Deepwater drilling outlook remains uncertain

Jan. 1, 2011
While some drillers remain positive about the deepwater Gulf, plans are still being stymied by a lack of regulatory clarity

While some drillers remain positive about the deepwater Gulf, plans are still being stymied by a lack of regulatory clarity

Bruce Beaubouef
Managing Editor

Gene Kliewer
Technology Editor, Subsea & Seismic

The single recurring word heard when industry experts talk about operations in the Gulf of Mexico post-Macondo is “uncertainty.”

Of course, offshore drillers and operators are used to uncertainty in the finding and producing of hydrocarbons in deepwater. But now, they are even more concerned with the regulatory and financial uncertainty that stem from new federal rules issued in the wake of the Macondo oil spill. As of now, no one knows what the US government wants, how to achieve those ends, what it will cost, or how long it will take to find out.

The deepwater drilling moratorium was lifted in November, but exploratory drilling permits for the Gulf have been few to date. Then, at the end of the year, the Obama administration reversed its earlier decision to allow offshore oil drilling in the eastern Gulf of Mexico and along the Atlantic Coast because of the BP oil spill.

In March, Interior Secretary Ken Salazar had announced the expansion of drilling areas, just weeks before the BP accident, as part of a political plan to encourage more domestic oil production in exchange for limits on carbon emissions. The eastern Gulf and the Atlantic seaboard had been off-limits to oil companies for years because of congressional opposition.

The recent decision says drilling will remain under a moratorium for those areas for at least the next five years, until stronger safety and environmental standards are in place. Drilling will continue in the central and western Gulf of Mexico, although under a set of new safeguards.

Industry response

Following an appearance by DoI Secretary Kan Salazar in Houma, Louisiana, this past November, a group of industry associations sponsored a press conference with the title “End to the Rhetoric.” The sponsors were the Offshore Marine Service Association (OMSA), the Shallow Water Energy Security Coalition, the National Oceans Industries Association (NOIA), the Gulf Economic Survival Team, and the International Association of Drilling Contractors (IADC).

“The point we wanted to make is that we are running out of time,” said Jim Adams, interim president and CEO, OMSA. “The vessels for safe deepwater drilling and the assets envisioned by the rules are the reasons we need to engage in the discussion. That equipment will be used either here or overseas, and there needs to be a sense of urgency from the government regulators before those assets are gone from the Gulf.”

These notes of uncertainty were also sounded at the recent King & Spalding Energy Forum held in Houston. “We are slowly moving in the direction of granting permits,” said Tim Engel, partner, King & Spalding’s Litigation & Antitrust and Energy Practice Groups in Washington, D.C. Engel opened the forum with a presentation entitled “Getting Past the De Facto Moratorium.” However, there remain new rules, interpretive notices, informal advice, etc. There also are environmental hurdles of multiple administrative reviews and what finally comes from environmental litigation.

BOEMRE action plan

The plan of action from BOEMRE leading to this point has been to establish the requirements and then develop rules to support the requirement. (The Bureau of Ocean Energy Management, Regulation and Enforcement will eventually be divided into the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement.) Heretofore, the process has been the opposite: First develop the rules and then establish how to meet them.

To industry, this “cart-before-the-horse” approach leaves operators with both formal and informal requirements, but no specific methods to attain those requirements.

BOEMRE has issued a new interim drilling safety rule and new workplace safety rules, but had only issued notices and informal advisories regarding containment and spill response as of press time. The drilling safety rule sets out BOP equipment/practices and also casing and cementing programs. Applications for new permits have to have independent expert review of well design and the BOP system. It also has new testing, inspection, and training requirements as well as requiring BOEMRE approval prior to displacing kill-weight drilling fluid.

The rules are aimed at tightening workplace safety on offshore rigs and beefing up standards for equipment. Chief executive officers will have to certify that their companies comply with the regulations. Drillers will have to provide third-party verification that blowout preventers are properly designed and can stand up to pressure under all conditions.

New drilling costs

Engel estimates that these new regulations, if enacted as written following the comment period, would add an extra $100 million at least to the cost of drilling in the GoM.

The federal government also has issued new drilling cost estimates. The new rules will add $183 million a year to the cost of drilling on the outer continental shelf, the Interior Department said in an Oct. 14 notice in the Federal Register. And the rules will add $1.42 million in costs for each new deepwater well that uses a floating rig, the department predicted. Shallow-water wells could cost an extra $90,000.

