Deepwater Drilling: Recommendations for a Safer Future

The United States imports roughly two thirds of its oil from other countries. The remaining third comes from domestic sources and 30 percent of that came from offshore production (prior to the May 2010 moratorium on drilling), a figure that is projected to grow over the next 20 years. Clearly, domestically produced oil provides a social value—both in the energy content that consumers use to power their vehicles everyday as well as in reducing our nation's dependence on oil imports. But oil drilling also poses serious risks to workers, the environment, and the community.

The April 2010 Deepwater Horizon oil spill released an estimated 200 million gallons of oil in the Gulf of Mexico and is likely to be the single most costly oil spill off the U.S. coast. In August 2010, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling asked RFF's Center for Energy Economics and Policy (CEEP) to conduct a series of studies that would help inform the commission's investigations and recommendations. RFF was not asked to assess the technical causes of the spill; instead, our task was to help identify potential improvements in industry and government practices to reduce the risk of future catastrophic spills.

We quickly assembled a team of experts with significant experience in risk assessment, regulatory and cost-benefit analysis, government enforcement, and the oil industry to tackle important questions such as: Are deepwater wells inherently riskier or might this incident simply have been caused by an outlier firm? What incentives to prevent a catastrophic spill faced the industry prior to April 2010? Are there economic or legal barriers to instilling a safety culture in the drilling industry? Do government regulatory agencies have the right tools to assess the risks of catastrophic spills? Are government enforcement efforts up to the challenge? Are proposed industry efforts to prepare for future catastrophic spills adequate?

In addition to our own research and analysis, RFF staff interviewed and met with members of the commission, current and former government officials, and numerous industry representatives. AS a aresult, RFF researchers formulated a series of findings and recommendations to improve the safety of future oil drilling operations.

The articles in this special issue of Resources explore various aspects of those findings and pose additional questions for the future of the industry. One of the key findings was the need to provide stronger incentives for industry to invest in safety, risk-reduction, and containment technologies. A second important finding was the need to reform regulatory structures to adapt to deepwater drilling risks. Finally, our researchers identified the need to strengthen the oversight capacity of institutions involved in offshore drilling.

To determine if deepwater drilling is riskier, my colleagues Lucija Muehlenbachs, Todd Gerarden, and I examined data on over 3,000 fixed offshore oil platforms in the Gulf of Mexico and reported on the impacts of offshore production, such as fire damage, injuries, pollution, and related consequences in our paper, "Preliminary Empirical Assessment of Offshore Production Platforms in the Gulf of Mexico."

What our findings show is the probability of a company-reported incident increases with water depth, even after controlling for levels of production, facility complexity, company in charge, and distance to shore. Simply put, ultra-deepwater production is both more complex and riskier.

For example, moving from a water depth of 500 feet to 5,000 feet increases the annual probability of a reported incident from roughly 10 to 70 percent. This finding holds even if the analysis is restricted to the top 10 oil producers in the Gulf. Although the analysis is restricted to the top 10 oil producers in the Gulf. Although the analysis does not suggest that the water depth itself is the cause of increased incidents, it does reinforce the suspicion that drilling at increased depths results in greater technical challenges and, therefore, may require novel approaches to industry operations and government regulations.