 10, with increased research investments from $5 billion to $16 billion, as well as a hike in green cards for engineers willing to work on the project. “Sadly, Americans spend more on potato chips than we do on new energy RD&D,” noted venture capitalist John Doerr with the American Energy Innovation Council.

Only higher prices for consumers force a change of habit. Obama’s demands, along with new regulations and insurance conditions for BP, will hike global crude-oil prices. Higher prices prompt conservation, reducing demand and permanently changing consumer behavior, as Saudi ministers repeatedly remind fellow OPEC members. Members of US Congress, facing election in November, however, are keen on theatricals – one representative mentioned hara-kiri as an option for BP executives and another apologized for a “White House shakedown “ of the company – rather than passing an energy bill.

Oil companies, after all, dominate the business world – seven out of top 10 Fortune’s Global 500 are oil and gas firms and remain major contributors to political parties.

Meanwhile, the US moratorium on offshore drilling could spur growth of 10th-ranked Sinopec – or encourage governments to rethink regulations for deepwater Chinese leases off the coast of Brazil, Argentina, Africa, the Middle East and Cuba. Already, Brazilian oil and government officials express interest in oil rigs stalled in the Gulf of Mexico for offshore wells deeper than BP’s.

The world confronts a stark choice. Consumers can keep making bargains with oil and gas giants, minimizing regulations in exchange for low prices, allowing those who profit from declining fossil fuels to poison oceans and air shared by all. Or consumers can make sacrifices – imposing regulations and carbon taxes, requiring disaster preparation and development of sustainable sources of fuel.

Energy is the foundation to a modern way of life. Delays in conservation and development of renewables can only lead to more of the chaos now on display in the Gulf of Mexico.


Journalist Susan Froetschel is the author of three mystery books. The most recent is “Royal Escape.”
Copyright © 2010 Yale Center for the Study of Globalization