Business Cover

Rig Safety Battle Intensifies

by Jeremy Alford

Wednesday, October 27, 2010

BOEM claims drilling will resume after rig inspections. By Jeremy Alford

The uncontrolled release of oil into the Gulf of Mexico this year has brought about a new culture of safety in the domestic energy industry that is trickling down from the federal level.

Wednesday, October 27, 2010

BOEM claims drilling will resume after rig inspections. By Jeremy Alford

The uncontrolled release of oil into the Gulf of Mexico this year has brought about a new culture of safety in the domestic energy industry that is trickling down from the federal level. While the explosion of BP's Deepwater Horizon rig is being credited with the wave of regulatory changes, the fact is that the industry faces similar - and thankfully less dramatic - challenges practically every year.

According to the U.S. Census Bureau, there were more than 3,500 spills in 2008, a vast majority of which emanated from ships and barges and resulted in less than 100 gallons each, although two of the spills yielded as much as 1 million gallons of spilled oil.

These are the kind of statistics that Peter Lehner, executive director of the Natural Resources Defense Council, a New York-based environmental advocacy group, conjures up when considering the ban that was lifted earlier this month on deepwater drilling. President Barack Obama instituted the moratorium following the BP incident in the name of safety and regulatory reforms.

Lehner argued that Obama's work is incomplete and that the ban should have remained on the books. "To ensure a disaster like this never happens again, we must know what caused it in the first place. We're still waiting for that answer, and until we get it the moratorium should remain in place," he said. "Multiple panels are still investigating the accident. ...We should wait for their solutions, because until we address the cause, we're still gambling with the Gulf."

The Obama administration, however, argues that it has sufficient safety regulations in place to move forward. In September, the U.S. Department of the Interior announced two new rules intended to help improve drilling safety by strengthening requirements for certain equipment, well control systems and blowout prevention practices.

The rules are also supposed to improve workplace safety by reducing the risk of human error. "These new rules and the aggressive reform agenda we have undertaken are raising the bar for the oil and gas industry's safety and environmental practices on the Outer Continental Shelf," said Secretary of the Interior Ken Salazar.

Under the new "Drilling Safety Rule," operators will need to comply with tougher requirements for everything from well design and cementing practices to blowout preventers and employee training. Additionally, the "Workplace Safety Rule" requires offshore operators to have clear programs in place to identify potential hazards when they drill; clear protocol for addressing those hazards; and strong procedures and risk-reduction strategies for all phases of activity, from well design and construction to operation, maintenance and decommissioning.

Citing the federal government's refusal to offer proper notice and accept public comments on the new rules, U.S. District Judge Martin Feldman of New Orleans overturned the safety measures on Oct. 19. His decision was related to a lawsuit challenging the moratorium, Bloomberg News reported. On Nov. 3, Feldman, the same judge who overturned the deepwater drilling moratorium in June - prompting the Obama administration to issue a new one in July, that also faced a legal challenge in Feldman's court - is scheduled to hold a hearing on dismissing the lawsuit and related decision altogether.

Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael R. Bromwich said that before deepwater drilling will actually resume in the Gulf, his agency intends to conduct inspections of rigs for compliance. Further rulemaking and more safety measures are expected from BOEM in the near future - and those actions may take into consideration any information that comes from the ongoing investigations into the Deepwater Horizon oil spill, Bromwich said.

Don Briggs, president of the Louisiana Oil and Gas Association, said the local arm of the industry is ready to get back to work and the overwhelming majority wants a renewed focus on safety.

The Obama administration must also find ways to get more shallow-water permits through the process, he said, which were not targeted by the recent moratorium but are at record lows. "The offshore industry welcomes these new rules to raise security standards and improve workplace safety in the Gulf of Mexico," Briggs said.

"Companies stand ready to meet the requirements of these new rules, but BOEM must provide an adequate process for industry to attain permits necessary to restart their drilling operations."

There's also the human angle - meaning those who actually work on the rigs; in many respects, they want safety reforms just as much, if not more so, than anyone else. Gary Beevers, international vice president of the Texas-based United Steelworkers, said the federal government needs adequate time to do its inspections and ensure that proper health and safety provisions are in place.

