Lawrence Solomon: A US$13-billion business

Is it any wonder that the BP calamity occurred? Here’s what has been preoccupying its environmental regulator, the Minerals Management Service, ever since MMS was established in 1982.

“Record for number of lease sales in a year,” MMS crowed, referring to its success in 1983. “Greatest high bid dollar amount received in a lease sale,” it added, displaying its haul to the very last digit: “US$3,469,214,969 in the Central Gulf of Mexico.” In 1984, more records: “Most tracts offered at a lease sale (8,868 tracts in Eastern Gulf of Mexico)”; “Record number of exploratory wells drilled in a year (597)”; and “Record number of platform installations in a year (229).”

Year after year, this agency went from one business milestone to another, seeing the accomplishments of its leaseholders — companies like BP, Exxon Mobil, and Texaco — as its own. In 1996, it cheered the “Well drilled in deepest water (world record well at 2,324 meters, or 7,625 feet)” and the “Deepest well drilled from a semi-submersible at 7,712 meters (25,450 feet).” In 2000, it achieved the “World’s tallest freestanding structure Installed in 535 m (1,754 ft) of water” and the “World’s deepest water drilling and production platform.” In 2001, it boasted the “largest find to date world deepwater drilling record set at 9,687 feet.” In 2002, it “Established world water depth record for well production and laying a pipeline at 7,209 feet” and announced that “The tallest self standing conductor.”

This all translates into cash. Last year royalties approached US$13-billion, making this agency an important source of revenue for the government, its take second only to that of the Internal Revenue Service.

The federal government, in turn, depends on MMS to meet numerous needs, everything from funding national parks to dams, canals, and other land and water-related projects. After the devastation of Hurricane Katrina, the government asked MMS to crank up its lease-sales effort to come up with the cash needed to help restore New Orleans. To squeeze more money still out of the Gulf by maximizing the amount of drilling underway, the MMS offers leases on the cheap in marginal drilling areas.

MMS is in the business of making money for government — it is, in effect, the continent’s largest exploiter of natural resources, as was intended when the U.S. government created it as a cash cow. By MMS’s 25th anniversary in 2007, its director summarized with pride his agency’s accomplishments: “Since our formation in 1982, MMS has overseen the production of 11 billion barrels of oil and 116 trillion cubic feet of natural gas,” he stated, and “collected and remitted to the U.S. Treasury, the Indian Tribes and the States their shares of nearly US$165-billion dollars.”

This gung-ho money-making agency of 1,700 employees is overwhelmingly focused on its bottom line — setting the royalty rates it charges the oil and gas drillers, ensuring it collects the royalties that are its due, creating financial instruments to squeeze more value out of its royalties, delivering the money to its government masters. MMS also has a sideline — it regulates its leaseholders to ensure safety. To acquit its responsibilities in this sideline — overseeing the safe operations of 2600 companies operating 4,000 drilling platforms and 30,000 wells in 43 million leased acres over an expanse of 1.76 billion acres of the Outer Continental Shelf alone — it hires some 60 inspectors. Put another way, it might almost not bother.

Because of the conflict of interest — numerous reports indicate MMS downplays safety concerns to maximize its take — the federal government is now proposing to beef up the number of inspectors and place them in an independent safety-inspection division within MMS. This would do nothing to change the fact that MMS would still be regulating itself, or that safety would still be subject to political trade-offs. Governments are not disinterested parties looking out for the public good — first and foremost, they look out for themselves. In the case of the BP spill disaster, for example, the federal government suffers few financial concerns — thanks to its Oil Pollution Act 1990, it inoculated itself from the pain that citizens and private businesses in the Gulf will endure.

The Oil Pollution Act 1990 determines liability for accidents such as the one now underway in the Gulf of Mexico. In passing it, the federal government took pains to accomplish two ends. First, to save itself from the billions in cleanup costs that an oil spill could cause, the federal government held oil companies and drillers fully liable here.

And second, to make sure that the oil industry wouldn’t be scared off by the much greater potential damage to citizens and private businesses from a massive oil spill — the costs to the fisheries, tourist industry, and private landowners — the federal government eradicated the private sector’s property rights by denying it fair compensation for its economic losses: The Oil Pollution Act 1990 limited the liability of the oil and gas industry to these private parties to US$75-million in the event of a spill, or a few cents on the dollar in the event of a worst-case accident.

Governments make for good regulators, but not when they regulate themselves. To provide the independent, arms-length regulation that the public deserves, there is but one option: Governments must get out of the private sector by privatizing their commercial holdings. A privatization of the Outer Continental Shelf would be a good place to start.

Lawrence Solomon
Financial Post
May 14, 2010

Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute and author of The Deniers: The world-renowned scientists who stood up against global warming hysteria, political persecution, and fraud.

Read “U.S. law disaster”, another article from Lawrence Solomon concerning the oil spill in the Gulf of Mexico.

Read the sources for this column.

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