Peter Van Doren

Blowout Prevention Act – Will Rs Get Buyer’s Remorse? (Modified July 18, 2010)

by Marlo Lewis on July 16, 2010

in Ethanol, Global Warming

Last week, the House Energy and Commerce Committee unanimously approved H.R. 5626, Chairman Henry Waxman’s Blowout Prevention Act. Here’s the version of the bill as marked up and approved by the Committee. Here’s the earlier discussion draft on which the Energy and Environment Subcommittee held a hearing on June 30.

Like the discussion draft, the marked-up version of the bill is a Trojan Horse for restricting and, ultimately, shutting down deepwater oil production.

The most mischievous language is in the first substantive provision, Sec. (2).

Sec. (2)(a)(3) requires each applicant for a drilling permit to have an oil spill response plan ensuring “the applicant has the capacity to promptly control and stop a blowout in the event the blowout preventer and other well control measures fail” (p. 2). If the ongoing disaster in the Gulf has taught us anything, it is that once the blowout preventer and other well control measures fail, there may be no way “to promptly control and stop a blowout.” H.R. 5626 would establish a test no oil company can pass, a standard none can meet.

Nobody had the capacity to “promptly control and stop” the Macondo well blowout after the preventer and other well control measures failed — not BP, not the oil industry working as a team, not the federal and state governments working with the oil industry.

The sponsors had to know they were demanding the impossible when they drafted the bill. Consider these excerpts from a colloquy between Oversight and Investigation Subcommittee Chairman Bart Stupak (D-Mich.) and ExxonMobil CEO Rex Tillerson at the June 15 Energy and Environment Subcommittee hearing:

Stupak: “So when these things happen, these worst-case scenarios, we can’t handle them, correct?”
Tillerson: “We are not well equipped to handle them. There will be impacts as we are seeing. . . .That’s why the emphasis is always on preventing these things from occurring, because when they happen, we’re not very well equipped to deal with them.”
Stupak: “. . . so no matter which one of the oil companies here before us had the blowout, the resources are not enough to prevent what we’re seeing day after day in the gulf, not only the loss of 11 people, but we’re on, what, day 56 or 57 of oil washing up on shores. There is no other plan. There is no way to stop what’s happening until we finally cap this well, correct?”
Tillerson: “That is correct. . . . There is no response capability that will guarantee you will never have an impact. It does not exist and it will probably never exist.”

The discussion draft’s permitting requirements apply to all “high risk” wells, defined expansively as any offshore well plus any onshore well having the potential to cause serious environmental harm in the event of a blowout. The marked-up version targets “covered wells” rather than “high risk” wells, but this is largely a distinction without a difference. Covered wells include all wells located on the Outer Continental Shelf (OCS), plus any other well that, “based on criteria established by rule … could, in the event of a blowout, lead to extensive and widespread harm to public health, safety, and the environment” (pp. 41-42).

The OCS is defined (by reference to Sec. 1301 of the Submerged Lands Act) as waters lying seaward of three geographic miles from the coastline (p. 43). So H.R. 5626 would cover any deepwater well plus any shallow-water and onshore well where a blowout could lead to widespread environmental harm. Very few large wells would be exempt.

Presumably, operators could “promptly control and stop” a blowout at any onshore well and most shallow-water wells. Nonetheless, H.R. 5626 could effectively ban new wells in deep water, and deep water is the future of offshore oil and gas production. As the Department of Interior notes in its May 27 report, Increased Safety Measures for Energy Development on the Outer Continental Shelf, U.S. deepwater offshore oil production surpassed shallow water oil production in 2001, and in 2009, 80% of offshore oil production and 45% of offshore gas production “occurred in water depths in excess of 1,000 feet.” 

The bill does not clearly state how its requirements would apply to existing wells. Would an operator’s permit be revoked if he cannot demonstrate the capacity to “promptly control and stop” a blowout after the preventer and other well-control measures fail? If so, then the bill would not only block new deepwater drilling, it would also create a vehicle for shutting down existing wells. 

Sec. (2)(c) requires the operator to obtain a revised permit if he makes a “material modification” in well design, the blowout preventer, his plan to promptly stop a blowout, or his capability to begin or compete drilling of a relief well for a covered well. Apparently, then, an existing well would be subject to the new permitting requirements if it undertakes a “material modification.” In that case, however, the bill could discourage operators from making material improvements in well safety. Some might avoid or delay making safety improvements in order to avoid or delay becoming subject to an impossible standard. If I am reading these provisions correctly, H.R. 5626 could actually make offshore drilling less safe!  

