Oil and Gas

Jumping to Conclusions

**Wednesday, May 26, 2010
Written by Don Briggs

How can lawmakers effectively advocate policies and regulations to reduce risk when we don't even have the facts about what caused the Horizon explosion?**

As we speak, industry experts and government officials are working diligently to solve the disaster created by the tragic explosion and sinking of the Deep Water Horizon drilling rig off the coast of Louisiana's shore. By utilizing advanced engineering mechanisms, they will soon find a permanent solution to stop the flow of the leaking well and limit its environmental impact. Thus far, the riser insertion tube tool containment system that is being utilized to collect and carry nearly 2,000 barrels a day of oil from the leaking pipe has served as a positive and temporary solution to fixing the problem.

To successfully achieve a solution to any problem, it's important to take the following actions: define the problem, look at potential causes for it, find an approach to resolve it, create a plan of action, and implement the plan. For instance, take a look at the steps that BP has taken to resolve the oil leak in the Gulf of Mexico. The problem, which is a rare accident, has been defined. With the assistance of some of the brightest industry experts and engineers, a plan of action was created to temporarily contain the leaking well. Alongside the efforts to stop the leak on-site, nearly 19,000 personnel have been deployed, 17 staging areas have been established, and 1.7 million feet of marine protection booms have been positioned. In the next week or so, plans to permanently solve the issue will entail the injection of heavy drilling fluids into the well to stem the flow of oil and gas, followed by cement to indefinitely seal the well.

On a daily basis, industry leaders, business owners and individuals use logical problem-solving methods to find answers to everyday problems. Unfortunately, politics work in a different manner. In many cases, when things become politically charged, problems are created out of problems. Without knowing with reasonable certainty what created this catastrophe, it's puzzling to think that lawmakers would begin pushing for regulatory measures. How can anyone effectively advocate policies to reduce risk when we do not even know what happened? As the Independent Petroleum Association of America Chairman Bruce Vincent put it, "Controlling the well and protecting the environment are the main priorities today. And we are urging the federal government, as they consider new regulations and new offshore exploration policies, to first allow the facts in this incident to be investigated."

The current situation in the Gulf of Mexico has renewed and heightened the debate in Washington over the need for an expansion of offshore drilling. While brave men and women are working night and day to fix this isolated and rare situation, politicians and bureaucrats in Washington are finding ways to capitalize and politicize this tragic event. Already there have been at least six congressional hearings set to discuss issues with the domestic oil and gas industry. In addition, members of Congress are hastily moving forward with legislation that will have significant and negative consequences for the oil and gas industry. This past week alone, more than 15 pieces of legislation have been introduced as a response to the incident. The most detrimental issue on the table entails significant changes to offshore financial liability requirements and the Oil Spill Trust Fund.

Recently, Sen. Robert Menendez, D-N.J., offered a bill that would increase offshore liability limits under the Oil Pollution Act of 1990. As it currently stands, the Oil Pollution Act imposes liability on offshore producers for removal costs and $75 million in damages. Menendez's bill, S. 3305, would raise this limit to $10 billion. It's important to note that independent operators must rely on insurance to assure that they can meet requirements set forth in the OPA 90 requirements. Insurance is not available at the levels set in this bill. Additionally, insurance has met its threshold worldwide for this industry.

Benjamin Wilcox, executive vice president of Alliant Insurance Services, wrote in a letter to Sen. Menendez: "If as we understand, there is legislation under consideration which would materially increase the liability cap for economic damages from its current level of $75 million, based on our experiences operators and non-operators in the US Gulf of Mexico will be unable to obtain adequate protection from insurance."  In like manner, Lloyd & Partners, a London-based major account (complex risk) insurance broker specializing in onshore and offshore energy insurance, noted in a letter addressed to Menendez, "Any significant increase in this limit will cause insureds operating in US waters to face the prospect of significant self insurance, since the insurance market will not have sufficient capacity to provide cover for this in addition to clean-up costs and third party properties damage suits."

As a reminder to our policymakers, it's important to remember that negatively affecting producers in the region will have a certain damaging impact on the entire spectrum of the offshore industry. In 1999, Applied Technology Research Corp. conducted a study that estimated the offshore industry has a direct impact of $3 billion on the state of Louisiana. At the time, the study showed that more than 21,000 producing company jobs existed in Louisiana as a direct result of oil and gas activities on the Outer Continental Shelf. The estimated payroll was $1.2 billion with an actual average salary around $60,000. In addition, producing companies paid nearly $6 billion to vendors and contractors in support of Outer Continental Shelf activities, with more than $3.7 billion spent in Louisiana.

For decades, the oil and gas industry in Louisiana has played a critical role in our nation's energy infrastructure. According to Louisiana Economic Development, nearly 88 percent of U.S. offshore rigs are off Louisiana's coast. Independents operating in the Gulf of Mexico hold approximately 90 percent of all oil and gas leases. While operating responsibly in the Gulf of Mexico for decades, independents produce nearly 30 percent of Gulf of Mexico oil and more than 60 percent of its natural gas.

One thing is certain, legislation to increase the cap for liability will severely and unreasonably impact independent operators' ability to provide the necessary energy for our nation. Egregious and over-burdensome regulations will directly inhibit Louisiana's ability to produce oil and gas and will indirectly affect all Americans. Simply put, less production in the Gulf means higher energy prices for all Americans.

Don Briggs lives in Lafayette and has been president of the Louisiana Independent Oil and Gas Association since 1992. Matt Ross, LOGA's assistant director for north Louisiana, contributed to this column.