17 Jun 2014

Can you trust an oil company's word on oil spills?

I taught a fourth-year class at Simon Fraser University where I allowed students to pick a "natural resource" topic that they would study, present and write on. I learned a lot from my students (who enjoyed the experience [pdf]) and asked each to write a blog post on an interesting dimension of the area they studied.

Here's an edited post from VG:

Imagine you live next to the proposed route of a pipeline project. Would you worry?

Enbridge's Northern Gateway Pipeline Project will transport oil products from Alberta to British Columbia so they can be exported to Asia via tankers.

There is always a possibility of an oil spill. Meanwhile, Enbridge has numerous records in the failure of its pipeline. According to the Polaris Institute, Enbridge had over 800 oil spills between 1999 to 2010. It was estimated that more than 6.8 million gallons of oil was released into the environment. This number does include the 2010 Michigan oil spill.

These statistics are troubling when Enbridge projects only twenty-five spills in the pipeline's fifty-year lifespan.

Moreover, Enbridge believes that tankers transport spills would happen only once per 250 years. This estimate is far lower than that of the tanker transport team at Simon Fraser University, which guesses that oil spills would occur every ten years.

But what if Enbridge is right? Regulators who listen to the academics may require too many safety precautions. This problem could be prevented by a market incentive (e.g., a penalty of $10,000 per barrel of oil spilled) that would force Enbridge put its money where its mouth is.

How much would $10,000/bbl cost? Enbridge's Michigan oil spill discharged about one million gallons of diluted-bitumen into the Kalamazoo River. That spill (caused by poor maintenance and exacerbated by ridiculous operational failures) did "irreparable harm" to the ecosystem (closing the river for two years), but it only cost Enbridge $3.6 million in fines. (Embridge spent $765 million in clean up costs, of which $300 million was reimbursed from insurers [pdf].)

Using the $10,000/bbl rate, Enbridge's fine would have been approximately $240 million. That amount (insured or not) would have focused minds at Enbridge. Operators, for example, would not have kept pumping oil through the 2m gash in the pipeline -- and into the river -- if the cost was 100x the benefit.

Bottom Line: Enbridge is underestimating its probability of an oil spill as well as underpaying when spills occur. Higher penalties would help Enbridge "care" about pipeline safety and avoiding spills.