Tug of war

Audrey Leon

March 1, 2016

BSEE has proposed a new well control rule that the agency says will make operating in the Gulf of Mexico safer. But, the industry disagrees, and now it has two studies to prove it. Audrey Leon sets out the detail.

At the heart of the matter: a blowout preventer. Photo from iStock.

In early February, industry analysts Wood Mackenzie, on behalf of the Gulf Economic Survival Team, released a new study damning the US Bureau of Safety and Environmental Enforcement’s (BSEE) proposed well control rule (30 CFR Part 250, Oil and Gas and Sulphur Operations 
in the Outer Continental Shelf — Blowout Preventer Systems and Well Control). The study’s executive summary states the rule “is expected to reduce offshore activity, both development and exploration due to higher incurred costs and technical constraints of implementation.”

The study, which assumes
an US$80 reference oil price,
says exploration drilling
would decrease by 35-55% -
or 10 wells per year. Industry
 investment, it says, would
drop by up to $11 billion per
year, on average. Production
would decline some 35%
by 2030 (>1 MMboe/d), and
industry job losses would be
in hundreds of thousands
(105,000-190,000). Not to mention the adverse effects the rule would have on the country’s GDP, which Wood Mackenzie says could decrease $27-45 billion in 2030. Government taxes would drop up to $70 billion through 2030. Rig declines would be 25-50% through the same time frame.

“Because the prospect inventory on currently held leases will likely be condensed and fewer leases will be acquired in upcoming bid rounds, it is anticipated the production gap will continue to widen and could be irreversible post-2030, further limiting jobs, GDP and taxes,” the study forecasts.

The study mirrors one prepared by Quest Offshore Resources and Blade Energy Partners for API last July. That study said, “Cumulative direct costs due to the adoption of the proposed rule as currently written are estimated at over $32 billion for the 10 years from 2017 to 2026.”

The Quest/Blade study further states, “the proposed rule will likely negatively influence deepwater development the most, especially high pressure, high temperature, and ultra-deep water wells, which may no longer be drillable, and the resources that these wells might have developed may be lost.”

Additionally, Quest/Blade believe the rule will lower the oil and gas industry’s contribution by $4 billion annually by 2030, from $31 billion in 2015. The 10-year cumulative GDP cost burden of the rule from 2017-2026 is estimated at $28.5 billion, the study said.


Brian Salerno testifies in front of a congressional hearing on the US Bureau of  Environmental Enforcement’s proposed well control rule on 1 December 2015. Image from BSEE’s Flickr page.

BSEE could not be reached for comment as of press time. However, BSEE Director Brian Salerno testified before a US congressional commit- tee on Energy and Natural Resources back in December, defending the rule. Salerno said that the proposed well control rule was born out of investigations and reports that took place after the deadly 2010 Deepwater Horizon accident, and incorporates recommendations made regarding blowout preventers (BOPs), well design, cementing, well integrity testing, kick detection and response, real-time monitoring of well operations, and other areas.

“The need for the well control rule is demonstrated by the fact that loss of well control incidents are happening at the same rate five years after the Macondo blowout as they were before,” Salerno testified in December, saying that in 2013 and 2014, there were eight and seven loss of well control incidents per year, respectively, and occurring in all water depths. Notably, Salerno recalled the 2013 Walter Oil & Gas blowout at South Timbalier 200, in shallow waters off Louisiana, resulting in the evacuation of 44 workers, a re that burned for 72 hours completely destroying the rig, and a financial loss of some $60 million to the company.

According to Salerno, first, the rule implements many of the recommendations related to well control equipment and fills
gaps in the regulatory program. It calls for increases in the performance and reliability of well control equipment, with particular focus on BOPs. It improves regulatory oversight of the design, fabrication, maintenance, inspection, and re- porting requirements for critical equipment. It also seeks to gain information on leading and lagging indicators of BOP component failures and identify trends in those failures and help prevent accidents. Finally, the rule seeks to ensure that industry uses recognized engineering practices as well as innovative technology and techniques to increase overall safety.

Also in attendance at the December congressional hearing was Erik Milito, group director, Upstream and Industry Operations, at the API, who testified that various provisions of the proposed well control rule could actually serve to increase risk and reduce safety. He urged the committee to, “ensure that it is not implementing prescriptive requirements that will serve to inhibit innovation and technology advancement.”

While potential losses in production, jobs, safety and in revenue have been criticisms lobbed at the proposed rule, at one point during the December congressional hearing, Salerno was asked about the possibility of the rule shifting command and control authority from rig to shore, which Salerno refuted, stating that the rule does not shift authority, but that it addresses capability, “so that there would be a second set of eyes, so that you can have extra experts onshore and provide diagnostic expertise in assessing an anomaly.”

Industry reaction

When the new well control rule was proposed in April 2015, BSEE sent a call out for industry comments and, in July groups such as the International Association of Drilling Contractors (IADC) named several areas of concern:

“Specifically with regard to drilling contractors, IADC identified three major areas of concern with the proposed rule. These include its prescriptive requirements that go beyond international standards and will negatively affect the US market for mobile offshore drilling units; the significant costs to drilling contractors to comply with the rule, which were not accounted for in BSEE’s impact analysis; and the inspection and more massive BOP equipment requirements, which will negatively impact operations.”

US supermajor Chevron weighed in during the public comment period back in July.

“Many of the requirements in this proposed rule making do not build on the significant progress made since Macondo and do not take into account the best available, economically feasible technologies for ensuring safety,” wrote Chevron North America President Jeff Shellebarger. “Rather, some proposed requirements would decrease safety by increasing risk to our people and our operations. Other proposed requirements are neutral in bene t and would only impose an increased and capricious burden that may make some wells uneconomical, resulting in abandoned or undrilled projects and stranded reserves.”

Base case scenario

Using an $80/bbl base case, Wood Mackenzie shows an aver- age of 19 exploration wells drilled a year, but with the well control rule implemented, that would decrease to somewhere between 9-12 wells per year. Total capex from 2016-2030 un- der normal scenarios would be $460 billion, but with the well control it would be in the neighborhood of $300-365 billion – a 20-35% reduction.

“Although we expect deepwater Gulf of Mexico to have material activity, value creation relative to other competitive basins could be significantly eroded from the well control rule,” Wood Mackenzie says in the well control rule study.

Wood Mackenzie says currently there are 392 exploration wells predicted to be drilled in the Gulf of Mexico thru 2035, but if BSEE’s well control rule was implemented, that could fall to 166.

“With 40% higher costs the exploration spend could be cut by 70%,” the study says. “Yet-to-find volumes over the period and value creation would follow.”

After Wood Mackenzie’s study was released, National Ocean Industries Association (NOIA) President Randall Luthi stated that the study was a clear reminder of the consequences of “unnecessarily burdensome regulations.”

“While the proposed well control rule purports to improve safety, an overly prescriptive rule may actually decrease safety and increase risk,” Luthi said. “A federal regulation of this magnitude must be carefully crafted to actually focus
on ways to improve safety and allow companies to adopt its requirements in a safe and practical manner, instead of the current approach which seems to be designed around a political objective and deadline. Getting this rule right is more important than rushing the rule out on an arbitrary deadline. We urge the (Obama) administration to carefully consider the findings of this study before finalizing the rule.”