03 May, 2010

Lessons from the spill

Sergio Abranches

The Gulf of Mexico oil spill tells us a story of disregard for the risk of deep sea oil extraction, and bad risk governance. It reflects an overall failure to account for risk of environmental damage and the associated economic losses of deep sea oil drilling and extraction projects.

That the leakage continues uncontrolled 14 days after the rig explosion, on April 20, tells a lot about BP’s impact analysis of the operation, and quality control of the equipment leased. It also reveals the lack of technology to deal with that sort of leakage. Nobody knows how to stop such a leakage before it turns into a major disaster.

The environmental cost will be immense. Cleaning is not clean. It’s just a lesser evil. Dispersants are toxic and will have a negative impact on maritime and coastal environments.

Economic losses will be huge. The whole southern coastal economy will be affected. BP liabilities will probably be higher than those paid by Exxon in the case of the Exxon Valdez spill. The Exxon Valdez has been the most expensive oil disaster to date in the US. It also showed that environmental damage, always overlooked on risk assessments, unfolds for decades after.

The first lesson is that risk is higher than acknowledged. The second one is that technology provides neither adequate risk prevention, nor prompt damage control. The third lesson is that such disasters have long run consequences. They are not short-term events. The fourth lesson is that this kind of oil project has hidden costs.

“What is likely to become one of the most damaging spills in history unveils the hidden costs of our addiction to fossil fuels. The truth is, fossil fuels are injurious in so many ways — to our health, the environment and national security.” (John Podesta and Joseph Romm – “Limited Government can, and often does, lead to unlimited pollution and unlimited disasters”, Climate Progress.)

This cost does not enter any business plan, project estimate, risk and financial assessments. The hidden cost of risk – both environmental and economic – distorts pricing, particularly comparative pricing confronting oil to alternative energy sources. It doesn’t show in the price equation neither at the rig, or at the pump. Oil is more expensive than it appears because it is riskier. It has become even more so as we moved from on-shore traditional drilling to off-shore deep water exploitation. The markets and insurance companies should carefully consider these lessons before jumping at the rather unwarranted benefits of future pre-salt drilling. Hidden costs and real risks will be multiplied by a significant factor when moving from deep-sea to sub-salt drilling.

“The only effective strategy is strong regulatory oversight to prevent disasters in the near term. And getting off oil in the longer term.” (Podesta and Romm)

In Washington, safety considerations have already made President Obama to condition his decision to allow off-shore drilling to safety considerations. But he

“offered little in the way of concrete promises. He said he still believes that ‘domestic oil production is an important part of our overall strategy for energy security,’ but said ‘it must be done responsibly for the safety of our workers and our environment’.” (Dave Levitan, Solve Climate).

It is unlikely that a disaster of that magnitude would not have political aftereffects over the long run both in the US and abroad.

This accident makes a good case  for everybody to probe deeper into corporate sustainability claims. The credibility of sustainability reports and impact assessments has never been very high. The spread of this oil spill should remind everybody to not take corporate statements and reporting at face value. Sustainability actions should be not only reported, but designed in such a way that they could be reported, measured – through good and proven metrics – and verifiable.

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