Regulations should not impede the industry's growth and recovery

In the year ahead, we may witness pivotal change in Washington, D.C. While the current administration pushes out the final planks of its agenda to cement the Obama legacy, candidates for the next administration will spend 2016 trying to convince voters that they are the best choice to lead the nation.

In the year ahead, we may witness pivotal change in Washington, D.C. While the current administration pushes out the final planks of its agenda to cement the Obama legacy, candidates for the next administration will spend 2016 trying to convince voters that they are the best choice to lead the nation. For some, 2016 ushers in the end of an era; for others, it brings the dawn of a new one. For the offshore oil and natural gas industry, 2016 may be a year in which survival is considered a victory.

Barring a sudden disruption of the world’s oil supply or an unexpected surge in the Asian economy, global oil production levels will likely keep oil prices low for much of 2016. Producers and service companies in the US Gulf of Mexico pared back in 2015; 2016 could bring more of the same. The offshore industry will also see a slew of regulations being pushed through at the end of the Obama administration.

President Obama has made it clear that his remaining actions, including his regulatory agenda, will filter through the prism of climate change. Unfortunately, many of the administration’s core supporters see fossil fuels as the primary target in the war to reduce greenhouse gases. The rejection of the Keystone Pipeline; the cancellation of two proposed oil and gas lease sales off the coast ofAlaska; and the refusal to grant extensions to companies needing extra time to explore in Arctic waters are clear indicators that the development of oil and gas will not be seen as a priority in 2016. Those demanding that oil and natural gas be left in the ground clearly have the president’s ear, particularly when it concerns new exploration and production.

TheUS Gulf of Mexico has the advantage of having a well-established oil and natural gas industry, one that is vital not only to the economies of the Gulf states, but also supplies a significant source of our nation’s energy. Gulf of Mexico oil and gas production, along with the onshore shale revolution, made possible by fracking, effectively reversed a long trend of increasing oil imports. In fact, imports now make up less than half of the crude oil processed by US refineries. If this trend continues, Middle East oil imports could become a distant, unpleasant memory. However, stricter regulations scheduled to be finalized in 2016 and low commodity prices could converge to drive US producers out of business and reverse our path toward energy sufficiency.

In 2015, theNational Ocean Industries Association (NOIA) and allied national and state trade groups worked hard to influence and shape the regulations and guidance to be finalized in 2016. We have been paying particular attention to the Well Control Rule (WCR) proposed in 2015 by the Bureau of Safety and Environment Enforcement. In the works for more than four years, the WCR is seen by the administration as a “must complete” item in 2016. Highly technically detailed and broad in scope and reach, the proposal includes a mix of one-size-fits-all and prescriptive provisions that could create unintended consequences that would shift risk rather than decrease it. One analysis indicated that over half of the wells safely drilled in the Gulf of Mexico in the last five years would not have been completed had the rule been in effect. Surely this would not have been the intended outcome of the rule. Hundreds of industry experts from more than 70 companies have devoted thousands of hours reviewing and discussing the rule and have supplied information to the federal regulators for their consideration. This author has been urging the administration to resist the pressure to meet a political deadline, and instead take the time to further consult with industry in order to complete a realistic, implementable, and enforceable WCR that achieves the stated goal of increasing the safety of offshore operations without shifting risk.

Tough economic times have also spurred concern over the adequacy of the current bonding requirements in the Gulf. Bonding assures federal regulators that leaseholders, whether past or present, have the financial ability to complete decommissioning activities once production has ceased. The probability of the US government being forced to foot decommissioning bills is minuscule, and history has borne this out. Nevertheless, regulators are exploring ways to increase bonding requirements -- mostly likely through a Notice to Lessees (NTL) in 2016. Guidance under consideration may make it impossible for some operators to continue business by requiring bonding amounts far in excess of actual decommissioning costs for each leaseholder, and may also be outside the purpose and authority of an NTL.

Royalty payments are also under scrutiny and may be revised in 2016. The Office of Natural Resources Revenue (ONRR) is in the midst of discussions regarding the payment of royalties and the correct method of unbundling transportation and production costs associated with production. Early indications are that companies could be fined many times the amount of questioned royalty payments, if the complicated process of unbundling costs is not done to the satisfaction of the regulator. An open dialogue and exchange of information between ONNR and the industry payor is crucial to the development of an unbundling process that is easily understood and enforceable.

As the administration nails down the planks of an Obama legacy, NOIA continues its work in Washington, D.C. to help shape and influence offshore regulatory decisions that are reasonable; can be realistically implemented and enforced; and most of all, are survivable.

Randall Luthi


National Ocean Industries Association

More in Regional Reports