Moreover, the industry should be helping the government ensure that all the rigs are safe to operate, he says. "We want drilling to return to the Gulf just like everyone else in the industry, but we have to make sure these rigs are safe first," Beevers adds. "We don't need another oil explosion and oil spill."

A CLOSER LOOK
In response to the Deepwater Horizon oil spill in the Gulf of Mexico, the administration of President Barack Obama implemented a number of aggressive and controversial reforms for offshore oil and gas exploration. Those regulatory changes are being carried out by the Department of Interior's Bureau of Ocean Energy Management, Regulation and Enforcement, or BOEM.

Here's a look at what's in and what's out:

In: BOEM is conducting comprehensive new environmental analyses of the Gulf of Mexico and the Arctic to help inform future leasing and development decisions.

In: Proposed lease sales and drilling projects must undergo thorough environmental reviews in accordance with National Environmental Policy Act.

Out: Interior closed the loophole, established in 2003, that exempted operators in the Gulf of Mexico from submitting plans for worst-case discharge scenarios.

Out: The Administration has submitted legislation to remove the requirement that hamstrings BOEM by requiring review and approval of exploration plans within 30-days.

In: Permit applications for drilling projects must meet new standards for well-design, casing, and cementing, which must be independently certified by a professional engineer.

In: Proposed exploration plans must meet new requirements to show the operator is prepared to deal with a potential blowout and the potential worst-case discharge scenario and the operator's ability to respond to such a discharge.

Out: Over the last three decades, safety equipment and regulatory requirements fell behind the technology that allowed companies to reach new oil and gas reserves in deeper waters.

In: Operators must adhere to the new "Drilling Safety Rule," implemented through emergency rulemaking, that raises the standards for blowout preventers, well design, casing, cementing and safety equipment. Blowout preventers must also meet new standards for testing and must be independently certified.

In: Under the new "Workplace Safety Rule," operators will be required to develop a comprehensive management program for identifying, addressing and managing operational safety and environmental hazards and impacts, with the goal of reducing the risk of human error and improving workplace safety and environmental protection.

In: The CEOs of drilling companies must for the first time ever put their signature on the line to certify that their rigs comply with all safety and environmental laws and regulations.

Out: The Royalty in Kind program, which accepted oil and gas in lieu of cash as royalty payments on federal energy resources.

Source: U.S. Department of the Interior

**Corporate Responsibility's Deeper Meaning
**
Public confidence in corporate leadership's readiness to respond to environmental issues has waned since the Gulf disaster.  By Jeremy Alford

Between the recent onslaught of awareness about coastal restoration and the last five years worth of named storms from the Gulf of Mexico, Louisiana's dual role as victim and beneficiary of the oil and gas industry has been well publicized. Now that the BP rig explosion and federal ban on deepwater drilling are moving further into the past, this delicate dichotomy that oftentimes pits riches against values is evolving, and the line between provider and polluter is getting fuzzier.

At the core of this ongoing debate is a singular question, spurred on by the recent BP incident: Has the spill altered perceptions about what being a responsible business means for politicians, environmentalists and industry? The answer is beginning to unfold slowly as south Louisiana recovers, but there is data that suggests the U.S. public has waning confidence when it comes to the readiness of corporate leadership to respond to environmental issues.

In the month following the April 20 Deepwater Horizon rig explosion, the University of Wisconsin commissioned Harris Interactive to conduct a nationwide poll of more than 1,000 adults on sustainable leadership. The poll found that only 13 percent of respondents were confident that corporate America had the knowledge to make decisions that consider long-term impacts on the environment. A vast majority, or 82 percent, agreed that company leaders need to learn more about the environment in order to make better decisions.

David Schejbal, dean of UW's continuing education division, says the Gulf disaster may have been viewed differently from the perspective of corporate responsibility if this advice would have been available beforehand and the responsible parties would have heeded it. "To compete as this new economy surges forward, today's corporate leaders must be environmentally agile, eco-literate and able to respond quickly," says Schejbal. "We must educate executives already on the job."

Dr. Bob Grambling, UL Sociology Department: "It's hard
to work in the oil patch and then condemn the people
who employ you."

