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Gulf Oil Spill and the Changing Energy Equation

An oil protection boom off Dauphin Island, AlabamaThe explosion of the Deepwater Horizon oil rig and subsequent oil spill in the Gulf of Mexico has critical implications for the energy industry. In response to the spill, the federal government and Congress are rewriting the rule book on offshore oil and gas production. These new rules will change the way the US produces, transports and consumes energy.

The Obama administration issued a six-month moratorium on the drilling of new wells below 500 feet in the Gulf and they stopped the drilling operations on 33 oil wells.

Structural changes are already underway at the executive agencies responsible for energy. The Minerals Management Service (MMS) is responsible for managing offshore oil and gas and renewable energy leasing and development on the Outer Continental Shelf (OCS), including safety and environment impacts. Due to flagrant misconduct, Elizabeth Birnbaum was removed from her position as the MMS Director (Birnbaum did resign, though she likely had little choice) and Chris Oynes, Associate Director of Offshore Energy and Minerals Management at MMS, has resigned.

A May 19, 2010 Secretarial Order divides the MMS into three separate agencies: a Bureau of Ocean Energy Management, focused on OCS oil, gas and renewable energy project leasing; a Bureau of Safety and Environmental Enforcement, focused on inspections; and an Office of Natural Resources Revenue, focused on royalty collection.

Some have even suggested that offshore drilling be taken away from the jurisdiction of the MMS and given to another federal department like the Environmental Protection Agency or the Department of Energy. The White House Council on Environmental Quality is reviewing MMS policies and procedures under the National Environmental Policy Act.

The oil spill has initiated a host of new safety recommendations. On May 27, 2010 Secretary of the Interior Ken Salazar provided safety recommendations to President Obama that included recertification of emergency systems, new deepwater well procedures and new well design requirements. Salazar also recommended increased federal testing, inspection, and intervention capabilities. Further, on June 8, the Department of the Interior (DOI) issued a Notice to Lessees outlining new safety measures for energy production on the OCS. The Presidential commission established to investigate the spill will add its drilling safety recommendations later this year.

The President tasked Labor Secretary Hilda Solis to oversee efforts to protect the health and safety of workers associated with the Gulf oil spill. Congress is also expected to review the potential health impacts on workers and volunteers in the Gulf.

DOI and Congress are working on the issue of liability related to offshore oil and gas production. The DOI has indicated that it will propose a new liability regime that differentiates between deepwater and shallow water production.

Several bills have been introduced in Congress to increase the liability limit for economic damages under the Oil Pollution Act of 1990. Increased liability (excluding the costs of cleanup and restoration) are currently capped at $75 million, the proposed bills would set the cap as high as $10 billion or eliminate the cap entirely.

Some have suggested that only those companies able to bear consequences of a catastrophic spill should be permitted to drill for oil, particularly in deep water. Other efforts are also underway to modify the Outer Continental Shelf Lands Act and provide better protection for whistleblowers.

On June 1, the Department of Justice announced a criminal investigation related to the oil spill. Congress has scheduled more than two dozen hearings and dozens of lawsuits have also been filed against BP, Transocean, and related contractors. Although it will take years and cost fortunes, the outcome of these legal battles will have implications for the entire energy industry.

The cost of fossil fuel production is expected to keep rising as pressure is building to eliminate the oil industry’s tax incentives and increase its rate of taxation. In May 2010, the House of Representatives passed a bill that quadrupled the tax paid by the oil industry into the Oil Spill Liability Trust Fund and insurers are expected to add to these costs with premium increases.

It may be hard to fathom through the billowing flow of underwater crude, but there is a silver lining to the dark cloud polluting the Gulf. The spill has breathed new life into clean energy legislation, and the increased costs of oil production will help to make clean energy more attractive.

The government is now exploring new kinds of energy partnerships. The recent establishment of the DOI’s Atlantic Offshore Wind Energy Consortium offers some insight into the kinds of government partnerships we are likely to see in the emerging energy economy.

As we tally the ongoing costs of fossil fuel production, it is becoming increasingly apparent that clean energy offers a viable alternative to our untenable addiction to oil. The oil spill is driving legislative and policy changes that are helping to change the energy equation.
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Richard Matthews is a consultant, eco-entrepreneur, sustainable investor and writer. He is the owner of THE GREEN MARKET, one of the Web’s most comprehensive resources on the business of the environment. He is also the author of numerous articles on sustainable positioning, green investing, enviro-politics and eco-economics.

Additional reading:
Gawker: The Idiots Responsible for the BP Oil Leak

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