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Gulf Spill Will Unleash a Regulatory Tumult

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Many moons ago, I stumbled out of graduate school and into the waiting arms of what is now Diamond Offshore (NYSE: DO  ) . While I wasn't a rig hand, I spent lots of time in and around drilling rigs.

I'm therefore especially sickened by last month's accident in the Gulf of Mexico, which appears to be the result of an inexcusable failure by BP (NYSE: BP  ) , Transocean (NYSE: RIG  ) , or someone else. The key is that a big, modern rig was operating in nearly a mile of water with a nonfunctional piece of major safety equipment: the blowout preventer, or BOP. The result was the loss of 11 human lives and an environmental catastrophe with no end in sight.

Red flags that could have signaled what was about to occur were ignored by both the industry and the Minerals Management Service (MMS), the government agency that oversees offshore drilling. Indeed, as The Wall Street Journal noted recently, back in 2005 a pair of Texas A&M professors wrote in a journal article that, "An area that has seen this stagnation and resulting call for change has been blowout control in deep and ultra-deep waters."

The WSJ also noted that the MMS has "in recent years moved away from requiring specific safety measures in offshore drilling and instead set broad performance goals that it was up to the industry to meet." To my way of thinking, this approach and the accident that resulted from it will lead to several less-than-desirable outcomes.

  • Offshore drilling is almost certain to be saddled with a massive regulatory overcorrection. Indeed, such producers as ConocoPhillips (NYSE: COP  ) , Petrobras (NYSE: PBR  ) , and recent IPO Cobalt Energy (NYSE: CIE  ) have had their shares battered while projects are put on hold during the search for the cause of the Deepwater Horizon explosion.
  • Perhaps as many as 7,500 drilling jobs will be lost in the Gulf unless the go-ahead is received for the start-up of new projects by midsummer.
  • With a bevy of new offshore regulations likely in the offing, it may be eons before new areas offshore of the East and West coasts are opened to drilling.

In the meantime, my advice to Foolish energy investors is to look hard at ExxonMobil (NYSE: XOM  ) . It's the biggest of the integrateds, one of the best-managed, and enjoys a new lease on life with its acquisition of natural gas producer XTO.

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. Petroleo Brasileiro is a Motley Fool Income Investor pick. The Fool owns shares of XTO Energy. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2010, at 9:00 AM, voelkels wrote:

    From yesterday’s (5/20) “The Times-Picayune” (New Orleans’ local paper) “final test would have signaled seal trouble”. According to the article, BP did not run a Cement Bond Log on the liner, which may have resulted in an annular blowout (See; for the full article). Not running the CBL on a multi-million dollar well to save a few dollars is like restoring a vintage Mercedes 300SLR and then driving it from New York to California without ever checking the oil - DUMB!!!

    C.J.V. - retired petroleum engineer, me

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