The workplace safety rule makes mandatory a Safety and Environmental Management System (SEMS) and calls for compliance within a year. New rules require a “company official” to certify that the operator will comply with “all applicable regulations” on each deepwater application.

There were lessons learned in the Macondo disaster. Some 45,000 personnel and 6,700 vessels were deployed along with 3.8 million feet of containment boom and 9.7 million feet of shoreline boom. There also were improvements in detection and tracking using satellite imaging, thermal/infrared images, and new communications equipment.

Discharge scenarios

One area leaving significant doubts for operators is NTL 2010-N06 regarding worst-case discharge scenarios. This is one requirement that has slowed permit issuance as studies are under way to decide how this will be determined. Until an acceptable method of determining worst-case spill volumes is defined, the site-specific calculations and the assumptions behind them cannot be determined and neither can an Oil Spill Response Plan be revised to meet the worst case. All are required steps to getting a drilling permit.

The current direction for determining the worst case is problematic for exploration wells especially. Exploration wells are, by definition, a foray into the unknown. However, the permit application requires determination of the greatest potential daily discharge volume from all producible reservoirs into an open hole. Data also must be provided for well design, reservoir and fluid characteristics, and PVT (pressure volume temperature) characteristics.

The informal direction from BOEMRE on this in NTL06 FAQ reads: “You must consider analog drilling or production data, rock and sand strength, formation age, variance in pore pressures, and other relevant geologic and engineering factors to support your determination” of the worst cast discharge. A practical impossibility for an exploration well going into unknown strata.

The informal guidance on a Supplemental Oil Spill Response Plan calls for a tiered approach. Once the worst case discharge volume is determined, the operator has to show a response capacity to handle 50% of the discharge within 24 hours; 100% within 36 hours; 200% within 48 hours; and 400% within 60 hours of onset. In determining the response capacity, 30 C.F.R. §254.44 calls for multiplying the manufacturers’ rated capacities by 20% to determine if there is sufficient recover capacity.

In short, during permit application review the BOEMRE will be looking for reasons to stop the drilling.

Statutory framework

The statutory framework for meeting the environmental demands to drill also are vague. Disregarding the immediate and ultimate affects of environmental litigation on GoM operations, meeting the post-moratorium requirements also remains a moving target. BOEMRE is reviewing the use of categorical exclusions, for instance, and says it will require an environmental assessment for each project. The problem comes because no template for an Environmental Assessment (EA) has been issued. In other words, no determination has been made as to what BOEMRE wants in an EA or what the thresholds for action might be.

Among the concerns for operators coming out of the 2010 mid-term elections is the call for federal spending cuts. BOEMRE, through DoI, already has requested additional personnel in order to move the operations applications through the system. If the funding is maintained or reduced, BOEMRE says the lack of sufficient staff will retard the pace at which permit applications are processed.

Road ahead

In its 2010 Road Ahead for Energy oil and gas conference, Deloitte took a long look at how the events of 2010 might be reflected in 2011. Deloitte also released its 2010 survey of the oil and gas industry. Predictably, the future of the Gulf was at the top of the list of concerns.

“Oil and natural gas executives have a tremendous amount of uncertainty about the future of energy in the U.S., including the effects of potential new regulations, the impact of the spill in the Gulf of Mexico, the implications of flat demand, and the long-term role of burgeoning natural gas supplies,” said Gary Adams, vice chairman for Oil & Gas at Deloitte.

In introducing the study results, Adams took a special look at the GoM in the post-Macondo era.

“Because the Gulf had been so safe, the blowout created shockwaves,” he said. “Regardless of the moratorium lift, it will take six months to meet the new regulations, and this production delay will lead to higher prices and more imports.”

Furthermore, permitting delays are expected due to the extended regulatory reviews; which, in effect, leaves the drilling moratorium in place.

Status of well permits subject to enhanced safety and environmental requirements. Since Oct. 12, 2010, applications for deepwater oil and gas drilling have been accepted for review and approval. Operators must certify compliance with all existing rules and requirements, including those that recently went into effect, and submit information regarding the availability of adequate blowout containment resources.

