Tough pipeline rules may compromise oil investment goals and consumer interest

Economist and National Regulatory Research Institute (NRRI) principal Ken Costello has recently written a report about striking a balance between pipeline safety and cost effectiveness. He discussed that safety has a price and that lawmakers should weigh this factor against presumed economic advantages. Additionally, he insinuated that pipeline safety measures nowadays may be too cumbersome.

Moderating safety rules can, in fact, lead to consumer benefits. As safety standards go up, cost increments increase, while marginal benefits go down. These costs are ultimately passed through to the consumer with rate increases or other factors.

Disasters involving pipeline operations continue to make headlines to this date.  One such incident is the 2010 San Bruno California pipeline accident which took the lives of 8 people. Costello said that after the catastrophe, there was a natural tendency among gas utilities to increase budgets and spending for safety, but this became uneconomical.

Gas utilities are at risk of declining cost-effectiveness, especially so when they are constrained to employ new technologies or adopt additional safety measures as dictated by health and safety laws.  Expenditures rise as a company tries to comply with the new set of regulations.

Rules that require utilities to invest in oil pipeline technology sometimes leave no room for choosing other available technology or methodologies that may be more cost effective.

Utilities nowadays have become more concerned with safety. Yearly, around $7 billion is being spent on programs that would ensure operational safety.

On the other hand, state regulating bodies can assist local distributors on how to budget their funds.

Utilities can concentrate on areas where they exercise some degree of control. Pipeline parts replacement or leakage detection procedures are just a few examples of these.

Further, state lawmakers impose huge penalties on hired contractors who are too lax to comply with safety laws. Studies show that individuals or institutions are more inclined to strictly follow rules if the costs of non-compliance far outweigh costs involved if they would simply follow the rules.

Nevertheless, spending too much for the sake of safety alone means more funds being allocated to safety programs instead of making further oil investment for pipeline projects that would have generated more revenue.

Costello believes that the role of regulatory bodies is to help strike a balance between implementing safety rules and ensuring that consumer interests are likewise upheld.

By: Chris Termeer

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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