Estimation of Environmental and Social Costs from

U.S. Offshore Oil and Gas Production and from the Alternatives

Kim F. Coffman, U.S. Bureau of Ocean Energy Management,703-787-1221,

Peter Meffert, U.S. Bureau of Ocean Energy Management,202-208-5162,

John Weiss, Industrial Economics, Inc., 617-354-0074,

Overview

The activities necessary to explore for, produce, and transport oil and gas necessarily impose environmental and social costs on individuals and on society as a whole in addition to those costs borne by the entities conducting those activities. These costs typically occur as a result of operations, such as drilling a well or operating a platform; physical presence, such as a platform located in commercial fishing grounds or in a whale migration route; or an oil spill. Some who bear these types of costs, such as commercial fisherman whose gear is damaged or lost, receive direct compensation. Others, such as residents along most of the Gulf of Mexico, receive indirect compensation through revenues specifically distributed to their local and State governments. On the other hand, importing oil to replace foregone domestic production (should OCS oil and gas activities be significantly curtailed) also causes its own environmental and social risks, especially in producing countries with lower environmental and safety standards than those in the U.S. Importing oil from overseas also increases global greenhouse gas emissions, not only from production and gas flaring, but also from the emissions of supertankers bringing the oil here and returning to the ports of origin. How can these costs be estimated? Which costs, if any, should be offset? Should cost-benefit models designed for U.S. policy makers include consideration of costs imposed on other countries? The Bureau of Ocean Energy Management (BOEM) is charged with assisting the U.S. Secretary of the Interior carry out the mandates of the Outer Continental Shelf (OCS) Lands Act, which calls for expedited exploration and development of the OCS to, among other goals, “reduce dependence on foreign sources and maintain a favorable balance of payments in world trade.” In fulfilling its responsibilities, BOEM is upgrading its internal Offshore Environmental Cost Model (OECM) to provide better estimates of costs, greater transparency, and more flexibility for sensitivity analyses and incorporation of new data.

Methods

The OECM is being upgraded under contract by Industrial Economic, Inc., a firm with extensive experience analyzing environmental and social costs of energy and natural resource extraction activities. The paper is largely a description of the rationale for using and upgrading the model, the framework for identifying and estimating the various kinds of environmental and social costs associated with OCS oil and gas activities and with the energy alternatives, the design of the model, and the sources of cost data. This information provides context that helps the reader understand the methodological decisions that have been made and, if appropriate, provide targeted feedback.

Results

The OECM provides estimates of the environmental and social costsimposed by OCS oil and gas activities, as well as those imposed by the most likely energy substitutes, on air quality, commercial assets/activities, recreational assets/activities, ecological resources, government/fiscal concerns, coastal property values, and subsistence use. It also estimates greenhouse gas (GHG) emissions caused by OCS activities and by the energy alternatives, but it does not produce a monetary estimate of the costs associated with GHG emissions. The model is from a national perspective, so it nets out offsetting factors within the country and excludes the effects outside U.S. jurisdiction. The one exception is the production of GHG emissions, which are estimated globally because any effects on climate should be more global than local/regional. It does not estimate the environmental and social costs of using the oil and gas, because lower OCS production has only minimal effects on energy demand, and the effects of refining/processing/using imported resources (the primary energy alternative) and domestic resources are roughly the same.

The OECM performs two sets of calculations. First, it estimates and attaches a dollar value to the gross environmental and social consequences of the exploration, development, production, and transport of oil and gas anticipated to result from a specific proposal to auction rights to OCS oil and gas resources. Second, it estimates and monetizes the environmental and social costs most likely to occur in the absence of that proposal. The anticipated environmental and social costs of the proposal, net of the environmental and social costs of the energy alternatives, are used in an overall net benefits calculation provided to the decision maker, along with numerous other analyses, including a full environmental impact statement.

Conclusions

The production of oil and natural gas on the OCS imposes negative “externalities” on society: those environmental and social costs imposed on society that are not reflected in the prices of the oil or gas. These would include effects on air quality, commercial and recreational uses of the coastal and marine environment, property values, etc. Most of these costs are associated with the unavoidable degradation of natural resources that result from the OCS oil and gas development process. Likewise, in the absence of OCS production, the “energy alternatives” (such as additional imported oil) would create their own negative externalities. Consideration of these external costs is an important step in deciding how best to implement the legal mandate to make OCS oil and gas resources available for development.

References

Industrial Economics, Incorporated, with Applied Science Associates, Inc., Northern Economics, and Nicholas Z. Muller. Revised Offshore Environmental Cost Model (OECM), Draft Guide Cost Calculations (Unpublished). August 2010.

Roach, B., W. Wade, and J. Plater. 2001. Forecasting Environmental and Social Externalities Associated with OCS Oil and Gas Development: The Offshore Environmental Cost Model, Volume 2, Determinants of Environmental and Social Costs. MMS OCS Study 2001-018. U.S. Department of the Interior, Minerals Management Service, Environmental Studies Branch, Herndon, VA. 254pp.

U.S. Department of the Interior, Fish and Wildlife Service and U.S. Department of Commerce, U.S. Census Bureau. 2006 National Survey of Fishing, Hunting, and Wildlife-Associated Recreation.

U.S. Environmental Protection Agency. 2009. BEACH Act: Beaches National Geospatial Dataset.

U.S. Department of the Interior, Minerals Management Service. Draft Proposed Outer Continental Shelf (OCS) Oil and Gas Leasing Program, 2010-2015, Considering Comments of Governors, Section 18 Factors, and OCS Alternative Energy Opportunities. January 2009.