New stringent government regulations on offshore drilling are casting another shadow on the long-term outlook for ocean energy extraction in the United States.
The Gulf of Mexico offshore oil and gas industry is increasingly worried about its prospects, looking beyond a recovery in the price of crude oil. The nearly 2-year-old oil price collapse has dealt the biggest blow to offshore drilling, but regulations are doubling the hit as companies are growing weary of an emboldened environmental movement now seeking to end new offshore energy leasing in the Gulf for good.
Yesterday, the Department of the Interior and its Bureau of Safety and Environmental Enforcement (BSEE) issued a final set of rules concerning offshore well control. New and costly requirements added to the technological complexity of offshore oil and gas extraction aim to prevent a recurrence of the devastating 2010 Deepwater Horizon rig explosion at BP PLC’s Macondo well, which killed 11 crew members and sparked the worst environmental disaster in U.S. history.
Industry says the government is going too far. The new regulations, many complain, will make activity in the Gulf of Mexico ever more expensive and potentially nonviable in the future. Costs of complying with post-BP Macondo/Deepwater Horizon spill rules are already believed to have pushed out smaller oil companies from the rich deepwater Gulf fields.
BP spilled millions of barrels of oil into the Gulf in 2010, one of the biggest environmental disasters in U.S. history. That triggered a sweeping re-evaluation of how the U.S. government oversees offshore development and a contentious process around the enforcement of new rules.
Regulators are unapologetic. They say years of painstaking investigation of the 2010 Gulf spill and deliberation by experts have finally achieved fruition in the form of a set of rules on what equipment must be used and how it must be tested and maintained, rules that are necessary to minimize the potential of another offshore spill. Industry now must move toward compliance, they say.
"These regulations are among the most significant safety and environmental protection reforms that the department has launched as part of President Obama’s commitment to ensure responsible development of America’s domestic energy resources," Interior Secretary Sally Jewell said in a conference call. She added that the package made public yesterday "seeks to better protect human lives and the environment from offshore oil spills by comprehensively addressing the full range of systems and processes involved in well control operations."
BSEE’s new rules take aim at blowout preventers (BOPs), the equipment designed to seal a gushing well that became the subject of a detailed post-spill investigation. Among other requirements, BOPs must be equipped with double shear rams, a redundancy feature designed to ensure that the BOP can cut off and seal pipe even if one shear ram fails, as was the case with BP Macondo. The rules also formalize standards for BOP testing and inspection, calling for "the complete breakdown and detailed physical inspection of BOP not longer than every five years," according to a BSEE fact sheet.
‘Confident it will stand’
BSEE also wants BOPs to be equipped with technology that keeps the drill pipe centered in the BOP, to ensure full cutting and shearing in the event of well blowout.
That requirement is a nod at findings by investigators with the U.S. Chemical Safety Board (CSB) publicly aired in June 2014.
CSB found that part of the reason why the Deepwater Horizon’s BOP failed to stem the flow of hydrocarbons was that the tremendous forces exerted on the pipe caused it to buckle, moving the pipe off-center within the BOP. When the blind shear ram activated, it only partially cut through, but not completely, allowing oil to continue flowing into the Gulf (EnergyWire, June 6, 2014).
CSB’s findings went well beyond the Deepwater Horizon and new drilling rigs entering the Gulf. It argued that the design flaw on the blowout preventer at the BP well was likely ubiquitous in the offshore oil industry. The CSB report implied that the industry should be called on to replace older BOPs with improved versions.
BSEE’s well control rules have been under industry assault for a year, but the agency said it has incorporated companies’ concerns into the revised rulebook. Still, requirements such as "third party certification of the shearing capability of BOPs" were left in place.
Rules also govern drilling operations. Government regulators want centralizers to be used in wellbore cementing. Other rules cover casing and subsea containment.
In February, consulting firm Wood Mackenzie warned that what BSEE and Interior were pursuing would deal significant damage to the U.S. offshore energy sector.
