Oil industry's response muted to Obama vow of more regulation

McClatchy NewspapersMay 14, 2010 

WASHINGTON — The oil industry reacted cautiously Friday to President Barack Obama's pledge to bring tougher environmental and safety regulation to offshore drilling, with some analysts warning that more aggressive government oversight could result in higher gasoline prices and a greater dependence on foreign oil.

"Our goal is zero-fatality, zero-injury and zero-spill," Cathy Landry, a spokesman for the American Petroleum Institute, a trade association of large oil companies, said in an e-mail. "This spill reminds us that we need to redouble our commitment."

Tony Hayward, chief executive of BP, which owns the well that has dumped millions of gallons of crude oil into the Gulf of Mexico since the Deepwater Horizon drilling rig exploded into flames April 20 and sank two days later, also used the occasion to voice support for safety.

"We absolutely understand and share President Obama's sense of urgency over the length of time this complex task is taking," Hayward said in a statement. "We want to thank the president and his administration for their ongoing engagement in this effort "

Jeff Eshelman, a spokesman for the Independent Petroleum Association of America, which represents smaller producers, also struck a conciliatory tone.

"There are many emotions, understandably, involved right now," he said. "Controlling the well and protecting the environment are the main priorities today. And we are urging the federal government, as they consider new regulations and new offshore exploration policies, to first allow the facts in this incident to be investigated."

How far the president will push new regulation is unclear.

"For too long, for a decade or more, there's been a cozy relationship between the oil companies and the federal agency that permits them to drill," Obama said. "It seems as if permits were too often issued based on little more than assurances of safety from the oil companies. That cannot and will not happen anymore. To borrow an old phrase, we will trust, but we will verify."

He noted that his administration already has announced it would divide the Minerals Management Services into two separate operations: one to lease oil exploration sites and collect royalty payments and the other to enforce regulations.

He also said that the administration would close "the loophole that has allowed some oil companies to bypass some critical environmental reviews" and would undertake "a new examination of the environmental procedures for oil and gas exploration and development."

His comments, however, made clear he hasn't dropped his support for offshore drilling. "Domestic oil drilling continues to be one part of an overall energy strategy that now includes more clean, renewable energy and energy efficiency than at any other time in our history," he said.

Ken Morgan, director of the TCU Energy Institute in Fort Worth, said it is "inevitable" that the oil and gas industry will face "new restrictions" on its operations, and how severe they are will determine whether they restrict the industry's profitability.

Drilling in the Gulf of Mexico, which accounts for about 17 percent of oil consumption in the United States, and efforts to restrict deepwater exploration, which accounts for most of the new supplies that are coming into production, could force the U.S. to import more oil.

But how that would affect prices or supplies is hotly debated. While a major part of U.S. production, Gulf of Mexico oil accounts for less than 2 percent of world oil supply — the same amount, one analyst noted, as Azerbaijan.

Oil prices are more subject to concerns about slowing economies in Europe and Asia than to worries about supply. So far this month, they've dropped from an average in April of about $83 to $71 on Friday.

Where the impact of any serious restrictions on offshore drilling there would be most likely felt would be on employment in the Gulf coast region.

"This is a no-win situation for the U.S.," said Michael Economides, a University of Houston professor and petroleum engineer who consults for Chinese and European oil companies.

"If the United States curbs production, oil companies simply go elsewhere abroad, taking with them important jobs from Texas, Mississippi and Louisiana," Economides said. "U.S. production would also fall, and our need to import oil would rise."

A permanent ban on offshore production — or a regulatory regime that discourages oil exploration and drilling — might also have longer term implications.

Deepwater production, both in the Gulf of Mexico and globally, was an important source of new oil in the past decade, when global demand skyrocketed, thanks to booming developing countries such as China and India. The amount of oil from deepwater wells grew from about 1.5 million barrels per day to 5 million barrels per day in the last decade.

If the concerns over the Deepwater Horizon disaster dampens deepwater exploration elsewhere in the world, that could have far-reaching economic impact.

"There is a new element of uncertainty concerning deepwater right now," said Jim Burkhard, the managing director of global oil research for IHS Cera. The U.S. will have to balance the economic tradeoffs against environmental threats.

"What is the right balance that this country wants to maintain in the future, that's a question that will be addressed," he said.

(Smith, of the Fort Worth Star-Telegram, reported from Fort Worth. Hall reported from Washington.)

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