MACONDO HAS led to much finger-pointing at the oil industry. BP, the other equity partners in the well, and the service companies implementing the drilling and related activities have been sparring over who bears most responsibility. But, in truth, U.S. management of deepwater resources is as much to blame. The MMS—the former Minerals Management Service, and as of June 2010, the Bureau of Ocean Energy Management, Regulation and Enforcement at the Department of the Interior (DOI)—was a disaster in the making. Reform of the MMS should have been a high priority for this administration.

The recent history of the MMS reflects activities that one normally attributes to poor, developing, resource-rich countries—it was embedded with incompetence, corruption, conflicts of interest and scandals. It was also responsible for the second-largest source of U.S. government revenue after taxes. In September 2008, in the heat of the last presidential campaign, the DOI inspector general, Earl E. Devaney, issued a report on the management of the royalty-in-kind program, a system whereby instead of paying royalties on production in federal waters, producers paid their royalties in oil. That oil was then sold to any willing buyer—trading companies and refiners—by the Department of the Interior, which during the Bush administration had developed a sort of national oil company within the bureaucracy. Last year, about $12 billion was collected from federal royalties, half of which came from these activities. The Department of the Interior had, in short, created a trading company of not inconsiderable size.

The DOI report of 2008 noted that the management of the royalty-in-kind program involved “a culture of ethical failure.” In particular, the report stated that it was “a culture of substance abuse and promiscuity”; it was one in which close ties between federal officials and industry resulted in rigging contracts and accepting gifts; and, those managing the program engaged in “illicit sexual encounters” both with other employees and with industry representatives. A year ago, Interior Secretary Ken Salazar announced the intention to end the royalty-in-kind program, and there was legislation and administration planning on the horizon to revamp the entire setup.

Thus far, the administrative structure of federal-land leasing has been playing catch-up with the more modern resource-management programs that have been adopted in other countries. The UK adjusted its offshore management in 1988 when the Piper Alpha platform exploded, killing 166 workers. Norway, Canada, Australia and others followed. In particular, they undertook operations only now being implemented in the United States, including separating the activities of leasing, safety regulation and revenue collection, and more closely monitoring rig operations, in some cases on a 24/7 basis. Brazil, where offshore development has been critical to production for a long time, has a more modern management system than the United States.

If we are ever going to get back to deepwater drilling—and do so with long-term viability—a new setup which involves hiring only people with experience and establishing procedures that bolster safety and discourage corruption is key. But we should not kid ourselves. All of these improvements will come with delays. Given the environmental consequences of the BP blowout and the way the disaster has further divided vocal interest groups both for and against deepwater leasing and development, litigation that slows down any chance of progress is also likely.

 

THE UNITED States is on the cusp of achieving energy-exporter status—something unthinkable but a decade ago—not just in gasoline, diesel and heating oil, but in natural gas as well. And it is the ingenuity of our industries that has made such a future possible. At home, the momentum from the unleashing of natural gas from shale, and oil from related sedimentary structures, is providing the basis for a base-load alternative and cleaner-burning fuel than coal, while also helping to foster far more competitive conditions for natural gas globally. But we should have no hope for a viable international energy regime that helps create a greener global future. Certainly, abroad, the administration has focused its main initiatives on environmental agreements, separating itself from the policies of the Bush administration by moving to constructive engagement. But legislative gridlock and the near impossibility of enacting either a carbon tax or a cap-and-trade system through Congress, combined with the inability to reach a consensus with China and other developing countries, look likely to sidetrack further developments internationally. And, when it comes to conventional hydrocarbon issues, the United States seems to have abandoned any international strategy.

For the time being, our best hope is that the government not get in the way. Macondo should not be allowed to prevent the necessary development of oil and natural gas to bridge the gap to a lower-carbon century. Business as usual might be the best way to protect U.S. interests. The market appears to be working well enough in providing adequate supplies, and recent high prices have played a fruitful role in damping demand in some parts of the world. The focus on hybrid cars, wind and solar (which are unlikely to be the answer) are confronting gridlock issues in Washington, so that too may be well and good. Washington has a terrible track record in choosing winners when it comes to energy. The Synthetic Fuels Corporation, created by Congress and President Jimmy Carter in 1980, aimed to produce 2 million barrels a day of liquids from coal by 1985, the year in which it was dismantled because of the fall in oil prices. Experiments on shale oil by government funding produced oil at a full-cost estimate of $1 million a barrel in the early 1980s. Clearly, fostering private-public partnerships by favoring technologies is a less-than-good idea; they face a difficult path when markets move in different directions.

If there were a main criticism of U.S. energy policy over the past year and a half it may lie in precisely this area—the failure to understand how markets have moved, and how to pursue goals by harnessing rather than fighting market forces.

 

Edward L. Morse is the managing director and head of global commodities research at Credit Suisse. He has previously served as deputy assistant secretary of state for international energy policy and was U.S. representative at the International Energy Agency.

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