It's clear the public wants corporate America be more responsive, but has the public's expectations of corporate responsibility changed any since the spill? Dr. Bob Gramling, a professor of sociology at UL Lafayatte, believes only time will tell.

Earlier this year, Gramling co-authored a book called Blowout in the Gulf: The BP Oil Spill Disaster and the Future of Energy in America, and in it he explores the inherent conflict of living on the Gulf Coast, where some commercial fishermen hurt by the spill also moonlight in the oil patch or have family members who rely on the industry.

"There's no easy answer about how people view corporate responsibility now. Honestly, I don't think the average person has given it much thought," Gramling said.

"They think in terms of their own everyday lives, even though they know what happened was irresponsible. And a lot of people are in denial. It's hard to work in the oil patch and then condemn the people who employ you."

Politically- at least in this year's U.S. Senate race - corporate responsibility has risen to the level of being a bonafide issue. Last week, BP agreed in court to waive the $75 million liability limit under the Oil Pollution Act of 1990.

This is somewhat consistent with a bill that was originally introduced by incumbent U.S. Sen. David Vitter, a Metairie Republican, that would require the Interior Department to accept a legal offer by BP to waive the cap and accept liability for damages resulting from the Deepwater Horizon oil spill.

Vitter's challenger, U.S. Rep. Charlie Melancon, a Napoleonville Democrat who represents portions of Acadiana, called on the senator several times during the campaign to withdraw his legislation, which would actually seek to limit BP's liability for the Deepwater Horizon disaster to $150 million.

Melancon, for his part, doesn't think there should be a cap at all. "It should be obvious to anyone who has been paying attention that BP is going to try to hide behind any cap on liability whether it's the current $75 million or David Vitter's bill that caps BP's liability at $150 million," Melancon says. "I'm opposed to any liability cap, and I've been fighting to make sure BP pays for 100 percent of the damage they've caused."

Another national survey released this year by the Tennessee-based Shelton Group suggests that there are a great number of consumers who feel it's their responsibility to hold BP accountable. The survey, which polled 1,312 consumers across the country, found that 20 percent of participants said they would reduce their gas consumption in response to the oil spill this summer, while a separate 13 percent said they would stop buying BP gas in particular.

According to Suzanne Shelton, president of the Shelton Group, it's an unmistakable sign that the American public isn't just going to take BP's word - or anyone else's - when it comes to corporate responsibility. People need to be able to see corporate responsibility in order to understand it and make an informed opinion. "For years, our research has shown America is a see-it-to-believe-it nation," Shelton says. "We need to see things with our own eyes or have a personal connection to something."

Jeremy Alford can be reached at [email protected]

**What does the future hold for the Gulf of Mexico?
**
Though BP remains silent, Shell Oil Company, Noble Corp. and Seahawk Drilling say they'll commence Gulf drilling as soon as they navigate new federal permitting requirements. By Jeremy Alford

The cause of the April spill and its long-term effects
still remain unknown.

Arguably the catalyst for all the energy doubts cast upon the Gulf of Mexico recently, BP has been keeping pundits and shareholders alike in suspense as it slowly rolls out a broad picture of its future plans for drilling in the oceanic waters just south of the U.S. border.

After its Deepwater Horizon rig exploded April 20, taking 11 lives with it, and since the federal government issued a ban on deepwater drilling that ended Oct. 12, BP has been the whipping boy for interests as diverse as environmentalists and roughnecks.

But as soon as the moratorium was lifted, all eyes and ears turned to BP, as if the energy giant's immediate plans in the Gulf would be an indication or trend-starter. For their part, company officials with BP said they would eventually pursue even deeper Gulf waters, and they weren't alone.

Other outfits like Shell Oil Company, Noble Corp. and Seahawk Drilling announced their intentions to begin drilling in the Gulf as soon as they could navigate a slew of new federal permitting requirements. It was a clear sign that the Gulf of Mexico indeed had a future, even if it is beginning to look slightly different from the Gulf of yesteryear.

