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Insight for Industry – New Offshore Regulations Respond to Key Failure
On April 13, 2015, the Department of the Interior’s (DOI) Bureau of Safety and Environmental Enforcement (BSEE) proposed new offshore oil and gas regulations that will cost the industry hundreds of millions of dollars. However, offshore oil and gas producers will have several years to comply with some of the more stringent rules, owing to the costs and the technical challenges involved.

The proposed regulations establish design and operational requirements for critical well control equipment used in offshore oil and gas drilling operations, revising existing rules while incorporating latest industry standards. When enacted, there will be new minimum baseline requirements for the design, manufacture, repair, and maintenance of blowout preventers (BOPs).

The DOI incorporated key recommendations made after the 2010 Deepwater Horizon incident in order to close gaps in existing requirements and update BSEE regulations to reflect industry best practices. While the costs of the regulations to the industry are significant, they will not deter current production and future development due to the long-term nature of existing projects and the investments that the industry has already made.

New Regulations Respond to Key Failure of Deepwater Horizon Spill
On April 20, 2010, a blowout occured at BP’s Macondo well in the Gulf of Mexico, triggering an explosion on the Deepwater Horizon drilling rig that killed 11 oil workers and caused 4.9 million barrels of oil to spew into the ocean over an 87-day period. The US Chemical Safety Board (CSB) concluded that the blowout occurred due to “effective compression,” a phenomenon that occurs when there are extreme pressure differences inside and outside of drill pipes, causing them to buckle. When oil and gas spilled on to the deck of the Deepwater Horizon rig, the crew moved to seal off the well using shears that cut and shut the pipe. The intense pressure differences meant that the drill pipe bucked and moved off center within the BOP, rendering the shears ineffective, and with disastrous consequences. The CSB presented its findings in a June 2014 report, in which it also stated that similar offshore blowouts were possible even when all safety measures are properly followed.

The April 13 proposed rule would require the use of BOPs with double shear rams, which is currently a baseline industry standard (API Standard 53), and it would also require shear rams to include a technology that allows centering of drill pipe during shearing operations. The proposed rule would require real-time monitoring capability for deepwater activities and establish additional requirements for remotely operated vehicles to help close the BOP stack. It would also include reforms in areas of well design, well control, casing, cementing, real-time well monitoring, and subsea containment. The DOI estimates that the proposed rules would cost 90 oil and gas companies $883 million over 10 years. However, the DOI believes that the rules will actually offer benefits of $656 million related to time saved and the avoidance of future oil spills. Oil industry groups, like the American Petroleum Institute, have been very muted in their response to the new regulations, perhaps recognizing the negative light that the Deepwater Horizon crisis shined on the industry.

Some of the more attainable proposed rules would be enforced just months after they are finalized. The stipulation for double shears would go into effect after five years, reflecting the high costs of implementation. The pipe centering capability would only be required after seven years, as the technology is yet to be fully developed. The BSEE also discussed including a provision that would have set a minimum severing capacity of the new shears, making them able to cut through virtually anything in their path, from pipe to debris. However, considering that the capability currently does not exist, the bureau is inviting public to comment to get a better understanding on whether this is achievable within a 10-year time frame.

The DOI emphasized its collaboration with industry in strengthening the drilling standards. The proposed rule incorporates key recommendations made after the 2010 Deepwater Horizon incident, closes gaps in existing requirements, and updates BSEE regulations to reflect industry best practices. It considers investigations of:

  • DOI/Department of Homeland Security Joint Investigation Team
  • National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling National Academy of Engineering
  • Ocean Energy Safety Advisory Committee
  • Government Accountability Office

Recent Rule among Many in New Era in Offshore Oil and Gas Oversight
Just months after the Macondo well was shut off, the government began implementing a spate of regulations that tightened safety and operational standards on the offshore oil and gas industry. First, due to perceived poor performance immediately following the Deepwater Horizon spill, the Minerals Management Service, which previously regulated oil and gas activity on the outer continental shelf, was split into the BOEM and the BSEE. In less than a half a decade, the sister agencies have tightened offshore oil and gas regulations and focused on both safety and spill prevention (Table 1).

