Managing Risk through Liability, Regulation, and Innovation: Organizational Design for Spill Containment in Deepwater Drilling Operations

Abstract

AbstractThe Deepwater Horizon oil spill in the Gulf of Mexico in April 2010 led to the deaths of 11 workers, a six‐month moratorium on deepwater drilling in the Gulf, and nearly three months of massive engineering and logistics efforts to stop the spill. The series of failures before the well was finally capped and the spill contained revealed an inability of both government and industry to deal effectively with a well in deepwater. Because drilling at this depth and even deeper depths is expected to provide a sizeable share of global oil and gas supply in the future, ensuring that deepwater and ultradeepwater containment capabilities adequately protect the public is a salient challenge for policymakers. In this article we consider long‐term readiness for deepwater spill containment. We assess organizational design, including the Marine Well Containment Company (MWCC), an industry consortium developed in the aftermath of the accident to contain future deepwater spills in the Gulf. We focus on two separate but related determinants of readiness: the roles of liability and regulation, and the adequacy of incentives for technological innovation in oil spill containment technology (to keep pace with advances in deepwater drilling capability). We find that without additional provisions in place to ensure innovation in containment technology and readiness, industry might meet near‐term minimum regulatory standards but still fail to meet the larger social need for innovation.