In a study commissioned by the Gulf Economic Survival Team, an industry consortium formed during the 2010 offshore drilling moratorium, Wood Mackenzie estimated that the new well control rules would curb exploratory drilling in the Gulf by 55 percent, while leading to a 35 percent decline in energy production by 2030. Hundreds of thousands of future jobs would be put at risk by the tighter standards, analysts there predicted.
Government revenues from offshore oil leases could see a $5 billion hit, the study concluded. "Ultimately, the proposed well control rule will impact the attractiveness of the Gulf of Mexico for future oil and gas investment and could result in oil and gas operators choosing to develop energy resources in other parts of the world," it said.
BSEE Director Brian Salerno said a close cost-benefit assessment of the rule shows a net positive for the industry. The agency said many of the industry’s own standards have been incorporated into the formal rulemaking process.
Salerno noted that the new rules focus primarily on BOPs. The earlier CSB report argued that not enough attention had been paid to BOP performance in post-Macondo spill investigations.
"Blowout preventer systems are the main focus of the rule, as they should be, because that critical system can be the last line of defense in preventing a human and environmental catastrophe," he said.
Industry groups are mostly negative on the news.
The Independent Petroleum Association of America (IPAA) and others argue that the prescriptive approach by the government may actually decrease offshore safety by taking away greater flexibility from operators. "Today’s highly prescriptive rule could result in unintended negative consequences leading to reduced safety, less environmental protection, fewer American jobs, and decreased U.S. oil and natural gas production," IPAA senior vice president Dan Naatz said in a statement.
Gulf Economic Survival Team (GEST) Executive Director Lori LeBlanc said in a release that the government should have allowed a second public comment period so that industry experts could have time to correct some of what was put out yesterday. GEST maintains its position that the ever-tightening regulatory climate in the Gulf of Mexico will see rigs float away elsewhere.
"This could result in Gulf energy companies that operate globally deciding to shift investment and jobs to other parts of the world," said LeBlanc. "The stakes are huge: as Wood Mackenzie found, the impact of the rule as proposed could reduce industry investment in the Gulf by up to $11 billion annually; reduce government tax revenues up to $5 billion annually through 2030, jeopardizing coastal restoration efforts; and place over 100,000 jobs at risk by 2030."
Secretary Jewell expressed great confidence that the well control rule will survive despite the loud industry complaints and potential for retaliatory measures taken on Capitol Hill.
"We’re confident that it will stand," Jewell said.
The Institute for Energy Research said the new rules are reflective of a "keep it in the ground" movement that activists are extending to the Gulf of Mexico. "Whether it’s this latest regulation, the anemic offshore leasing program, or the coal-leasing moratorium, the president has shown that his chief goal is to keep American energy — a key to our economic prosperity — in the ground," IER President Thomas Pyle said.
Environmental groups admit that they are taking this movement to the Gulf of Mexico, hoping to press the government to end all future leasing of new offshore exploration acreage in the Gulf. Like-minded protesters disrupted the latest offshore lease sale held in New Orleans (EnergyWire, March 24).
The Bureau of Ocean Energy Management recently announced a new offshore lease sale schedule to begin in 2017. BOEM angered the industry by taking Atlantic offshore drilling off the table for another half-decade.
Environmentalists see the removal of Atlantic drilling as a victory. BOEM cited local opposition to drilling as one of the reasons for that decision. Groups failed to end future plans for leasing offshore Alaska, but no drilling is occurring in federal Arctic waters anyway, and the oil price crash makes new Arctic offshore drilling uneconomic.
More actions are planned. David Turnbull, campaigns director at Oil Change International, said in an email that multiple organizations have their sights set on the Gulf of Mexico next. "There will definitely be some sort of events at the ‘open houses’ BOEM is planning to hold in New Orleans and Houston regarding the 5-year plan," he said.