Gulf Spill Will Lead to Higher Energy Costs, Fewer Deals

Reaction to the Gulf oil spill has been intense. Pictures of oil-covered seagulls and dead fish have made BP the most hated company in the U.S. But little attention has been paid to the higher energy costs that will likely be the disaster’s broadest economic consequence.

The Gulf spill will make energy production, particularly off-shore drilling, more regulated. This will make it more expensive for investment firms to look for energy and to produce it.

“Consumers will bear the costs of the regulations,” said Dan Revers, managing partner of ArcLight Capital, which invests in oil, gas and coal power.

Kenneth Hersh, CEO of NGP Energy Capital Management, believes it’s naïve to think there will be no investor ramification. “Both the amount of capital available for investment as well as returns will suffer in the short to medium term,” he said, adding that the recent moratorium on off-shore drilling has put off-shore investments in “total jeopardy.”

Revers feels there will be fewer deals in energy because of the spill. “People are in a holding period,” he said, referring to companies that invest in the Gulf. “They’re waiting to see what it will entail to getting a permit and what costs will be to get new wells in the Coast of Mexico.”

The increased regulation will lead to less domestic production of oil and gas, Revers said. Firms will likely still operate in the Gulf but they’ll have to evaluate the costs and returns of staying there. Smaller companies, those with less capital and less profit, may be in trouble.

“It may be that [the Gulf] is still an attractive place,” Revers said. “But people are still drilling for oil in other parts of world.”

Hersh took issue with the portrayal of the oil sector “as freewheeling.” The energy sector is one of the most highly regulated, he said. The Gulf spill was “an accident. Well meaning people did their job to the best of their ability but there was human error. And some equipment malfunctioned. It was not a systemic risk in all drilling. Unfortunately, the public reaction seems to equate this spill with every single spill in the oil and gas business. And that’s not true.”

Hersh compared the spill to airline accidents. When a plane goes down, the accident is sometimes pilot error. “But we don’t ground the airline industry. We learn from our mistakes. That’s what needs to happen here,” he said.

With all the bad press, the once-high flying BP is facing an uncertain future. BP is the third largest company in the world with a market value of more than $100 billion. But rumors are circulating that the oil company may go bankrupt or get taken over. Shares have fallen 40% since the April catastrophe.

Hersh would not comment on BP’s future while Revers said BP should be able to weather the storm. “They’re facing the unknown in terms of total costs [of the catastrophe] and there is lots of momentum against them…Theoretically, I expect them to do fine. But we’re in uncharted territory here,” he said.