Terra Firma

CANADA'S LEGISLATIVE AND LEGAL CHALLENGES

Canada faces fallout from the spill in all three of its major energy exploration and development areas: oil sands in Alberta, production from the Gulf of St. Lawrence in the east, and plans to open Canadian Arctic waters for further oil and gas exploration. In particular, even before the Gulf spill, proposals to build a pipeline to move Alberta oil sands to the Pacific Ocean port of Kitimat had aroused local opposition among those who fear that sharp increases in tanker traffic along the coast could force an ecological catastrophe. Oil sands developers are determined to see the project through, since a fall in gasoline demand in the US makes access to Asian markets crucial for the sustainability of a fast-growing industry. Yet, television images of crude oil gushing into the Gulf of Mexico have provided local activists with new ammunition.

Production off the coast of Newfoundland accounted for 268,000 barrels per day in 2009, a figure expected to rise over the next two years. Exploration activity is underway in waters that face significant weather and iceberg management challenges. Since the Gulf spill, safety concerns have triggered parliamentary hearings. As for the Arctic, even before Deepwater Horizon, further exploration was not slated to begin until at least 2014. Those plans will probably be delayed further as Stephen Harper’s government manages the concerns of environmentalists and demands from the Liberal opposition for a moratorium on new drilling.

In other words, the safety debate in Canada will play out much as it will in the US – as a political and legal fight among multiple competing interest groups that can only be resolved in parliament and in court.

MEXICO'S ANTI-REFORM LEFT GAINS AN ISSUE

Mexico’s constitution provides the state with monopoly control of the country’s hydrocarbon reserves and national oil company, Pemex, maintains all exploration and production rights. Unfortunately, the company’s production levels have been falling since 2004 and though the government claims the decline stopped earlier this year, Pemex continues to rely heavily on fields that are well past their prime. The Mexican government estimates that there could be 29 billion barrels of oil within its deepwater jurisdiction, but without extensive exploration, it is impossible to know for sure. Pemex ranks far behind private-sector companies in deepwater exploration and production technology and has no deepwater discoveries to its credit. It plans to drill nine exploratory wells by 2018.

But the Deepwater Horizon spill has electrified the country’s left and officials of the opposition Institutional Revolutionary Party will attack any government proposal that involves either deepwater exploration or private-sector participation in exploration and production. In this case, America’s oil spill has paralysed Mexico’s (already moribund) oil reform debate.

AUSTRALIA NEEDS THE OIL

In August 2009, Australia suffered its own major oil spill off the country’s western coast following a blowout from a wellhead platform that generated a leak that lasted 74 days. An inquiry commission charged with issuing a final report on the spill provided Canberra with its findings on June 18, but the government of brand new Prime Minister Julia Gillard has yet to act on its findings or even to release a copy. That is probably because there is an election coming – and because offshore drilling remains crucial for Australia’s energy and economic policy, providing Australia with about 90 per cent of its oil and gas supplies. It will take more than another spill, this one nine thousand miles away, to force a moratorium. Issuance of offshore drilling permits continues, and more than half of recently issued licences have gone to deepwater projects. 

Yet, the Deepwater Horizon spill will have an impact in Australia, which holds national elections on August 21. The country’s electoral system allows voters to rank candidates in numerical order of their preference. If a candidate fails to win a simple majority of first preference votes, ballots from the candidate with the least number of votes are reassigned based on second preferences. On July 19, Gillard’s Labor Party announced a deal with the country’s Greens by which Labor will direct some of its Senate preference seats to the Greens in return for some of the Greens’ preference seats in the House of Representatives.

The deal will probably help Gillard form Australia’s next government, but it will also give the Greens considerable legislative leverage. Environmental policies are at the top of their agenda, and though they have not called for an offshore drilling moratorium, Greens’ officials insist that no new leases be awarded until the government releases the oil spill commission’s findings. That is why tougher inspections and safety requirements are likely for offshore projects – and why oil companies may well be asked to contribute to an oil clean-up fund. The US spill will only make that outcome more likely.