Offshore Regulations

While the BSEE has released numerous regulations, the Environmental Protection Agency (EPA) has also announced rules related to some of the environmental impacts associated with the Deepwater Horizon spill. On January 13, the EPA proposed amendments to Subpart J of the National Oil and Hazardous Substances Pollution Contingency Plan (NCP), which addresses use of dispersants and other chemicals and biological agents to respond to oil spills in U.S. waters. The proposed amendments reflect EPA’s research on improved protocols and incorporate lessons learned in the aftermath of the Deepwater Horizon spill when BP used chemical dispersants to make unsightly oil on the ocean’s surface to sink to the ocean’s floor.

The new rules seek to address concerns regarding efficacy, toxicity, environmental trade-offs, and monitoring challenges raised by the level of dispersants used during the Deepwater Horizon incident – approximately one million gallons of dispersants were deployed over a three-month period on surface slicks spanning thousands of miles and, for the first time, approximately three quarters of a million gallons of dispersants were injected directly into the gushing oil.

Obama Administration Announcements Suggest Continued Preference for Gulf of Mexico, Despite Horizon Disaster
While the Obama administration has tightened offshore oil and gas regulations considerably since the Deepwater Horizon disaster, its actions have signaled its general acceptance of the offshore oil and gas industry in the Gulf of Mexico (GOM). Moreover, changes in the Mexican energy industry, along with the fragile nature of the Alaskan Natural Wildlife Reserve, point to a preference for oil and gas development in the GOM. The OCS is divided into 26 planning areas grouped into four regions – Alaska, Pacific, Gulf of Mexico, and Atlantic (Table 2). Although much of the Eastern GOM Planning Area is currently unavailable for leasing through June 30, 2022 (as part of the 2006 Gulf of Mexico Energy Security Act), leases exist in all planning areas apart for the Atlantic. The OCS oil and gas industry generated more than $7.4B in revenue in 2014. The Central and Western GOM areas form the primary offshore source of oil and gas in the U.S., representing approximately 97 percent of all OCS production.

On January 27, DOI proposed the 2017-2022 offshore lease program, prioritizing GOM development over Alaskan, Atlantic, and Pacific areas. The program is projected to open approximately 80 percent of estimated undiscovered technically recoverable oil and gas resources on the OCS. The Outer Continental Shelf Lands Act authorizes DOI to grant mineral leases and govern oil and natural gas activities on OCS lands. It requires DOI to prepare a five-year program detailing a schedule of lease sales and proposed leasing activity that best meets the national energy needs while addressing economic, environmental, and social considerations.

The Draft Proposed Program (DPP) includes eight planning areas – three in the Gulf of Mexico, two in the Atlantic, and three in Alaska. It schedules 14 potential lease sales for the five-year period– 10 sales in the Gulf of Mexico, one in the Atlantic, and three off the Alaskan coast. The DPP schedules region-wide sales comprised of the Western, Central, and Eastern GOM unleased acreage not subject to moratoria. The DOI expects its region-specific approach to balance sales more effectively while providing greater flexibility to industry, including the ability to respond to the Mexican government’s recent energy reforms that have the potential to meaningfully change GOM exploration and development decisions.

The December 2013 U.S.-Mexico Transboundary Hydrocarbons Agreement establishes a framework for U.S. offshore oil and gas companies and Mexico’s PEMEX to jointly develop transboundary resources. Mexico made constitutional amendments in December 2013 and issued secondary legislation in August 2014 opening oil and natural gas markets to foreign investments, including investments that are active in the GOM. In addition to increased frequency of bidding opportunities on the OCS, cross-border activity will likely increase, as resources straddle on either side of the U.S.-Mexico maritime boundary. The trend supports long-term expansion of U.S.-Mexico energy trade and opportunities for U.S. companies though investment focus could shift from U.S. OCS to Mexican waters.

