What was up with April 2010?
The fossil fuel sector would love to forget this past month. During this one month alone, no less than three catastrophic accidents have significantly affected the image of each of the sector’s primary industries: petroleum, coal, and natural gas.
The Headline Stories:
Apr 21 – BP Offshore Oil Rig Explodes and Results in Enormous Gulf Oil Spill
o Potentially the worst environmental disaster in US history
o 11 presumed dead
Apr 5 – West Virginia Coal Mine Explosion
o Worst US coal mining disaster in forty years
o 29 people dead
Apr 18 – Natural Gas Well Hits Shallow Pocket, Contaminates Town’s Water Supply
o Over 135 homes evacuated in Caddo Parish, LA
o Told they cannot drink their water
While accidents have always been a part of the energy production story, it is strange how easily we forget how frequently and severely they can occur. Unfortunately it takes something significant and in rapid succession like what has happened in the past month to remind us of the true, hidden costs of our dependence on fossil fuels.
The British Petroleum Oil Spill
BP’s oil rig explosion and enormous gulf oil spill seriously threatens the future of deep water domestic offshore oil production. While the root cause is still being sorted out, what is clear is that after the well was drilled and about to be capped off, an oil/gas mixture accidentally shot up the mile long pipe and ignited into a fireball once it reached the surface rig. The ensuing fire killed 11 people, destroyed the rig, and caused it to collapse and sink, breaking the pipe as it sank into the ocean. But the wellhead at the sea floor could not and STILL cannot been shut off (now three weeks after the event) despite safety valves and attempts to use an improvised large metal “cap” to siphon off the leaking oil. BP is spending $6-7M per day to stop the leak and it is believed that the total cleanup costs will end up running anywhere from $2B to $14B. To put that into perspective, BP’s net income for all of 2009 was $17B, and the company’s stock has already fallen almost 20% since the accident, wiping out $32B in equity value.
Here’s a time-lapse aerial movie of the spill:
Original estimates were that the oil leak was 1,000 bbls/day, but this was quickly raised to at least 5,000 bbls/day based on satellite images that showed a rapidly spreading oil slick. Recent estimates have put the leak as high as 70,000 bbls/day based on analysis of a video made public of the leaking well. But the real problem is that it isn’t clear how long it will take to turn off the leak. The worst case scenario is that it will take 90 days to drill another well into the original one to shut it off. If this happens, this spill will easily eclipse the 1989 Exxon Valdez spill in Alaska, the largest ever in US waters with roughly 250k bbls spilled. Compared to the Valdez oil spill whose cleanup took a very long time due to the remote location, the Gulf Coast is much more accessible which should speed up cleanup efforts. The flip side is that a lot more people live around the Gulf and there are a lot more businesses and livelihoods that will be affected. There is also the concern that the spreading oil slick could enter the Gulf Stream and be swept around the tip of Florida and onto beaches of the East Coast.
Footage from the ocean floor:
One thing to keep in mind, however, is that while terrible, the amount of oil that has been spilled in accidents is actually very small relative to the amount we consume. If you total ALL of the oil spills that have been recorded in the world since the 1940s, you find that there have been a total of roughly 40M barrels of oil spilled over the last 70 years. Considering that the US currently uses ~20M barrels of oil and the world uses ~85M barrels every day, the average yearly amount that gets spilled is actually a very tiny fraction (0.002%) of what the world uses in a year. It’s almost a miracle that we don’t spill more, especially considering that 30,000 oil wells have been drilled in the Gulf with over 3000 producing today. The problem, of course, is that even this tiny spilled fraction can wreak environmental havoc on the affected area and result in billions of dollars of direct and indirect damages – or worse, destroy ecosystems for generations.
The issue with BP is that they’ve had a string of accidents in the last few years, including a burst Alaskan oil pipeline and a fatal refinery explosion, and investigations have pointed to a culture of cost-cutting and a lack of safety measures that resulted in the accidents. So far, there is evidence that a relatively inexpensive second-level wellhead shut off device was not installed that could have already stopped the leak. While this device is not legally required by the US (although it is required by the governments of Norway and Brazil), it certainly gives the appearance of a very bad gamble to cut corners. At the time of this writing BP (the overall well owner), Transocean (the rig owner), Haliburton (the well capping company), and the Mineral Management Service (the federal agency responsible for determining and enforcing regulations) are all pointing fingers at each other in an attempt to shift blame.
