Resources for the Future (RFF) is a nonprofit and nonpartisan organization that conducts independent research – rooted primarily in economics and other social sciences – on environmental, energy, natural resource and environmental health issues.
In August 2010, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling asked RFF to conduct several studies that would help inform the Commission’s investigations and recommendations. The seven papers below released in January 2011 comprise RFF’s Oil Spill Commission series.
Discussion Paper | January 2011 | Lucija Muehlenbachs, Mark A. Cohen, and Todd Gerarden
This paper reports on a preliminary analysis of performance indicators on 3,020 platforms operating in the Gulf of Mexico between 1996 and 2010. Statistical analysis reveals that company reported incidents (such as blowouts, fires, injuries, and pollution) increase with water depth, controlling for platform characteristics such as age, quantity of oil and gas produced, and number of producing wells. In addition to company-reported incidents, we examine government inspections and the type of enforcement action (warning, component shut-in, facility shut-in, or civil penalty review) following an inspection. Fewer incidents of noncompliance are detected during inspections on deepwater platforms compared with shallow-water platforms; however, the magnitude of the effect of depth on noncompliance is not large. We provide a preliminary analysis of the effect of prior findings of noncompliance, suggesting that noncompliance is persistent. We also find significant variability in both self-reported incidents and noncompliance across leaseholders.
Discussion Paper | January 2011 | Roger M. Cooke, Heather L. Ross, and Adam Stern
The Oil Spill Commission’s chartered mission—to “develop options to guard against … any oil spills associated with offshore drilling in the future” (National Commission 2010)—presents a major challenge: how to reduce the risk of low-frequency oil spill events, and especially high-consequence events like the Deepwater Horizon accident, when historical experience contains few oil spills of material scale and none approaching the significance of the Deepwater Horizon. In this paper, we consider precursor analysis as an answer to this challenge, addressing first its development and use in nuclear reactor regulation and then its applicability to offshore oil and gas drilling. We find that the nature of offshore drilling risks, the operating information obtainable by the regulator, and the learning curve provided by 30 years of nuclear experience make precursor analysis a promising option available to the U.S. Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) to bring costeffective, risk-informed oversight to bear on the threat of catastrophic oil spills.
Discussion Paper | January 2011 | Lynn Scarlett, Arthur G. Fraas, Richard D. Morgenstern, and Timothy Murphy
This study compares and contrasts regulatory and related practices—in particular, regulatory decisionmaking, risk assessment and planning processes, inspection and compliance, and organization structure, budgets, and training—of the Minerals Management Service (MMS, now the Bureau of Ocean Energy Management, Regulation, and Enforcement, or BOEMRE) with those of the Federal Aviation Administration (FAA) and the Environmental Protection Agency (EPA). Comparing MMS practices with those of other federal agencies that also manage low-probability but high-consequence environmental risks provides a basis for identifying opportunities for enhancing regulatory capacity and safety performance in managing deepwater energy exploration and production. Our research finds important differences in processes for setting standards; peer review contribution to the rulemaking process; establishment of tolerable risk thresholds; and training of key staff. The paper concludes with several recommendations for how various EPA and FAA practices might be modified and used at BOEMRE to strengthen its regulatory and risk management processes.
Discussion Paper | January 2011 | Alan J. Krupnick, Sarah Campbell, Mark A. Cohen, and Ian W.H. Parry
The purpose of this paper is to provide a conceptual framework for understanding how analysis of costs and benefits might be incorporated into an assessment of regulatory policies affecting deepwater drilling. We begin by providing a framework for analyzing the life-cycle impacts of oil drilling and its alternatives, including onshore drilling and importing oil from abroad. We then provide background estimates of the different sources of oil supplied in the United States, look at how other oil supply sources might respond to regulations on deepwater drilling, and consider the economic costs of these regulations. After providing a comprehensive description of the potential costs and benefits from various types of drilling—including, when possible, estimates of the magnitude of these benefits and costs—we discuss the extent to which these costs and benefits may already be taken into account (or reinforced) through the legal, regulatory, and tax systems and through market mechanisms. We conclude by presenting a framework and simple example of how a cost–benefit analysis might be used to inform regulation of deepwater drilling, and sum up the policy implications of our work.