Federal officials may not be able to finesse Sec. (2)(a)(3), even if they want to, because H.R. 5626 would empower “citizens” to enforce its provisions and associated regulations via litigation:

Any person having a valid legal interest which is or may be adversely affected may commence a civil action in Federal district court of appropriate jurisdiction on such person’s own behalf to compel compliance with this Act, or any regulation or order issued under this Act, or any regulation or order issued under this Act, against any person, including the United States, and any other government instrumentality or agency (to the extent permitted by the eleventh amendment to the Constitution) for any alleged violation of any provision of this Act or any regulation or order issued under this Act. [p. 28]

The discussion draft did not include the qualifier “valid legal interest.” But how difficult is it for an environmental group to demonstrate a “valid legal interest” in enforcing environmental laws and regulations? Enact the Blowout Prevention Act, and environmental groups will be able to sue any agency that fails to hold an oil company to an unattainable standard.

A few concluding thoughts. The security risks of dependence on petroleum imports are often hugely exaggerated, as the Cato Institute’s Jerry Taylor and Peter van Doren explain. Nonetheless, the sponsors of H.R. 5626 view petroleum imports with alarm. If the bill kills the future of U.S. offshore production, our dependence on Saudi Arabia and OPEC will increase. Is that what the sponsors want?

Perhaps their core premise is that oil is so evil that any restriction on oil production is good, because it will hasten the arrival of a “beyond petroleum” future. Such thinking is dangerous folly.

Although oil spills are bad, oil is good. Without oil, there would be no modern commerce and no mechanized agriculture. Life for most of humanity, including most Americans, would be poor, nasty, and short. Indeed, many of us would not even be alive.

Killing the future of offshore production would increase consumers’ pain at the pump, destroy tens of thousands of high-paying jobs, and undermine the economy of the Gulf Coast region. A “beyond petroleum” future would likely be just as distant — or even more so, because a poorer America would have fewer resources to invest in technological innovation.

Petrophobes overestimate their ability to predict and control the future. Consider these examples. 

  • In 1990, the California Air Resources Board (CARB) adopted a zero emission vehicle (ZEV) mandate requiring 10% of all new cars sold in California be electric vehicles by 2003. Ten percent of the California new-car market is about 150,000 vehicles. CARB had to backpeddle several times as it became apparent that consumers were not buying these costly, limited-range vehicles. In 2008, CARB reduced the mandate to 2,500 all-electric vehicles – a rollback of about 98%.
  • Congress in 2007 enacted a Renewable Fuel Standard (RFS) requiring refiners to sell 250 million gallons of cellulosic ethanol in 2011. Earlier this week, EPA announced it would reduce the 2011 target to 5 – 17 million gallons per year –  a 94-98% rollback.

It is not surprising that veteran petrophobes like Reps. Waxman and Markey (D-Mass.) drafted H.R. 5626. It is surprising that every Republican member voted for it too. Do any of them have buyer’s remorse? If not now, when?

Will climate change cause water wars? Will Waxman-Markey enhance U.S. energy security? No and No.

by Marlo Lewis on September 21, 2009

in Energy, Ethanol, Global Warming

Last week, on the free-market energy blog MasterResource.Org, I posted a two-part column on climate change and national security. In a nutshell, I argued that global warming is likely not an important geopolitical or military “threat multiplier,” and that the national security risks of climate change policies likely outweigh those of climate change itself.

One of the great things about “publishing” on the Internet is that readers can quickly and easily share other insights and information the author had not considered.

Climate scientist and fellow blogger Chip Knappenberger called my attention to a remarkable essay in Nature magazine by Wendy Barnaby, editor of People & Science, the journal of the British Science Association — and to Chip’s review of Barnaby’s essay on WorldClimateReport.Com.

One of the principal ways climate change supposedly acts as a “threat multiplier” is to intensify drought and water shortages, leading to crop failure, famine, and armed conflict within and among nations. Barnaby had written a book about biological warfare, and the publishers suggested she write a book about the coming century of “water wars.” 

At the outset, she assumed that water scarcity is a signifcant source of armed conflict in the world – a pervasive problem just waiting to be ‘threat multiplied’ by climate change. The book was to include a history of water wars, but, as she dug into her topic, she found there wasn’t much history to write about. ”Cooperation, in fact, is the dominant response to shared water resources,” she discovered. The data are overwhelming:

Between 1948 and 1999, cooperation over water, including the signing of treaties, far outweighed conflict over water and violent conflict in particular. Of 1,831 instances of interactions over international fresh water resources tallied over that time period (including everything from unofficial verbal exchanges to economic agreements or military action), 67% were cooperative, only 28% were conflictive, and the remaining 5% neutral or insignificant. In those five decades, there were no formal declarations of war over water (emphasis added).

