Does the Government Influence Deepwater Drilling
June 24, 2010
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An interesting analsys here. I haven't seen this reported in the MSM (then again, I don't watch or read the MSM, so you tell me). Back in 1995, the United States government started giving financial incentives for deep water drilling, while since 1990 there has been a complete ban on drilling on the east side of the Gulf. So you have a couple things going on. All drilling, shallow or not, in the Gulf takes place on one half of the Gulf Coast. Two, the number of deepwater rigs in the Gulf has exploded since 1990. Go figure. Say it with me, "Government intervention fails again!"
David in Qatar
Bashing BP (for Doing Exactly What Government Led Them to Do) by Matthew J. Novak
Government Intervention: A Major Contributor to the Mess
After first hearing about the problem BP as a company currently faces, I became curious about the positions of oil platforms in the Gulf of Mexico. I am no expert, but drilling in over five thousand feet of water sounds hard. So, I searched for something to show me where the platforms are located and found the following map, which I find useful for discussion.
Incentivizing Risk
In 1995, President Bill Clinton signed into law the Deepwater Royalty Relief Act (DWRRA), which was "intended to encourage natural-gas and oil development in the Gulf of Mexico in waters at least 200 meters (656 feet) deep by offering royalty relief on qualifying natural gas and oil lease sales." This act has since expired, but there remain continued incentives for drilling in deep water.
For example, a report from the DOE written in 2005 states that after the conditions of the DWRRA expired in 2000:
"the MMS adopted a program which determines royalty relief on a lease-specific basis. Under the revised method, leases located in the same water depth may have different volumes exempt from royalty charges if the economic conditions vary. For example, if one natural gas field is more expensive to access, then it may potentially receive more royalty relief than a field in the same water depth with lower costs to access."
In other words, the government specifically passed laws that gave the oil companies incentives to drill far offshore — that is, in deeper water where risk is presumably higher. In addition to the higher risk of accidents, the cost of solving any problems are necessarily greater in five thousand feet of water than in, say, 250 feet of water.
How much of an incentive was there to drill in deeper water? The same DOE report contains the following table.
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