New risk environment

The American Petroleum Institute estimates that a production loss of 80,000 to 130,000 b/d could be felt through the year 2015. The International Energy Agency estimates that 100,000 to 800,000 b/d of new oil supply could be deferred, making domestic demand that much more difficult to meet.

Also, because of the new and pending regulations, particularly regarding liabilities, Adams said the deepwater Gulf could become a “niche” play for only the biggest operators. Of the 300 or so companies operating in the GoM, he said only 10 IOCs and NOCs have a market capitalization above the $30 billion liability total reached by Macondo so far.

“This new environment for risk means that managers of most companies are betting the entire company on every well,” Adams pointed out.

He does not see the Gulf fading in importance, however. “The GoM deepwater is important to the United States as a driver of growth, especially for oil, but for natural gas, too. The GoM provides 30% of the US oil supply and is expected to grow.”

“The political risk in the United States is higher (than before), but it is an acceptable risk compared to other operating arenas,” said Branko Terzic, executive director of the Deloitte Center for Energy Solutions. And that should keep the area popular with operators.

Another area in which Deloitte expects to see differences is in joint operating agreements and contracts with suppliers. “Those are undergoing revisions now and could result in profound changes (in how business is conducted),” Adams said.

Drilling rule requirements

While Salazar said GoM operators should expect “a dynamic regulatory environment” for the foreseeable future, there are a number of new regulations and practices put in place since Macondo. The American Bureau of Shipping (ABS) notes the following highlights of the new drilling safety rule:

  • New casing installation requirements
  • New cementing requirements (incorporating API, RP 65, Part 2, Isolating Potential Flow Zones During Well Construction)
  • Required independent, third-party verification of blind-shear ram capability
  • Required independent, third-party verification of subsea BOP stack compatibility
  • New casing and cementing integrity test requirements
  • New requirements for subsea secondary BOP intervention
  • Required functional testing for subsea secondary BOP intervention
  • Required documentation for BOP inspections and maintenance
  • Registered Professional Engineer to certify casing and cementing requirements
  • New requirements for specific well control training to include deepwater operations.

The independent, third-party referenced must be a technical classification society; an American Petroleum Institute (API)-licensed manufacturing, inspection, and/or certification firm; or a licensed professional engineering firm capable of providing the verifications required under this part of the rules. ABS provides certification of offshore drilling systems based on its Guide for the Certification of Drilling Systems; the guide incorporates or references the latest industry and international standards. An operator that complies with ABS requirements can obtain the classification notation CDS.

International reaction

Reaction to the spill and resulting steps is not confined to the United States. The UK Industry Taskforce on Peak Oil and Energy Security (ITPOES) says the regulatory ramifications are likely to reduce capacity and increase oil costs within the United Kingdom within the next five years.

Seven UK companies – Arup, Buro Happold, Kingfisher, Scottish and Southern Energy, Solarcentury, Stagecoach Group, and Virgin – recently joined to launch a briefing note titled “Peak Oil – Implications of the Gulf of Mexico Oil Spill.”

The taskforce report says that owing to the importance of deepwater drilling to the global oil supply, “any future delays or problems associated with deepwater drilling will have much greater impact on supply than is the case today. The impact of the spill is most likely to be felt in project delays due to new legislation, tighter controls, or more inspections of deepwater installations.”

Optimism remains

Some positive news came in mid-November, when the International Energy Agency (IEA) announced that drilling requests for the Gulf of Mexico were picking up since the moratorium had been lifted.

“Oil companies are queuing up to submit requests to recommence drilling, including many of those previously active in the area,” the IEA said in a report. “Companies remain keen to work in the Gulf of Mexico, seeing it as one of the more profitable regions accessible to them.”

Offshore operators remain optimistic about the Gulf. On Oct. 21, Chevron approved a $7.5-billion plan to develop oil and gas fields in the GoM. And Royal Dutch Shell says it expects to produce 220,000 b/d of next year in the Gulf.

Apache Corp., a new entrant in the GoM deepwater play, echoed Shell’s optimistic outlook at a recent event in Houston. Carl Scharpf, Gulf Coast Exploration & New Ventures, said the deepwater GoM remains a promising exploration venue. The company marked its entry with the $3.9-billion merger agreement with Mariner Energy announced earlier this year.

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