**OUTLOOK AND FORECAST
**
Overall, it's a mixed bag. The Baker Hughes rig count for the Gulf of Mexico clocked in at 21 rigs for the most recently-completed week in October. That's a 34 percent decrease from the same period in 2009 and the lowest count on record for at least the past 17 years. On the state level, the Louisiana Mineral and Energy Board saw its October lease sale come and go with absolutely no interest in offshore leases from private investors. On the other hand, the offshore leases awarded in August set a record for the calendar year, and 32 acres off the coast of Plaquemines Parish went for nearly $41,000 last month - a clip of action that's still overshadowed by previous years.

It's a pattern that Dalton F. Smith III, senior vice president of PetroQuestEnergy, noticed in October as chairman of the Gulf Coast Prospect and Shale Expo. Sponsored by the Louisiana Oil and Gas Association and held Oct. 18-20 in his hometown of Lafayette, the show simply puts sellers in direct contact with buyers - and Smith says the latter showed up hungry. "Oil prospects are in high demand right now," Smith says, adding that the expo offered investors various play types.

Wet developments, however, are, well, all wet. Smith saw a what he calls a renewed interest in the Gulf Coast onshore by a number of companies. "[And] we expect this trend to grow," he notes. That's evident from the latest Baker Hughes data, too, which shows 132 rigs on land in north Louisiana out of 181 total statewide.

**TECHNOLOGY AND DISCOVERIES
**
As for the next big thing for the Gulf of Mexico, there's a great deal of hype attached to Brazil's Petrobras, an international energy firm that's going further out and deeper than U.S. permitting laws allow in the Gulf.

Petrobas has so far invested more than $1 billion in technology known as Floating Production, Storage and Offloading facilities, or FPSOs, for its developments in Africa and South America. Its rigs in these regions go twice as deep as BP's Deepwater Horizon rig did and, in relationship to their shorelines, Petrobas's foreign rigs would stretch far beyond the Gulf's pipeline network, which stands today at 30,000 miles long.

Instead of pipelines, though, FPSOs rely on supertankers that can carry nearly 13 million gallons of oil at a time and shuttle the black gold back and forth around the clock. The U.S. oil industry has reportedly been eyeing the technology for more than a decade, and observers expect Petrobas' advancements to spur even more interest back home.
  
Currently, big finds are encouraging action in the Gulf as well. For example, Shell Oil Company made its final investment decision for its Mars B deepwater development last month.

The development is located approximately 130 miles south of New Orleans and will include a second tension-leg platform named "Olympus" to enhance recovery from Shell's prolific Mars field, which was discovered in 1989 and is daily yielding roughly 100,000 barrels.

Most notably, Mars B will be the first redevelopment of an already-existing field in the Gulf's deeper waters. The new platform will also provide process infrastructure for two of Shell's other recent deepwater discoveries, West Boreas and South Deimos.

RELIABILITY AND UNCERTAINTY

Other companies, meanwhile, are gobbling up as much Gulf property as they can, like Texas-based Plains Exploration and Production Company, which is positioned to swallow up most of McMoRan Exploration's Gulf holdings.

If ultimately approved by regulators and shareholders, Plains Exploration will receive $75 million in cash and 51 million shares of McMoRan common stock from the deal, which was announced in late September. In exchange, McMoRan will hand over all of its leasehold located in less than 500 feet of water.

Plains Exploration CEO James C. Flores says his company has long enjoyed success in the Gulf, where the long game can outplay the short, and he describes his continued interest in the region as a "consistent value creation strategy."

While there are clearly several positive indicators on the horizon for the Gulf, Dan Juneau, president of the Louisiana Association of Business and Industry, predicts that the coming months won't be easy - and that also goes for shallow-water rigs, which were supposedly spared from the moratorium.

Since June, only a handful of permits for new wells have been issued for shallow-water operations, far below the number the U.S. Department of Interior has historically doled out, Juneau says. The inability for drillers to obtain these permits in waters with depths less than 500 feet has resulted in a "de facto moratorium" on all Gulf of Mexico drilling and the stacking of many shallow-water rigs, Juneau adds.

In short, business and industry will need to see some political changes as well before it can enter a brave new era in the Gulf of Mexico. "With what shallow-water drillers have been experiencing since the new regulations were implemented in June," he says, "we have deep concern that the same negative effects will befall the deepwater rigs, similar to what we are seeing in the shallow waters."

Jeremy Alford can be reached at [email protected]