If Sarbanes was bad, what do we think “TARBANES” will do for the Economy?
“Tarbanes”: the laws and regulations upon which the oil and gas industry will have to operate under in the Gulf of Mexico and other federally controlled waters. If we are not careful it will become the federally mandated equivalent to another over reaching and difficult law, Sarbanes Oxley. Tarbanes, will systematically unravel the offshore industry just as Sarbanes has made the IPO market in the United States uncompetitive and board room operations very difficult.
In 2001 our country faced a financial crisis which was caused by “big business” not playing by the rules. The major culprit named in the action was Enron, they were accused of manipulating the natural gas market and other commodities to their benefit. Prior to these issues Enron was the community darling, they could do no wrong until they were accused of back door deals and shady operations. A whole new side of Enron came to light, a side that been rumored to exist within the industry for years, but had never come to light. They were accused of inflating their share price and hiding loses. Basically they personified everything that was bad about corporate America. The arguments are very similar to what we now hear about “big oil” and the reputation given to one of the biggest, BP.
The media chased down rouge traders and shell companies and turned one of the institutional icons, Enron, into a bankrupt empty company. Enron lost in the court of public opinion and was punished by the market long before the regulators and legislators got involved. Soon Duke Energy began to feel the pinch, El Paso, Dynegy, and others were all caught in the web of Enron. The trading industry in the power sector was under siege and Congress was getting involved.
After all the hearings, the testimony from industry, from victims, from irate senators and congressmen the Sarbanes Oxley law was put forward and signed by President Bush. Corruption in corporate America was never to happen again. It is interesting to note that all of this happened before any charges were formally brought against Enron, Ken Lay or Jeff Skilling.
However, the damage was done, the trading industry all but disappeared, the new rules made it so that companies chose not to be public or to flee to other countries to access the public markets and in the end we got another financial scandal in the form of subprime mortgages.
What does the story of Enron have to do with the largest oil spill in the Gulf of Mexico? I think it is clear that a pattern is forming here. First BP comes into this situation with similar baggage to Enron. In the past they have been shown to balance cost with safety and have had catastrophic results. First Thunderhorse almost tipped over, then the Texas City Refinery blew up, the Alaskan pipelines broke from lack of maintenance, and now the Deep Horizon goes down with similar accusations. BP is out in front among oil companies with their image, Beyond Petroleum, as was Enron with the concept of data over assets. Enron created an economic shock wave that devastated thousands. Now the Gulf spill threatens 1,000s of jobs and could eliminate entire industries. Enron was punished in the market; BPs share price is currently down by nearly 50% from a high of 62.38. The major difference between BP and Enron was the size of the industry they represented, Enron could be contained, oil cannot it is spreading through the gulf at breakneck speed. Tony Hayward the CEO of BP has made promises to clean up the spill, but if BP is gone how will that work? With 98% of our transportation running on oil we cannot afford to shut it down. So in this scenario, is BP really “too big to fail” or will we allow market forces to take their toll on the company.
The hearings on capitol hill have all ready begun, the first of which showed BP pointing at TransOcean, TransOcean pointing at BP and Halliburton, Halliburton pointing at BP and the testimony just got better. There were reports of TransOcean employees arguing with BP company men about pulling the mud out of the string. Comments about how they were going to depend on the Cameron built BOP to prevent problems. Questions are raised on the quality of the cement job done by Halliburton. BP employees plead the 5th to avoid testifying and it just doesn’t look good. All issue circling the fact that the Deep Horizon blew up and 11 people lost their jobs and the impact of the spill is just beginning to be felt.
Legislators are beginning to use the spill for political gains, Governor Christi of Florida who recently lost his party’s primary comes out against drilling on his coasts. Marco Rubio, a staunch supporter of drilling is poised to run for the Senate as a republican against Christi, now an independent. President Obama is on site and “taking charge” of the actions. The Governor of Louisiana is out in front trying to save his coast line. In the mean time the MMS, is found to be too close to the industry. They have been taking bribes and turning a blind eye to what the “big oil” companies are doing. Secretary Salizar comes to the rescue and the head of the MMS retires. The regulatory body is to be reorganized and new procedures are being evaluated. In the meantime Congress is getting involved.
The first order of business is to increase the liability of oil companies; the legislation hastily put together narrowly fails. But had it gone into effect the impact on the smaller oil companies would have been devastating. While BP can volunteer to front millions, smaller companies cannot compete with that standard would be pushed out of the offshore. Next President Obama orders a stop to all deep water drilling. This has the net effect of pouring gasoline on an all ready volatile situation. Rigs normally rent for $250,000 to $500,000 per day, so that's as much as $2.97 billion costs in idle rigs during the six-month moratorium. Each rig has two crews of 90 to 140 people so they can rotate on and off, for 180 to 280 actual jobs, so about 7,590 direct jobs could be affected across all the rigs. Boats service each rig every day at rates of $15,000 per day apiece, so that's lost revenue of nearly $1 million per day or as much as 186,000,000. Add this onto the shutdown of the fishing industry and the impact to the tourist industry in coastal states. Louisiana is hardest hit, being a home for all three industries. All that is needed is a match to light off a huge economic cascade effect.
