The Obama Administration’s Offshore Drilling Safety Rule: Should It Stay or Should It Go?

WASHINGTON—In March 2017, President Trump signed executive orders requiring agencies to review existing rules that potentially burden development or use of domestically produced energy resources. In response, the Department of the Interior (DOI) flagged a 2016 offshore oil and gas drilling safety rule, implemented in response to the 2010 Deepwater Horizon oil spill, for review. Last week, DOI announced it would be publishing proposed modifications to the rule.

As part of a larger Resources for the Future (RFF) project assessing the potential impacts on industry and the public if the regulations are eliminated, modified, or delayed, a new report analyzes the 2016 drilling safety rule, also termed the well control rule.

The study’s authors, RFF Senior Fellow Alan Krupnick and Research Assistant Isabel Echarte, replicated the Bureau of Safety and Environmental Enforcement’s (BSEE’s) 2016 analysis and then reanalyzed the benefits and costs of the rule, accounting for sunk costs (i.e., onetime costs industry has already spent to comply with the rule). Maintaining the rule would result in $512 million to $598 million in net benefits over 10 years (at 7 and 3 percent discount rates, respectively, in 2012$)—over $65 million larger than BSEE estimated in its 2016 RIA.

Krupnick and Echarte also found that a large share of the rule’s benefits, as measured by BSEE, go to industry because of a deregulatory provision in the 2016 rule. This provision provides 98 percent of the benefits of the rule ($1.1 billion to $1.3 billion over 10 years), while the remaining 2 percent of benefits are from the external benefits of the rule (i.e., to the environment) from reducing future oil spills. Because the Trump administration would likely focus on repealing only the regulatory requirements of the rule, it at first appears as though the forgone benefits—those from reducing future oil spills—are small enough that repeal would result in net benefits. But on closer inspection, BSEE admits that it underestimated those benefits by assuming that the rule would reduce the risk of future oil spills by only 1 percent, as the actual level of risk reduction is unknown.

Krupnick and Echarte found that when repealing only the regulatory provision of the rule the break-even risk reduction would only need to be 31 percent. The authors state that: “Given the lack of information regarding the effectiveness of the well control rule, the highly uncertain benefits, and the immense consequences of such a spill—including impacts on tourism and fishing in local economies, risks to human safety, and effects on ecosystems—a risk-averse regulator might choose to not repeal the regulatory requirements. … In our view, BSEE should conduct further research regarding the forgone external benefits prior to any adjustments.”

The authors believe that, because of BSEE’s decision to undervalue the external benefits of the rule, it will likely be easy for the Trump administration to argue that its proposed changes (to be published this week) result in only minor forgone benefits. The report concludes that the administration should convene an expert panel to conduct an expert elicitation on the external benefits of its proposed modifications of the rule so that the public can be fully informed of related impacts.

Read the full report: The 2016 Blowout Preventer Systems and Well Control Rule: Should It Stay or Should It Go?

Also read the previous report published as part of this series: The 2016 BLM Methane Waste Prevention Rule: Should It Stay or Should It Go?

NOTE TO CORRESPONDENTS: When the proposed rule is published to the Federal Register, the authors intend to post a blog at www.rff.org/blog.