The GOM OCS region has the greatest resource potential of the four OCS regions and is located such that it can supply oil and gas to the top U.S. consuming regions – East Coast, Gulf Coast, and Midwest. Despite continued decline in petroleum imports and new tight oil production from Bakken and Eagle Ford fields and other Midwest formations, OCS production is important to U.S. energy markets to meet Gulf Coast refineries’ demand for medium and heavy crude. The medium-to-heavy sour crudes produced from the OCS are greatly needed in U.S. Gulf Coast refineries which are not equipped to efficiently handle the light, sweet crudes from tight oil formations without incurring huge additional costs.

According to EIA, the recent downturn in oil prices is expected to have minimal direct impact on GOM crude oil production through 2016 due of the long timelines associated with offshore projects. The EIA projects GOM production to reach 1.52 million barrels per day (bbl/d) in 2015 and 1.61 million bbl/d in 2016 – approximately 16 and 17 percent of total U.S. crude oil production in the two years, respectively (Figure 1). The production growth forecast is driven by new projects and the redevelopment and expansion of older fields. In FY 2014, the GOM provided the bulk of the $13.5B offshore and onshore energy revenue, supplying approximately 18 percent of U.S. oil and 5 percent of gas production. The six sales held under the current five-year program have yielded approximately $2.4B in auction proceeds. Currently, the OCS has approximately 6,000 active leases, spanning more than 32 million acres – the vast majority in the GOM, and the remainder in Alaska and Pacific regions.

GOM Offshore production

OCS production supports long-term planning to respond to unexpectedly high energy needs in the future rather than adjust to unexpectedly low energy needs. It is not as responsive to price changes as production from tight formations. Though current low oil price increases uncertainty to the timelines of early stage deepwater GOM projects, EIA notes that producers are addressing the issue by collaborating to develop projects more cost-effectively, expedite final investment decision and first production, and share development costs. For instance, in January Chevron Corporation, BP, and ConocoPhillips Company announced a collaborative effort to explore and appraise 24 jointly held offshore leases in the northwest portion of the GOM’s Keathley Canyon.

Compromises Seen in Obama Administration’s Offshore Strategy that Highlight Atlantic Resources over Alaskan Development
As part of the BOEM 5-year drilling strategy announced on January 27, the DOI announced that it would open up an offshore area spanning from Virginia to Georgia, where the oil and gas industry believes significant reserves could be located. In doing so, it appears that proximity to major population centers would not be a central consideration in offshore oil and gas leases, though the plan did include a 50-year buffer zone from beaches. The Atlantic proposal was an expansion of a plan to open up drilling off of Virginia, but was scrapped after the Deepwater Horizon spill. While opening up the Atlantic for drilling, the Obama administration also moved to place off limits the Alaskan Natural Wildlife Reserve, which includes highly prospective oil and gas areas in the Chukchi and Beaufort Seas that have been long deferred for oil and gas activity. The DOI will permanently prohibit oil and gas drilling on 12 million acres in the ANWR.

The Obama administration has made offshore oil and gas regulations far more stringent than they were at the time of the Deepwater Horizon spill. Many of the rules and regulations that have been implemented in recent years have been direct responses to that disaster. The most recent April 13 draft rule responds to a key technical failure that triggered the spill and is unprecedented in that it will cost the industry hundreds of millions of dollars and require the development of technology that doesn’t exist today.

However, the Obama administration clearly recognizes the importance of offshore oil and gas production to the country’s energy matrix and economy. While tightening regulations, the DOI has also placed the Gulf of Mexico as the focal point for present and future offshore oil and gas activity in U.S. waters. Such a move suggests that environmental impacts will be the key consideration in future oil and gas regulations, rather than considerations related to population proximity and tourism.

Originally published by EnerKnol.

EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.