October 8, 2010
http://online.wsj.com/article/SB10001424052748704657304575540063579696700.html
By NEIL KING JR. And KEITH JOHNSON
Congress was still convulsed over the Exxon-Valdez oil spill on Dec. 6, 1989, when Shell Oil flashed an announcement that would revolutionize American energy policy: The Anglo-Dutch giant had hit oila lot of oilnearly 3,000 feet below the surface of the Gulf of Mexico.
The bulletin on the Auger Field discovery marked the start of a rush into the Gulf’s deep waters. At the time it looked as if the Gulf might be a magic-bullet solution to America’s energy and national-security needs.
It made nearly everyone giddy. Politicians in both parties offered incentives to boost offshore production. Regulatorsespecially under President Bill Clintoneased rules to support the boom. And oil companies, deploying ever more complex drilling technology, barreled ahead, leaving four administrations scrambling to keep pace.
While environmentalists fought fiercely to prevent offshore oil drilling in places like Californiawhere crude was still being found in shallow watersthey decided to tolerate drilling in the Gulf. One environmentalist dubbed the region a “national sacrifice area.”
So, oil production soared in the Gulf of Mexico, even as it declined elsewhere in the U.S. But safety and environmental regulators never did catch up to the rush there. That lapse culminated with nearly five million barrels of oil spewing into its waters this summer after the April 20 blowout of BP PLC’s Macondo well.
A Wall Street Journal examination of two decades of oil exploration in the Gulf of Mexico, based on government documents and interviews with dozens of politicians and industry officials involved, yields a story with an echo of the recent financial crisis. Both stemmed from collective national drives toward a laudable goallifting the home-ownership rate in one case, and boosting domestic energy production in the otherwith little thought to potential downsides.
Former Florida Sen. Bob Graham., co-chairman of the president’s oil-spill commission, blamed the BP disaster on what he called “an enormous and shared failure of public policy.” The causes of the spill, he said in recent testimony before the commission, “go back decades and are attributable across the spectrum to government, to industry, to the White House, to Congress, to Republicans, to Democrats.”
Now, in the wake of the spill, people across the political spectrum are drawing different lessons from it. The Obama administration has halted deep-water drilling off the entire U.S. while it ponders tougher regulations. Republicans and many Gulf-area Democrats call that overkill. They say offshore drilling should be resumed immediatelyboth to boost domestic energy production and to provide badly needed jobs.
Former House Speaker Newt Gingrich, a vocal proponent of offshore drilling, says the Gulf disaster stemmed from two problems, “one caused by BP and the other caused by the ineptitude” of the government response to contain the spill.
Bruce Babbitt, who headed the Interior Department during the Clinton Administration, thinks the problem goes deeper. Mr. Babbitt says he and other federal officials erred by allowing the industry greater leeway to regulate itself during the 1990s. “The deep-water boom brought a real quantum jump in both the risk and the complexity of the technology involved,” he says. “In retrospect, I should have understood that.”
The pressures to drill deep in the Gulf water aren’t going away. Shell’s newest project sits in 10,000 feet of water, twice as deep as BP’s ill-fated well, and relies on innovations that regulators haven’t even begun to wrestle with.
In late 1989, as Shell pushed into the Gulf’s depths, all eyes in Washington were cast elsewhere. Thirty-four hundred miles to the northwest, the grounding of the Exxon Valdez oil tanker on Alaska’s Bligh Reef that March sent more than 250,000 barrels of oil into Prince William Sound.
The worst offshore oil spill in U.S. history at the time, the mess was epic. Veterinarians had to learn how to anesthetize ottersthe only way to clean oil from their fur. Cleaned beaches turned black again as oil oozed from the rocky sand.
The disaster had another effect: The most sweeping oil-spill legislation in U.S. history passed Congress in the summer of 1990. Given the disaster in Alaska, it focused almost entirely on the perils of transportation, not production. Much of the furious back and forth that summer was about whether to require tankers to have double hulls: The Exxon Valdez had just a single, three-quarter-inch plate of steel. The law ultimately required double hulls. The law also devoted whole sections to protecting the waterways of Alaska, and even laid out restrictions for the Outer Banks of North Carolina.
But with push back from Gulf lawmakers, the law didn’t mention the Gulf of Mexico, which even then provided more than 90% of the country’s offshore oil. The Gulf Coast was the only shoreline outside of Alaska open to oil exploration. In another nod to Valdez, the law capped liabilities for spills in deep-water ports at $350 million, but it sharply lowered the limit to $75 million for accidents occurring further offshore.
