Energy & Entrepreneurs

Drilling Regs: Costs and Uncertainty

by Raymond J. Keating

Which is worse: the cost of regulation or regulatory uncertainty?

You can get a pretty good debate going between economists and among business leaders over this question.

Unfortunately, current U.S. policymakers are making the point somewhat moot by jacking up regulatory costs, and generating an enormous amount of uncertainty regarding future regulations. Is the idea: why choose, when you can cause problems on both fronts?

Just consider the current situation when it comes to offshore drilling.

On September 30, the Interior Department issued new rules regarding offshore drilling.

Secretary of the Interior Ken Salazar, in a speech at the Woodrow Wilson International Center, said, "Under these new rules, operators will need to comply with tougher requirements for everything from well design and cementing practices to blowout preventers and employee training. They will also need to develop comprehensive plans to manage risks and hazards at every step of the drilling process, so as to reduce the risk of human error."

OK, after the BP spill, some added regulation had to be expected.

However, Michael R. Bromwich, director of the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM), also stated, "These two rules are part of a broader series of reforms we are undertaking to reduce the risks of offshore energy operations. We are substantially raising the standards for all offshore operators, and are doing it in an orderly and responsible way. We will continue to move forward with other changes and reforms in what will remain a dynamic regulatory environment. We owe the public nothing less."

Hmmm, what exactly does "other changes and reforms in what will remain a dynamic regulatory environment" mean? Sounds like more regulations are to come, and no one really knows what those will be. That's certainly not positive for domestic energy exploration and development.

Then there's the following remark from Salazar, as quoted in the Wall Street Journal on October 1, about the current deepwater drilling moratorium: "I recognize that there will always be risks associated with deepwater drilling. We will only lift the moratorium when I ... am comfortable that we have significantly reduced those risks."

Wow, that seems awfully vague. The industry is left wondering where one political appointee happens to feel comfortable.

And even when the moratorium is lifted, how long will it take to get the approval to explore and drill, and how many permits will regulators issue? And those are not just questions for deepwater drilling, but for shallow waters as well, which many argue is under a de facto moratorium.

API upstream director Erik Milito summed matters up this way in a statement: "The rule must serve the interests of improved safety and energy development.  There has to be a clear, practical, and certain process for project review that will protect the environment.  We cannot have an approval process that creates unpredictable delays that could place at risk the flow of domestic energy in our country.  Operators want regulations that provide certainty. Unpredictable, extended delays in permit review and approval discourage investment in new projects, which hampers job creation, reduces revenue to the government, and restricts energy production... We also still have the issue of the Gulf deepwater moratorium.  Every day the moratorium remains exacts an economic penalty on the people of the Gulf and on our nation.  The costs are already too high.  We continue to urge the government to end it as soon as possible."

U.S. House Natural Resources Committee Ranking Member Doc Hastings (WA), in response to the new offshore drilling regulations, captured the cloud on uncertainty this way: "The Interior Department today announced new rules on drilling, but still refuses to say when the arbitrary, non-science based moratorium will be lifted.  When will the Administration actually begin issuing permits? When will people in the Gulf be allowed to return to work?" He continued: "New rules by this Administration must be clear, concise, enforceable and, most importantly, enable energy production to immediately resume in the Gulf.  Otherwise, a de facto moratorium could remain in place for years that will cause more American job losses and more companies moving operations overseas."

It is critical that the Obama White House hear what is being said about the regulatory costs and uncertainties they are creating, and grasp the significant damage to U.S. economy in the near term and over the long haul.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.