Will Deepwater Horizon be the petro industry’s Three Mile Island?

What happened at Three Mile Island in 1979 led to a new regulatory environment that increased the costs of building and running nuclear power reactors in the U.S. The environment was so hostile to the industry that no new reactors have been ordered since then. There are several in the planning stages, but none have been approved. The question now being debated among energy analysts is whether or not what’s going on in the Gulf of Mexico at the moment will lead to similar challenges for the oil industry.

Of particular interest is the precedent set this week when BP agreed to pony up $20 billion, to be doled out by an independent panel, to make right what they’ve done to the ecology and economy of the region. It is reasonable to expect other jurisdictions around the world will now demand any deepwater drilling be undertaken only by those with comparably deep pockets.

The Economist reviews the analogy:

Electric utilities could not take the risk that financial regulators at the state level would allow them to recoup their investments in nuclear power. In fact, for many plants in the works, the cost to retrofit them became too great, and the industry was left holding the bag. In some cases, investor-owned utilities were on the verge of bankruptcy, and taxpayers had to come to the rescue. This is why the nuclear rebirth now being discussed in Washington is so dependent on the prospect of federal loan guarantees–no company wants to go through that again without some sort of government support.

But then reaches a negative conclusion:

But in the context of oil, it’s hard to imagine one event undermining the entire industry, even one this big. As Mr Cranford writes, oil is just too valuable, and we’re just too dependent on the stuff to take a break from it, much less a 30-year hiatus. For context, he gives this statistic: $100 billion in damages would add only pennies to the price of a gallon of gasoline.

So whatever damage this episode does to BP as a company, it will be a drop in the proverbial bucket (or barrel), as opposed to some sort of industry game-changer like Three Mile Island.

But I think that misses the point. No one’s arguing that the Deepwater Horizon disaster will mean an end to the entire oil drilling business, just the practice of drilling a mile or more beneath the waves, where, as we have learned, cleaning up messes can be more problematic than shutting down a melting reactor.

Consider that the nuclear power industry supplies about 20 percent of the country’s electricity. Deepwater drilling supplies about 25 percent of the country’s domestic oil. An effective moratorium on new reactors lasted three decades (and counting) but didn’t inflict fatal damage on the nuclear industry, which is still operating more than 100 reactors in the U.S. A moratorium on new deepwater wells would be similarly tolerable.

All of this may be moot, of course, if things are as bad as one industry insider says is the case in the Gulf. If it really proves impossible to staunch the flow of oil from the well, then the chances of any more deepwater wells ever being approved, anywhere, drops dramatically. The insider speculates:

… the very least damaging outcome as bad as it is, is that we are stuck with a wide open gusher blowing out 150,000 barrels a day of raw oil or more …

Even if those fears prove unwarranted — and we really don’t have a good idea of what the future holds — things still don’t look good for those who make their living on deepwater rigs. If the U.S. does get around to setting a price on carbon, an already pricey source of gasoline will be that much more expensive. I’d have to say there is great deal of uncertainty facing the economics of deepwater drilling at the moment.

8 Replies to “Will Deepwater Horizon be the petro industry’s Three Mile Island?”

  1. Three Mile Island didn’t kill anyone, injure anyone, or damage the environment. The subsequent PR and regulatory reaction was both unwarranted and disastrous to our hopes for energy independence.

    But it would probably be fair to say that Deepwater Horizon was the industry’s Chernobyl.

  2. the three-decade moratorium on nuclear power plant construction did not put much of a crimp in overall power generation, because other power plant technologies were available to pick up the slack. we now have many more coal-burning plants than we likely would have had but for TMI, but we don’t have an electricity shortage — on TMI’s account, at least.

    OTOH, we’re drilling for oil a mile under the ocean because we’ve pretty much run out of easier-to-get-at oil fields. if we stop deepwater drilling, even for a decade, total oil extraction capacity would be likely to take a statistically significant blow; no other sources of oil would be available to cover the shortfall. prices would rise faster than they otherwise might. the resultant political pressure would make any such moratorium very hard to sustain, i think.

  3. TMI was in 1978 and Chernobyl was 1986.

    Actually, it was 1979. Thanks for pointing out the error, though. — jh

  4. “An effective moratorium on new reactors lasted three decades (and counting) but didn’t inflict fatal damage on the nuclear industry, which is still operating more than 100 reactors in the U.S.”

    It did. No new nuclear power plants.

    “A moratorium on new deepwater wells would be similarly tolerable.”

    Nope. Not even close. A nuclear reactor can easily work 20-30 years, you can just sit and milk the profits it generates.

    An oil well typically works a few years and after that it’s exhausted. So you’ll HAVE to do new drilling.

  5. The problem is not “the practice of drilling a mile or more beneath the ocean floor.” It’s drilling through an ocean floor that’s a mile beneath the surface of the water.

  6. it would probably be fair to say that Deepwater Horizon was the industry’s Chernobyl.

    Well, Chernobyl was unique, but there was a Brazilian oil rig that sank about 2002, there was Ocean Ranger, the Alexander Kielland, Piper Alpha, and maybe others. Maybe collectively they correspond.

    Oil and uranium were once direct competitors in the electricity arena. From the point of view of governments of the time, this was a competition between barrels of oil at roughly $10 each, of which a dollar or so was royalties, and ~$0.20 barrel-oil-equivalents. The prices have since changed but are still in roughly the same ratio.

    So government was looking for any excuse to hobble the nuclear industry. They were, and are, looking for any excuse not to hobble the oil industry; onshore, offshore, knock over the Washington monument if necessary, just get those royalties in, and get the oil to the consumer, because he won’t be paying his excise taxes until you do.

    If this is a valid analysis, what does it predict for nuclear power that replaces fossil fuels that are not highly lucrative for government?

    (How fire can be domesticated)

  7. No, the problem is that in the US, the price of gas isn’t pricey enough. It hasn’t stopped the sales of over-sized, inefficient vehicles and outdoor toys. It hasn’t changed the driving habits of most Americans, with just a brief pause during the worst of the recession when gas climbed over 4 bucks a gallon, in curtailed long-distance travel. Local driving habits didn’t change at all.

    In the US, there is ZERO interest or motivation among the common-folk in being environmentally-conscious or community volunteer proactive. They won’t save gas, save water, save electricity and they sure as hell won’t car-pool or use public transportation (or walk or use bikes), sort their garbage, volunteer for community service, refrain from throwing trash out of their car windows or dropping it carelessly in public places, or vote yes for necessary municipal, road or school district maintenance projects. They are dead set against tax increases after having benefited from years of tax rebates, tax revolts and tax incentive plans. They are spoiled children and they are not going to change their ways.

    In short, your average American is a lazy sod who feels very, very owed. Owed for what is not clear. However, it is because of this “I is owed!” attitude that BP and other petroleum producers are engaged in deep offshore drilling.

    Even if the Deepwater Horizons fiasco is a watershed moment and changes…something…it’s going to take a much larger Three-Mile Island-like meltdown to shift the flea-like attention and ingrained attitudes of the ultra-selfish American Everyman.

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