Complicating matters further within Australia’s federal system, although the National Offshore Petroleum Safety Authority is responsible for worker safety on oil rigs, oversight of the integrity of the wells themselves lies with state and territory governments, which receive enormous royalty revenues from oil production.

BRAZIL - THE OIL IS POLITICALLY USEFUL

Brazil’s 33 active deepwater offshore rigs are second in number only to the US, and policymakers and petroleum engineers there are moving forward with plans to develop one of the world’s largest recent offshore oil discoveries. BP’s Deepwater Horizon project drilled to ocean depths of about 4,900 feet. Brazil’s vast deepwater reserves, discovered just four years ago, lie beneath a layer of salt more than 7,200 feet down. If Workers Party candidate Dilma Rousseff is elected Brazil’s president this October – the likeliest outcome – and if current oil reform legislation makes its way through congress in the months that follow, Petrobras, Brazil’s national oil company, will assume responsibility for bringing that oil safely to the surface. 

The technical challenges associated with this project are historic. Petrobras must reinforce pipes to withstand enormous deep-water pressure. Special alloys must be used to limit the corrosive effects of carbon dioxide. The unstable ocean floor at this depth will make rigs difficult to anchor. No oil company in the world has faced such complex problems, yet plans are advancing full speed ahead, with broad public and political support, despite the deepwater nightmare to the north.

There is an element of national pride at play. President Luiz Inácio Lula da Silva has called the deepwater discovery a “second independence for Brazil.” In part, that’s because it can reduce the country’s dependence for growth on economic conditions beyond its borders, a powerful political incentive for any developing state. State-owned Petrobras, the world’s leading producer of deep-sea oil reserves, produces more than two million barrels per day. More than 75 per cent of that total comes from deepwater wells. About 19 per cent of the total comes from depths equal to or greater than the Deepwater Horizon project. When asked about spill-related safety and environmental concerns, Brazilian officials argue that the Gulf spill is the all-too-predictable result of America’s irresponsible attitude toward the state’s regulatory responsibilities. Like Australia, Brazil will adopt tougher safety standards – though it will limit their cost to industry to ensure that the project is not delayed.

Another reason that the Deepwater Horizon spill will not slow offshore drilling in Brazil is that unlike in Mexico, legislative debate over oil reform has centred in recent months on how the huge expected deepwater profits will be divided among federal, state and local governments. Brazil’s political powerbrokers at every level of government will share in the profits, and though production remains years away, governments are already making plans to spend the money.

In addition, the federal government sees state-owned Petrobras as a useful tool of economic policy. During the economic slowdown in Brazil that followed the US financial crisis – another example, Brazilian policymakers note, of US regulatory incompetence – Petrobras boosted domestic job growth by expanding investment in local companies and by buying more of its equipment from local suppliers. If Petrobras can double its production over the next decade, a publicly announced goal, most of the new oil must come from deepwater production.

Only a major oil spill that tars Brazil’s beaches could slow offshore drilling, and the deepest reserves are located offshore between Rio de Janeiro and São Paulo, Brazil’s most densely populated cities. However, the largest wells are 150 to 250 miles from the coast, and federal officials say that prevailing ocean currents would actually carry a spill further out to sea.

OIL PRODUCTION ELSEWHERE MAY RISE

Ironically, the US oil spill could even hasten production in other regions. In general, the Deepwater  Horizon spill has heightened environmental concerns and bolstered public support around the world for greater funding for hydrocarbon alternatives. But as production grinds to a halt in the Gulf of Mexico, the potential for near-term redeployment of rigs towards countries like Brazil and West African producers like Nigeria, Ghana and Angola could actually accelerate their offshore projects.

Ian Bremmer, President, Eurasia Group

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for Slate, a contributing editor at The National Interest, and a political commentator on CNN, Fox News and CNBC.