“The industry convinced nearly everyone in government that what they were doing was so sophisticated that it was both totally safe and impossible for government to understand, much less regulate,” said California Rep. George Miller, a veteran environmental advocate in Congress. “Government was romanced,” he added. “And it succumbed to the romance.”
Former Democratic Sen. Bennett Johnston of Louisiana, who now lobbies for the American Petroleum Institute, has a different view. “There was never a thought that we were sacrificing safety,” he said. “Everyone involved, from the regulators to the companies themselves, agreed that [offshore drilling] was a safe endeavor.”
By 1994, America was facing an oil crisis. The U.S. was pumping well under half the country’s daily needsjust 6.6 million barrels a dayand importing the rest from around the world.
Nowhere was the production decline more ominous than the Gulf. Production off Texas, Louisiana and Mississippi had fallen by 20% in just five years.
“The gulf was becoming a dead sea,” says Allen Verrett, a veteran petroleum engineer who currently heads the industry’s offshore operators committee. “In the shallow waters, all the elephants were gone, and we were pursuing field mice.”
Shell Oil, the independent U.S. affiliate of Royal Dutch Shell, thought there still might be big game in the Gulfif it could reach it without breaking the bank. Compared to the far simpler standards of shallow water, drilling for oil in over 1,000 feet of water was expensive and complicated.
In April 1994, Shell opened the spigots on the deepest well ever drilled in the Gulf of Mexico, 2,860 feet below the surface of the ocean at its Auger Field, about 140 miles off the coast of Louisiana. Auger was more than just a single project. Shell’s U.S. branch was betting its future on deep-water output in the Gulf.
The drilling job was a tour de force, requiring what was then new technology: a floating platform hovering above the seabed. More than 900 companies were involved in its construction. Shell had to develop remote vehicles to work at such depths.
The billion-plus-dollar project didn’t look like a financial winner in the early days. Oil was cheap, $16 a barrel, meaning Auger’s first two wells had to produce about 8,000 barrels a day each. The first managed barely 2,000; the second, even less.
“I was looking in the mirror and saying, ‘Did we just blow a billion dollars?'” recalled Rich Pattarozzi, then Shell’s general manager of deep-water exploration and production.
By June, engineers thought they had the problem licked. In drilling the well, calcium phosphates had clogged the reservoir. So they blasted the deposits with hydrochloric acid.
“They came in one day and said, ‘We’re at 8,000 barrels,’ and we all said, ‘Thank God,'” recalled Gordon Sterling, who worked for Mr. Pattarozzi as manager of major projects for Shell’s deep-water division. The wells soon topped 10,000 barrels a day. By the late 1990s, the entire field was pumping more than 100,000 barrels a day, making Auger the best producer in the Gulf at the time.
The oil industry wasn’t alone in fretting about the costs of offshore exploration. So were many of President Clinton’s energy officials and the president himself.
Concerns over energy security soared in the mid-1990s as national production continued to slump. The U.S. reliance on imported oil had been driven home a few years earlier by the Iraq-Kuwait war, which raised fears of a supply rupture.
In a meeting with 75 oil-state lawmakers in June 1994, Mr. Clinton showed a willingness to help the industry that astonished many in the oil patch. His message: So long as it didn’t increase the federal deficit, he was open to a range of tax incentives to spur deep-water exploration. Boosting output, Mr. Clinton told the lawmakers, was a matter of national security.
After the Republican takeover of Congress that November, the president got what he wanted. On Nov. 28, 1995, he signed the Deepwater Royalty Relief Acta move the White House promised would “unlock an estimated 15 billion barrels of oil in the central and western Gulf of Mexico.”
Companies typically paid around 12% of all oil produced in royalties to the U.S. Treasury. But the relief act waived payments for the initial productionand the deeper the project, the better the royalty relief. An industry publication praised Mr. Clinton “as the new champion of the exploration sector.”
Seismic crews fanned out across untested waters, gaining new imagery of the reservoirs below. The number of new deep-water leases soared, topping 1,200 in 1997, compared with 326 the year the law passed. The “dead sea” was rebounding.
For federal regulators at the Minerals Management Service, the Interior Department agency in charge of overseeing domestic oil production, the question became: How to keep abreast of this boom without hindering it?
The MMS decided it made little sense to develop new rules given the swift changes in drilling technology. Instead, MMS let the industry establish its own “best practices,” which regulators would oversee.
For decades, oil companies have used massive devices called blowout preventers to shear through pipes and seal wells in a disaster. One of the reasons for the BP spill this summer is that the final fail-safe on its blowout preventer, the so-called deadman switch, failed to work.