This is already affecting public policy: Obama has distanced himself from his previous willingness to pursue offshore drilling. Ironically, this oil spill could actually threaten action on a climate change bill. In order for the bill to have gotten as far as it did, environmentalists and conservatives had to compromise, and a plan was developed that called for more renewables, more nuclear, and offshore drilling. Now, the environmentalists are putting their foot down and are backing away from the table, while conservatives are still scrambling to shape a message. “California Gov. Arnold Schwarzenegger and Florida Gov. Charlie Crist have changed their minds about offshore drilling. Schwarzenegger went a step further and withdrew support for a plan to allow drilling offshore Santa Barbara County. Several senators, the latest being Democrat Jay Rockefeller, have refused to vote for any bill that expands offshore drilling.” In some sense, this incident could polarize the debate and force a restart of the legislative/negotiation process.
The West Virginia Massey Energy Coal Mine Explosion
This accident is a sad reminder of just how dangerous coal mines are. Since 1970, 262 coal miners have died in the US and thousands have suffered from indirect, respiratory deaths over the years. In the past 10 years, over 10,000 miners have died from black lung in the US alone. Worldwide, thousands of workers die each year and undocumented tens of thousands more will die from respiratory problems. But these respiratory issues don’t just affect the miners. The particulates that are released into the atmosphere when coal is burned to generate electricity increase the risk of asthma attacks, and are estimated to cut short 30,000 lives each year in the US alone. Considering the direct and indirect deaths due to respiratory problems, and the environmental damage due to strip mining, mountain top removal mining, CO2 emissions, and the occasional coal ash tailing pond that collapses, it is clear that coal is one of our dirtiest fuel sources. None of these negative externalities are priced into the deceivingly rock bottom <$0.04/kWh price that we pay for wholesale electricity. Perhaps this latest tragedy that killed 29 miners – the highest number in the US since 1970 – will help us reconsider these hidden costs.
Exco Natural Gas Well Water Contamination
Finally, the natural gas fracking incident that occurred in Caddo Parish, Louisiana – in the heart of the Haynesville Shale discovery – is exactly what the shale gas industry does NOT want to happen. On April 18th, Exco Resources apparently hit a pocket of natural gas that was much closer to the surface than expected which caused the gas to be released into the atmosphere. Subsequent tests of the local water supply showed that the aquifer had unacceptably high levels of natural gas. This is PRECISELY the biggest concern that environmental groups have with the process of hydraulic fracturing, or “fracking” that natural gas companies use to extract shale gas from the geologic formations underground. Although fracking is a mature process that has been used tens of thousands of times over many years, and the gas is typically found far below surface aquifers, the potential to contaminate a region’s water supply perhaps permanently is there. Natural gas has clear benefits over coal, especially in terms of reduced CO2 emmisions, and it is gaining in popularity as a “transition fuel” toward renewables. But incidents of water contamination such as this one will only hurt the industry’s image. If enough large accidents were to happen in the near future, it could spell an abrupt halt to this promising domestic energy source.
The Hidden Costs
With all of these accidents happening, it got me thinking – how DO you come up with the costs of all the negative externalities associated with the entire fossil fuel industry? There’s CO2 emissions and the effects of global warming, direct environmental damage (air, water, land) due to daily operation as well as accidents, loss of life, health problems, the cost of securing access to oil through military projection, and national trade deficits with countries that aren’t friendly to us. This is a very important question because the fact is we ARE paying for it one way or the other – just not at the pump or the plug. If, for example, gasoline costs $2/gallon at the pump, but causes $10/gallon worth of negative external effects that are distributed over everyone at some point later in time, this Total Cost of Ownership is not only worth knowing, but not recognizing these costs are a failure in the marketplace. Getting these numbers right is important to truly compare energy sources on an apples-to-apples basis in order to set effective policy.
A new report from the National Research Council, called “Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use,” has attempted to arrive at a number. This report looked mainly at the effects on human health (and did not thoroughly look at the effects of climate change, rising food prices, or risks to national security). It found that the hidden cost of our current energy mix on human health alone was $120B in 2005, the last year for which data was available. When the other effects are taken into account, this number could exceed $500B each year – over $1500 per person per year.
I don’t know why all of these serious accidents happened in just one month, but if there is any silver lining to them, it is that the currently un-priced, negative externalities associated with our dependence on fossil fuels are suddenly and unavoidably put back into the spotlight. Hopefully this will galvanize the growing public support for alternative sources of energy and will provide a renewed commitment to their development.