Offshore Oversight: How Deep Is the Regulatory Ocean?

Jan 7, 2011

Offshore Oversight: How Deep Is the Regulatory Ocean?

The aftermath of the April 2010 Deepwater Horizon disaster has increased the demand for strengthened regulation and enforcement efforts designed to reduce accidental spills associated with offshore oil drilling activities. Indeed, in its final report, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling stated that substantial reform by government and industry is imperative to prevent future oil spills. But would revamped and strengthened oversight actually reduce the risk of blowouts and other catastrophes on offshore rigs?

A recent RFF discussion paper, “Preliminary Empirical Assessment of Offshore Production Platforms in the Gulf of Mexico,” by Lucija Muehlenbachs, Mark A. Cohen, and Todd Gerarden, provides an initial baseline assessment of current enforcement efforts. The authors conduct an empirical analysis of more than 3,000 fixed offshore oil platforms in the Gulf of Mexico and report on the impacts of underwater drilling, such as fire damage, injuries, pollution, and related consequences.

One particularly significant finding of the analysis is that when controlling for levels of production, distance to shore, and other factors, the probability of a company-reported incident increases with water depth. For a platform with average characteristics, each 100 feet of added depth increases the probability of an incident by 8.5 percent. Although the analysis does not suggest that the water depth itself is the cause of increased incidents, it does reinforce the idea that drilling at increased depths results in greater technical challenges and, therefore, may require novel approaches to industry operation and government regulation.

The authors also examine incidents of noncompliance detected during government inspections. They find that noncompliance is a persistent problem—with little evidence that government enforcement efforts deter future violations.

Analysis of individual companies also produced interesting results. Examination of the 10 top producing firms in the Gulf of Mexico in 2009 reveals significant disparities between companies in reported incidents as well as enforcement actions. For example, BP is more likely to report an incident than most other large producers. On the other hand, BP is less likely to receive an enforcement action during an inspection. It is unclear what causes this disparity—it could be dutiful reporting by BP or lenient enforcement by government officials

The authors caution that their findings are preliminary and raise as many new questions as answers. They show, however, the importance of rigorous empirical analysis of enforcement data and the policy implications for improving government monitoring and enforcement policy.

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