In January 1997, MMS said companies needed to test their huge undersea blowout preventers every two weeks, instead of the previous requirement for weekly tests. The shift, pushed by the industry, would save companies around $25 million a year, MMS estimated.
In the five years after the Clinton White House unleashed new exploration, deep-water production shot up fivefold to 742,000 barrels a day. Despite the boost in Gulf oil and gas production, overall U.S. production continued its precipitous slide. That, in turn, led to an even-greater focus on boosting output from the Gulf during the Bush Administration.
In May 2001, when an energy task force commissioned by Vice President Dick Cheney released its final report, domestic producers were churning out just 5.8 million barrels a day, little more than half of peak production in 1970 and just 30% of U.S. oil consumption.
In 2005, President George W. Bush signed a sweeping energy bill designed to nudge the country in a new direction, with a focus on nuclear power and alternative fuels. But the $12 billion bill fit a familiar pattern. Conservation groups thwarted oil-industry efforts to pry open Alaska’s Arctic National Wildlife Refuge, the eastern Gulf of Mexico near Florida, and the Atlantic and Pacific coasts. Oil companies, meanwhile, won more incentivesaround $2 billion in allto seek additional oil and gas in the remote pockets of the Gulf.
“The central and western Gulf had basically become a national sacrifice area,” said Richard Charter, a senior advisor for the environmental group Defenders of Wildlife who has been working on offshore issues for decades.
The quest for more offshore drilling found its ultimate spotlight on Sept. 3, 2008, during the Republican National Convention in St. Paul, Minn., when hundreds of delegates joined in a chant of “Drill, baby, drill.”
A day later, the party’s presidential nominee, Sen. John McCain, picked up the torch. “We will drill new wells offshore, and we’ll drill them now,” he pledged. At issue was a federal ban on offshore production in most areas, except for the central and western Gulf of Mexico and some parts of Alaska. A congressional ban, in different forms, dated back to 1981. A presidential ban was first ordered by George H. W. Bush in 1990. That double whammy kept about 85% of America’s offshore oil and gas resources off-limits.
Until crude oil starting climbing in price, the ban wasn’t a big political issue. Sen. McCain had long supported it, but hinted early in his 2008 presidential campaign that he might back opening up some promising areas offshore. But when crude in February 2008 settled above $100 a barrel for the first timedriving gasoline prices above $4 a gallonthe energy issue threatened to overshadow two wars, terrorism and early troubles at investment banks in New York.
Boosting energy production became a centerpiece of Sen. McCain’s campaign. Those in charge of regulating the continental shelf were equally gung-ho. “Gas doesn’t come from gas stations,” said Randall Luthi, then the head of the MMS, in July. President Bush moved first, waiving the executive ban on offshore drilling in mid-July of 2008, the day oil hit its all-time high. “Now the ball is squarely in Congress’s court,” he said.
Congress, controlled by the Democrats, wasn’t about to lift its ban on offshore drilling, however. Democrats argued oil companies were sitting on millions of idle acres. Sen. Barack Obama argued all summer that offshore drilling wouldn’t solve the energy crisis. That stance became a liability. In July, Sen. McCain ran what his campaign called “The Pump” advertisement for the first time. Set against twirling numbers at a gas pump, the voice-over asked: “Who can you thank for rising prices at the pump?” Cheers of “Obama, Obama, Obama” followed.
Within weeks, as support for increased drilling grew, Mr. Obama tempered his opposition. He said in early August he would support “carefully circumscribed” drilling if it was part of a “comprehensive” energy plan.
In late September, the congressional ban on offshore drillingthe last obstacle to more productionfell by the wayside. Congress declined to renew the moratorium. For the first time in a generation, America’s coasts were fair game for exploration.
At the end of this March, after months of public hearings and testimony, and less than three weeks before the Deepwater Horizon burst into flames, President Obama put forward a plan to expand drilling off the Atlantic Coast. He praised the industry’s offshore safety record in defending his decision.
The White House said Mr. Obama’s offshore policy was carefully calibrated, although it acknowledges the Deepwater Horizon spill exposed weaknesses that now need to be fixed.
The pressure to keep finding more offshore oil isn’t going away. Rep. Doc Hastings, the senior Republican on the House Natural Resources Committee, says Americans haven’t forgotten the gasoline prices of two years ago. He believes that memory will prove at least as strong as the BP spill when it comes to offshore drilling. “Four-dollar gas still resonates with the American people,” he says.
Write to Neil King Jr. at neil.king@wsj.com and Keith Johnson at keith.johnson@wsj.com
Special thanks to Richard Charter