Then the first criminal investigation is announced. Attorney General Eric Holder has opened a criminal investigation into the explosion of the deepwater horizon. What does he expect to find? Perhaps he is following a pattern of mistakes that BP has made in recent years, some of them resulting in the loss of life, others in serious supply disruptions and now a huge environmental spill. Perhaps he knows that the public will support an attack on “big oil” presently and it would mean a big win for the anit-hydrocarbon agenda.
President Obama takes action and appoints former two-term Florida Gov. and former Sen. Bob Graham and former administrator of the Environmental Protection Agency William K. Reilly as co-chairs of a commission to find out what happened to the deepwater horizon.
“If the laws on our books are inadequate to prevent such an oil spill, or if we didn’t enforce those laws – I want to know it. I want to know what worked and what didn’t work in our response to the disaster, and where oversight of the oil and gas industry broke down. We know, for example, that a cozy relationship between oil and gas companies and agencies that regulate them has long been a source of concern” says President Obama.
So this commission is going to investigate, even before the well is plugged, and make recommendations on how to better regulate the offshore. My guess is that “Tarbanes” will be even harsher than Sarbanes and probably have a much larger impact on our economy. Let’s suppose, Tarbanes is somehow tied to the cap and trade energy schemes being discussed in the Senate and far reaching legislation is passed in a time of crisis.
We might see the bonding requirements for drilling in the Gulf of Mexico rise. We may see the certification for DeepWater equipment become more stringent. We may see that the cost of insurance for oil companies operating offshore will rise. We could see the majority of the deepwater rigs currently in operation head to other parts of the world. We may see smaller companies in the gulf, give up and either sell or plug their holes.
So who does have the economic strength to continue to operate in the Gulf under these circumstances? It would take a company that could self insure, and could handle the large bonding requirements and the added the costs that come from regulation. This would make the Gulf of Mexico the home of the majors, BP, Chevron, Shell, ExxonMobil, ConocoPhillips and perhaps Devon. While currently there is lots of completion in the Gulf, this would effectively give these companies a monopoly, with no guarantees they would choose to operate under this circumstance. The reason the majors have focused on the DeepWater is that the size of the fields and potential resources are large enough to make the projects attractive to them. Smaller projects in shallower water are really not of interest to them. Effectively a stringent Tarbanes set of laws and regulations could have the net effect of shutting down the majority of the production in the Gulf of Mexico.
This would leave the federal government with really only one choice. They would have to step in and decide to continue producing the smaller fields. Effectively this would nationalize the majority of the Gulf of Mexico production. Ironic since the only major spill we have had, came from the one of the only players who will be left in the gulf and the companies who have successfully operated in the gulf for years will be gone.
30% of our domestic oil supply comes from the Gulf of Mexico. It is estimated that over 55,000 petroleum-related workers are employed in the Gulf of Mexico offshore industry. The Gulf of Mexico contains estimated 36-41.5 billion barrels of undiscovered, economically recoverable oil and 161-207 trillion cubic feet of undiscovered, economically recoverable natural gas resources. The federally managed OCS provides the bulk—about 89%—of all U.S. offshore production. Five coastal states—Alaska, Alabama, California, Louisiana and Texas—make up the remaining 11%. The federal government would need to suddenly create a national oil company that could handle this level of responsibility. Perhaps our federal government also recognizes the potential income that could come by controlling 30% of our domestic hydrocarbon resources. And while we might hope that state controlled assets would still be available, these regulations could also be applied in state waters, the way the EPA can enforce air quality regulations over the laws of the State of Texas.
We all know that they are having trouble with post office, the social security system, medicare and medicade, and now we expect them to be able to run 89% of our offshore production of oil? While Tarbanes may compare to Sarbanes, the effect on our economy will be far reaching. You only have to look South to Mexico to see what happens when you tap oil resources for federal programs.
As an industry, we know very well that the development of hydrocarbons off shore is a risky business. We understand that accidents can happen and that this one is a big accident. However, if we do not stand up and try to work with the public, the government and the media we are headed down the road to oblivion. It seems that some are willing to sit on the sidelines and allow a “tarbanes” solution to roll over the industry. Where are our leaders standing up for the industry that is now in peril. Or are we willing to call this a BP problem and let it rest at that? Perhaps as the mighty BP fades in the market place we will begin to see the real danger of over reaching legislation in this area.
