Though some feel that the BP oil spill will spur a shift towards alternative sources, others say this is unlikely given the heavy investments and short-term risks involved in renewable resources.
Vidya Ram
London, July 18
At last some good news for BP – the British oil giant is still waiting for the outcome of crucial tests but it looks like the worst may be behind it after it succeeded in capping the well on Thursday, halting the gushing for the first time since 11 workers lost their lives in the explosion in April.
So what now for big oil?
Some are optimistic that this crisis could prove a crucial turning point in the industry, prompting a radical shift towards alternative sources.
In a report published last month, the world's largest insurance market, Lloyd's of London, and influential British think-tank Chatham House warn that to date a “phony war” has been fought.
“We keep hearing of difficulties to come, but with oil, gas and coal still broadly accessible – and largely capable of being distributed where they are needed – the bad times have not yet hit,” writes Lloyd's CEO Dr Richard Ward in a foreword to the report.
However, for Dr. Ward the recent Gulf of Mexico crisis highlights to the world the dangers of moving into more and more “unpredictable terrain” to extract energy sources, providing it with an opportunity for change. (The report's conclusion – when it comes to oil – is stark: that the world is heading towards the dual challenge of a global oil supply crunch and a price spike, rarely predicted together as a Financial Times blog notes.)
Renewable challenges
The report notes the enormous challenges that the move to renewable resources will present: “Of particular importance for new technologies is the risk of constraints on raw materials such as rare earth metals, as scarcity may drive up costs” – essentially suggesting that despite the problems with resources such as oil, the high short-term costs of alternatives may deter investors.
For the moment, at least, it is the sceptics who appear to be winning. In the US discussions about the future of drilling have led, in the Congress, to a postponement of a bill supporting the development of alternative sources.
Across in Europe – arguably a leader of green energy investment and development – the picture isn't much brighter. The Spanish government, one of the biggest investors in wind and solar energy, has recently slashed subsidies to the industry, while cuts have also been made in Germany, Denmark and Italy – partly as a result of overheated markets (such as Spain) but also as a result of the budget tightening that has followed the region's fiscal crisis.
Advantage, big oil
And among experts there seems little doubt that it is big oil that will triumph, particularly in the more difficult terrain where much of the biggest reserves lie. The huge size of potential liabilities will mean that smaller oil firms (such as BP's partner Anadarko) will struggle to justify investing in riskier projects, despite the high potential rewards, argues Mr Christopher Skrebowski, founding director of London-based Peak Oil Consulting.
“It's only the biggest companies that effectively will be able to conduct such projects. Other boards will be intensely reluctant to expose themselves – there is no point saying the risk is 1 to 10,000 if it could lead to total wipeout.”
The ability of BP – and other big firms – to bear the troubles was highlighted by reports (in the Financial Times) that the company might be able to write off some of the money spent on clean-up and compensation against its tax bill – only possible for a company of that magnitude.
It's a view shared by Dr Simon Boxall, a lecturer in Oceanography at the University of Southampton and an expert on oil spills.
“There are only a handful of companies that could have withstood this.” And far from discouraging big oil from investing in riskier projects, the impact of the crisis on the regulatory environment will be fleeting, he argues. More so because the environmental damage – compared to crisis such as Exxon Valdez or the current situation in the Niger delta – is lower.
“Compared to the environmental damage of those crises, this pales into insignificance and while I would like to think that this crisis would lead to change, practice doesn't say we will see a huge change.”
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