Oil Drilling Leases, Liability & US Government Thuggery

I wrote this post earlier this week discussing Congress' and the administration's implicit roles in the BP undersea gusher disaster.

I wrote, in part,

"How is it that the same administration and Congress that looks elsewhere for the cause of the recent financial crisis, while overlooking their own complicated regulatory schemes and agencies, can repeat the act in the energy arena?

Whatever regulatory processes exist would seem to have been deemed appropriate by Congress. If the MMS was 'captured' by industry participants, then Congress' legislation pertaining to the agency must have allowed for that.

If we are to believe the president, nobody has ever tried to find alternative, renewable energy sources, despite the immense payoff which would accrue to the first person or company to patent such discoveries.

How is the US supposed to remain competitive if the only way to bring new energy sources to market is to subsidize them with government money? By definition, they'll be uncompetitive on a cost basis. Otherwise, those discoveries would already be providing said energy.

It's disappointing to see an administration and Congress so totally ignorant of economics that they believe that nobody has tried to find profitable renewable energy sources, and, thus, are only awaiting government handouts to make such ideas a profitable reality."

Throughout the past few days, as I've listened to dozens of pundits exclaim on various aspects of the Gulf oil disaster, I've formulated some questions and thoughts of my own.

Suppose the US were starting from scratch in the area of extracting minerals, metals and valuable liquids and gases, e.g., oil and natural gas, from our land and the sea and seabed which we control. What questions would we, as a nation, confront as we sought to enjoy economic benefits from the extraction of said natural resources?

Certainly we would seek to sell leases and licenses to explore for valuable resources and extract them. We'd probably want to hold said lessees liable for any damage they caused through their operations, and to return the land, water or seabeds to acceptable, near-original condition.

To assure ourselves that any lessee could fulfill his obligations not to cause unwarranted external costs to others, including our nation, by failing to finish restoring sites and removing unwanted structures, etc., we'd probably require some sort of bond or insurance in an amount considered adequate by knowledgeable professionals.

So far, this seems reasonable, doesn't it?

But what about that liability clause? If a lessee encounters some situation, whether accidental or by poor management, that creates a disaster on the scale of BP's Gulf rig gusher, do we seriously expect to hold that company totally responsible for every penny of expense related to the problem?

The US does not exist in a vacuum. There are deposits of virtually all of our natural resources located in other countries, on other continents. Many other countries offer far less onerous regulatory environments than those which currently exist in the US.

As tempting as it would be for the US to insist on carte blanche, unlimited liability assumption by its natural resource lessees, competitive realities could easily cause such a policy to result in no lessees whatsoever.

Even an honest, scrupulous adherence to a rule of law that mandated unlimited liability could leave the US with no firms interested in the assumption of such unlimited liability, against very limited revenues and profits from such leases.

But in reality, it's much worse than that.

Our country's president has just mugged BP, shaking it down, as Representative Joe Barton correctly observed, for $20B. Completely abrogating the rule of law in the process.

What global energy or mining company will now wish to risk its solvency by bidding for and operating under a US lease to explore and exploit natural resources?

Against the unlimited, company-killing risks now apparent for operating in the US, any company would be considering much higher tangible exploration and production costs anywhere else in the world.

It's all well and good to want a pristine environment. It sounds reasonable to expect a natural resources exploration and production firm to pay for every dime of damage they cause to the environment.

But in a competitive global economy, it's foolish and naive to actually demand that.

The result is far more likely to be an exodus of global mining and energy firms, and the jobs and capital that accompany them.

The administration's recent extortion of BP to the current- not necessarily final- tune of $20B, and Congress' vilification of BP and its CEO, before final conclusions regarding the rig failure are known, seem to be at odds with a desire to foster economic expansion, job creation and risk taking in America.

And it doesn't stop at extractive industries. If one administration is capable of illegally shaking down a private company for cash, outside or due process channels, who's to say that administration, or another one, won't trample due process rights on any matter of business operation? Perhaps, next, it will be a food processor. Or a trucking firm. Maybe, again, finance?

Nobody really knows. Once extortion becomes an established, accepted practice by government, no business is safe.

Those of us who are citizens may not wish to move overseas to ply our trades. But others who live overseas may think seriously about continuing to do business here, or commencing operations on US shores.

The effects of the recent treatment of BP on long term US economic health could be truly enormous, unanticipated and unintended consequences.

Before I finish this post, consider one other dimension- global political-financial issues. For example, this hypothetical.

Suppose next Monday morning, you read that financially crippled, value-depressed BP has sold itself to a consortium of Chinese banks, a Chinese sovereign fund, and Chinese mining interests. Later in the week, you read that the Chinese foreign ministry, at the behest of BP's new owners, have announced that they will renege on the $20B fund, and, further, demand US cessation of all criminal and civil penalties against the BP operations, on penalty of China selling its US debt obligations?

What would be the US response to such actions?

The recent trend toward sovereign control of minerals and metals production is a fact. The Chinese have been engaged in a battle over control of iron ore production for the past year. This hypothetical would simply be an extension of that trend. But the implications would be staggering.

Dealing with private firms in the area of unexpected environmental disasters is one thing. The prospect of facing a major sovereign creditor which owns a major oil firm with substantial interests in the US, with global economic and military ambitions which are at odds with ours would be catastrophic.