Discussion Paper | January 2011 | Robert Anderson, Mark A. Cohen, Molly K. Macauley, Nathan Richardson, and Adam Stern
The Deepwater Horizon oil spill in the Gulf of Mexico in April 2010 led to the deaths of 11 workers, a six-month moratorium on deepwater drilling in the Gulf, and nearly three months of massive engineering and logistics efforts to stop the spill. The series of failures before the well was finally capped and the spill contained revealed an inability to deal effectively with a well in deepwater and ultradeepwater. Ensuring that containment capabilities are adequate for drilling operations at these depths is therefore a salient challenge for government and industry. In this paper we assess the Marine Well Containment Company (MWCC), a consortium aimed at designing and building a system capable of containing future deepwater spills in the Gulf. We also consider alternatives for long-term readiness for deepwater spill containment. We focus on the roles of liability and regulation as determinants of readiness and the adequacy of incentives for technological innovation in oil spill containment technology to keep pace with advances in deepwater drilling capability. Liability and regulation can significantly influence the strength of these incentives. In addition, we discuss appropriate governance structure as a major determinant of the effectiveness of MWCC.
Discussion Paper | January 2011 | Lynn Scarlett, Igor Linkov, and Carolyn Kousky
This paper reviews implementation of the risk management frameworks used by eight federal and foreign agencies—including the Minerals Management Service (MMS, now the Bureau of Ocean Energy Management, Regulation, and Enforcement, or BOEMRE)—and summarizes the features of a robust tolerable risk (TR) framework. A TR framework conceptually breaks risk into three categories—acceptable, unacceptable, and tolerable—separated by numerical boundaries. Most of the agencies surveyed in this review have adopted a TR or modified TR framework, but MMS (BOEMRE) generally has not (although the agency does use an Oil Spill Risk Model to assess spill probabilities and possible trajectories). The study argues that while numerical thresholds are not essential to risk management, they provide a transparent goal against which to benchmark practices, equipment, standards, and facilities, and would be a valuable tool for BOEMRE. We also recommend that BOEMRE develop better risk assessment and management guidance; identify and more systematically collect information for understanding and evaluating risks and safety performance; and strengthen performance-based risk management by adopting proven approaches, such as those used in Norway and the United Kingdom for offshore oil and gas development.
Discussion Paper | January 2011 | Mark A. Cohen, Madeline Gottlieb, Joshua Linn, and Nathan Richardson
Although the causes of the Deepwater Horizon spill are not yet conclusively identified, significant attention has focused on the safety-related policies and practices—often referred to as the safety culture—of BP and other firms involved in drilling the well. This paper defines and characterizes the economic and policy forces that affect safety culture and identifies reasons why those forces may or may not be adequate or effective from the public’s perspective. Two potential justifications for policy intervention are that: a) not all of the social costs of a spill may be internalized by a firm; and b) there may be principal-agency problems within the firm, which could be reduced by external monitoring. The paper discusses five policies that could increase safety culture and monitoring: liability, financial responsibility (a requirement that a firm’s assets exceed a threshold), government oversight, mandatory private insurance, and risk-based drilling fees. We find that although each policy has a positive effect on safety culture, there are important differences and interactions that must be considered. In particular, the latter three provide external monitoring. Furthermore, raising liability caps without mandating insurance or raising financial responsibility requirements could have a small effect on the safety culture of small firms that would declare bankruptcy in the event of a large spill. The paper concludes with policy recommendations for promoting stronger safety culture in offshore drilling; our preferred approach would be to set a liability cap for each well equal to the worst-case social costs of a spill, and to require insurance up to the cap.