It is true that many nations are water-stressed, but this has not meant that their people must either perish or go to war to seize another country’s water supplies. Usually, it means that countries cooperate and import “virtual water” in the form of agricultural produce. It takes lots more water to grow crops than it does to supply households with drinking water. So where water is scarce, people tend to substitute grain imports for home-grown produce. Israel, Jordan, and Egypt are a case in point:

Israel ran out of water in the 1950s: it has not since then produced enough water to meet all of its needs, including food production. Jordan had been in the same situation since the 1960s; Egypt since the 1970s.  Although it’s true that these countries have fought wars with each other, they have not fought over water. Instead, they all import grain. As [U.K. social scientist Tony] Allan points out, more ‘virtual’ water flows into the Middle East each year embedded in grain than flows down the Nile to Egyptian farmers.

Climate change-related drought would pose challenges to resource managers but should not lead to armed conflict where nations are free to cooperate and trade. (As noted in my MasterResource column, cap-and-trade treaties require carbon tariffs for enforcement — a recipe for conflict and trade war rather than cooperation and trade.)

Barnaby’s conclusion is worth reproducing in full:

Book or no book, it is still important that the popular myth of water wars somehow be dispelled once and for all. This will not only stop unsettling and incorrect predictions of international conflict over water. It will also discourage a certain public resignation that climate change will bring war, and focus attention on what politicians can do to avoid it: most importantly, improve the conditions of trade for developing countries to strengthen their economies. And it would help to convince water engineers and managers, who still tend to see water shortages in terms of local supply and demand, that the solutions to water scarcity and security lie outside the water sector in the water/food/trade/economic development sector. It would be great if we could unclog our stream of thought about misleading notions of ‘water wars.’

Waxman-Markey would increase U.S. dependence on petroleum product imports

As discussed in my column on MasterResource.Org, U.S. dependence on oil, including oil imports, is not a “crisis.” Nonetheless, many eco-warriers and defense hawks claim that it is. They also claim that Waxman-Markey would enhance U.S. energy security by inaugurating the transition to a “beyond petroleum” economy.

Well, another colleague sent me a report showing that Waxman-Markey would make us more dependent on petroleum product imports.

The report, prepared by EnSys Energy for the American Petroleum Institute, finds that by 2030, Waxman-Markey would:

  • Significantly increase U.S. refining costs;
  • Reduce U.S. refining volume by up to 4.4 million barrels per day (mbd);
  • Reduce annual U.S. refining investments by up to $89.7 billion (up to an 88% decline in investment);
  • Reduce refinery utilization rates from 83.3% to as low as 63.4%;
  • Create competitive advantage for non-U.S. refineries; and, hence
  • Increase U.S. reliance on petroleum product imports.

EnSys analyzed three scenarios: a “Base Case” (EIA’s reference case projection of future liquid fuels supply and demand without climate legislation); a “Basic Case” (EIA’s analysis of Waxman-Markey assuming timely development of key low-emission technologies and no severe policy constraints on the use of both domestic and international offsets); and a No International/Limited Case (EIA’s analysis of Waxman-Markey assuming limited access to international offsets, and no deployment of key technologies beyond EIA’s reference case).

Okay, now that we understand the terminology, let’s look at some graphs from the EnSys report. First, the impact of Waxman-Markey on U.S. refinery output:

ensys-throughput

Next, the impact on U.S. refining investments:

ensys-investment

Next, the impact on petroleum product imports by volume:

ensys-product-import-volumes

Next, the impact on petroleum product imports by percent:

ensys-import-volume-by-percent2

Finally, the impact of Waxman-Markey on U.S. refining global market share:

ensys-regional-impacts1

Bottom line for “energy security” mavens: Waxman-Markey grows foreign refining output at the expense of U.S. output, and increases U.S. dependence on petroleum product imports.

The EnSys report very likely understates the impact of Waxman-Markey on U.S. refining. A modeling study can only estimate how carbon constraints will affect refining via their impact on fuel prices. Models cannot estimate how carbon-constraints might affect refining via their impact on investor psychology.    

Investors can get spooked when government declares regulatory warfare on an industry, and the Waxman-Markey bill does just that. Consider the gross disparity between the refining industry’s share of covered emissions (43%) under Waxman-Markey and its share of emission allowances (2.5%).

ensys-allocations-vs-emissions  

Investors cannot be blamed if they view Waxman-Markey as the proverbial “writing on the wall” for the U.S. refining industry. From this I conclude that Waxman-Markey’s adverse impacts on U.S. refining – and thus on the volume and percent of petroleum product imports – could be substantially greater than those EnSys projects.

Conclusion

Waxman-Markey will not take us “beyond petroleum.” Instead, it will make gasoline more costly to consumers while making America more dependent on imported petroleum products.