With activity ramping up two years following the Deepwater Horizon incident, drillers continue to face significant operating challenges in the region. An industry-focused panel appraised the new operating regime at the recent KPMG Global Energy Conference in Houston.
Two years following the largest oil spill in offshore history, activity levels are experiencing an uptick in the U.S. Gulf of Mexico (GOM) once again, according to a panel speaking at KPMG’s 10th Annual Global Energy Conference in Houston on May 17.
The BP-operated Macondo well blowout and subsequent oil spill that occurred in 2010 after Transocean’s Deepwater Horizon semisubmersible rig sank in water more than a mile deep in Mississippi Canyon 252 “changed everything,” and a new era for operating in the GOM has ensued.
Along with a more vigilant industry focused on safeguarding offshore E&P, “the primary vector of change is now one whereby management is guided by regulation,” said Kevin Ewing, natural resources and environmental issues advisor and partner, Bracewell & Guiliani, Washington, D.C.
Immediately following the tragic well incident, operators “leaped into regulatory mode,” developing risk mitigation strategies that have since reshaped the traditional business model, according to the panelists.
At the core of such contingency plans are better practices, greater transparency and above all, improved safety requirements, guided by the new regulatory agencies formed from the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE).
But while oil and gas development on the U.S. Outer Continental Shelf continues in step with a previously established mandate that has “stayed the same decade after decade,” Ewing said, “its contextual interpretation has become more stringent” for GOM operators alongside government enforcement of oil and gas management post-Macondo.
Ewing likened the change to a “philosophical shift” that has significantly impacted the upstream oil and gas industry as well as how government’s increased involvement and evolving role will continue to affect the way business is conducted in the region. “What has changed is that Washington is now in your knickers, and they’re not going to leave,” he added.
According to Ewing, the former BOEMRE (now the Bureau of Safety and Environmental enforcement [BSEE] and the Bureau of Ocean Energy Management [BOEM]) was regarded as less of a regulatory entity and more of a public service.
As its nomenclature suggests, the oil and gas regulatory arm “is no longer a service, it’s a bureau,” he said. “It’s prophetically named. We’ve gone from service to bureaucracy, and management is now through management and enforcement.”
And that, he emphasized, is the “Brave New World” under way in the GOM.
A key operating factor in this new world order, according to Ewing, is the number of days involved in today’s permitting process. Citing statistics from 2011, he noted that six major GOM operators logged 130, 140, 140, 230, 240 and 310 permitting days, respectively. “These are not numbers that make it easy to do capital planning,” he said.
Noting that it is still early in the GOM recovery, Superior Energy Services chief executive officer and president Dave Dunlap underscored that activity levels remain down some 20%. “There seems to be mainly an investor perspective that GOM activity has recovered.”
However, the new regulatory environment continues to hinder a rebound in activity back to pre-spill levels, he added.
Navigating more rigid standards for equipment and conduct related to performance in the GOM also affects time-sensitive technology deployment in offshore developments fast-tracked for production – a bottleneck in the face of accelerating fossil fuel consumption across the globe.
“Subsea technology had to be rapidly developed in a short time to tap the deepwater frontier. Now you won’t find service companies deploying technologies that haven’t been proven and tested,” Dunlap said.
The regulatory environment has become more risky and financially burdensome, and the increased costs and expenses “stifle innovation in terms of development,” added Gerry Stevenson, vice president and treasurer at Noble Energy Inc.
In the wake of Macondo, he explained, the industry was facing some Draconian legislation that would have put a lot more companies out of business.
But even as BP has gone to great lengths to forge ahead, the disaster looms large as the industry’s albatross. “If we had a repeat of this unfortunate situation, what would happen? The government would foot the bill and the taxpayer would pay,” he said.
Notwithstanding the GOM’s risky business, Stevenson said Noble still sees the region as a key area worth continuing to develop but cautioned that with an election on the horizon, “it is important to develop a concensus and a symbiotic relationship with regulatory bodies, government, industry, and the public.”
The bigger question is the industry’s response: “how do we bring back trust and confidence in offshore development?,” he asked. “Mechanisms need to be put in place that provide greater assurance.”
Such mechanisms being implemented by industry and government involve new levels of complexities and processes and require greater cooperation to impart the technical expertise needed to train government agents, inspectors and regulatory enforcers. “All organizations need to raise capabilities and competencies,” Ewing said, “but financial constraints are a continuing problem for government.”
According to Dunlap, operators and service companies might be in a permanently impaired market in the GOM, but activity will improve and opportunities will go up. “Despite my pessimism on the regulatory environment, I am optimistic that from a business perspective the market will improve – just not as well as it would have.”
Operators do have other options, Stevenson remarked, and Noble is a good example with an international portfolio that spans from Israel to West Africa. “Balance and diversity are important,” and companies must maintain flexibility when industry risks are too high or in a downcycle, he said.
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