Overview of the BP Macondo Catastrophe – Economic and Policy Implications


a report by Professor Omowumi Iledare Louisiana State University Center for Energy Studies, Baton Rouge


On 20 April 2010, the excitement that the proposed lifting of the moratorium on leasing and drilling operations in the Atlantic and Pacific Outer Continental Shelf (OCS) by the Obama administration would help to keep offshore oil production growth dynamic in the US beyond 2015, was short-circuited. On that day, the Deepwater Horizon rig, contracted by BP to drill the Macondo well for the development of the Macondo petroleum prospect, caught fire, subsequently sinking and causing an unprecedented crude oil spill in the Gulf of Mexico (GOM). The resulting well explosion cast a dark shadow on the outlook for offshore petroleum resource development in the US and re-energised the call for tougher regulations governing the development of unconventional oil and gas resources, such as shale gas and shale oil.


The immediate reactions of the Obama administration to the Gulf catastrophe included the imposition of a six-month moratorium on deepwater drilling operations in the US GOM, the suspension of the recently lifted drilling moratorium in the Atlantic seaboard and the restructuring of the Minerals Management Service (MMS), the US Department of the Interior agency that had hitherto regulated offshore oil and gas operations in the US. Furthermore, the US House of Representatives in a sweeping response also passed a bill purportedly banning exploration and production (E&P) companies with blemished safety records from participating in the OCS Leasing Program. The Senate also set in motion the debate on the idea of lifting the liability cap in the Oil Pollution Prevention Act. The Macondo well explosion and the immediate reactions from both the executive and the legislative arms of the US government created some apprehension that the BP Macondo catastrophe may not only have long-term effects on the Gulf Coast environment and economy, but also a long-lasting impact on the US deepwater offshore industry structure and the competitive advantage of the GOM Region in deepwater investment patterns. There are concerns that the incident may lead to more stringent deepwater drilling plan permit approvals, tougher operating guidelines and safety/environmental regulations that would make it extremely difficult for less capitalised operators to have access to oil and gas resources in the GOM.


In this article, we put into perspective certain global offshore industry trends and the GOM offshore industry structure for consideration, as the US government attempts to address the emerging offshore environmental and safety regulatory issues from the Macondo well explosion incident. The economic implications of the likely impact of an offshore drilling-related economic shock on the Gulf States economy are also highlighted.


Probable Impact of the Macondo Explosion on the US Gulf of Mexico Deepwater Industry


The GOM Region re-emerged as a highly prospective petroleum province in the early 1990s, after the declining trends of the 1980s,


© TOUCH BRIEFINGS 2011


just as the finite nature of global petroleum resources onshore and in shallow waters became more apparent to international oil and gas operators. The region, which was perceived in the late 1980s by petroleum industry analysts as ‘dead in the trap’ for big E&P investment, became attractive to investors subsequent to the Deep Water Royalty Relief Act of 19951


gas E&P activity in the US to date.


The changing structure of the OCS oil and gas industry, advancements in offshore drilling and production technologies, government regulatory programmes and fiscal incentives and favourable market conditions of high oil and gas prices made the GOM Region contribute to E&P investment growth.2


Incentives to explore and develop


petroleum resources, especially natural gas, in the more difficult areas of the GOM contributed to the rising leasing activity and E&P operations in the region. As a matter of fact, without the increase in GOM deepwater oil and gas activities in the 1990s, the overall decline in US oil production over the past decade would have more than doubled. For example, while the deepwater percentage of total GOM oil production was less than 40% in 1989, it was over 80% in 2009. Empirical evidence suggests that the prospect of increasing petroleum reserves and supply in the US hinges very much on making new, sizable and profitable discoveries in the GOM Region, especially in the deep offshore areas.


However, any drastic fiscal policy and regulatory changes because of the Macondo accident may impact on the structure of oil and gas operations in the US GOM and make the business environment less attractive to international E&P operators. It is important to note that nearly every top 20 international oil and gas company considers deepwater operations an essential component of its strategic business development.3


and has remained the primary focal point of oil and


These international oil companies (IOCs) dominate deepwater operations worldwide, accounting for 82% of operational and prospective wells in the Gulf of Guinea and 52% in the GOM (see Table 1). The independent US oil companies (LOCs) also have a


Dr Omowumi Iledare is Professor of Petroleum Economics at Louisiana State University. Over the years, Dr Iledare has specialised in the analysis of global oil and gas industry structure, conduct and performance; oil and gas exploration and production economics and policy; the environmental and economic effects of oil and gas exploration and production; and oil and gas taxation and regulation studies. He received a PhD in mineral economics from West Virginia University and BSc degree with honours in petroleum Engineering from


the University of Ibadan, Nigeria. He is Vice President of Finance for the International Association for Energy Economics (IAEE) and an associate editor for the Society of Petroleum Engineers (SPEs) Journal of Economics and Management.


E: wumi@lsu.edu


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Regional Focus – The Americas


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