April 2014

Drilling advances

Some federal “fixes” are anything but that

Jim Redden / Contributing Editor


Common to the DNA of governments the world over, I’ve come to believe, is the incessant need to tinker. Sage counsel that holds, “if it ain’t broke, don’t fix it,” or “leave well enough alone,” simply doesn’t fit into the lexicon of your typical bureaucrat.

Take, for example, the arbitrary and baffling rule proposed by the U.S. Bureau of Safety and Environment Enforcement (BSEE) that would change the process for determining what is “Best Available and Safest Technology (BAST)” for offshore drilling and production. Never mind that the current federal statute, which lays out the process for defining BAST, appears to have been working quite nicely for many years. BSEE, however, says that the drilling and production landscape has evolved, and that the rules need to evolve with it. The issue remains up in the air, and is expected to come to a head sometime this year.

When BSEE announced last August that it was considering changing the current BAST process, nearly every industry trade group quickly requested that it be withdrawn from consideration, post haste, calling it “unwarranted, unjustified” and generally fraught with uncertainties. The biggest problem with this scheme, other than the fact that it was floated with very little, if any, industry collaboration, is that companies have spent millions upon millions of dollars to comply with the current BAST process. Arbitrarily changing to a new, yet-to-be-clearly-defined process for determining if you are employing the best and safest technologies threatens to force companies to go back to the drawing boards—and their accountants—to meet new procedural standards.

In January, a trio of Houston and New Orleans attorneys argued that the proposal creates myriad uncertainties, not the least of which is affording the technical wizards within BSEE the sole discretion for determining what constitutes BAST. “The biggest concern involves the agency’s sole responsibility for selecting economically feasible BAST. Nowhere in the rulemaking does BSEE explain the criteria and methodology it will follow to accomplish this task,” they wrote. “In addition, there is no discussion about whether BSEE will seek out industry expertise when analyzing BAST, or even if it will allow industry to have a voice in this process.”

The attorneys and others say a major concern with the proposal, as written, would be removal of the safe harbor provision in the regulation, which eliminates or reduces a company’s liability, if it is shown to have acted in good faith and in compliance with the standards on the books. “For example, will an operator and/or equipment manufacturer be able to request a BAST determination, or are they limited to requesting a departure? All of these unknowns have created legal and operational uncertainties that will need to be navigated in future OCS developments. Faced with these uncertainties, operators and their counsel must be aware of any new regulatory developments or guidance related to this rulemaking in general, and BAST in particular, and be ready to adapt their technology and compliance programs accordingly,” the attorneys argued.

U.S. not alone. The U.S. certainly does not hold a patent on proposing head-scratching legislation. As we saw in the UK in mid-March, even when a change is made that the industry welcomes with open arms, the occasional “oh, by the way,” clause is slipped in, which amounts to a case of “the government giveth, and the government taketh away.”

In one stroke, the UK government professed its unqualified support for the long-awaited recommendations of the Wood Report, whose namesake, the venerable retired businessman, Sir Ian Wood of Aberdeen, called for relaxing the taxation regime for mature North Sea fields. The industry wholeheartedly welcomed the government’s espousal of the Wood recommendations, saying it would create incentive for badly needed drilling investment in ultra-high-pressure, high-temperature (HPHT) wells. All well and good, until the UK government decided also to change the tax rate for rigs and accommodation vessels operating under bareboat chartering arrangements. According to Oil & Gas UK, modifying the traditional chartering model tax rate will increase the day rates for rigs and flotels. The trade association warns that the new tax structure for bareboat charters promises to damage exploration and development activity on the UK Continental Shelf (UKCS).

“It is perplexing other good news, that the government has chosen to proceed with the bareboat measure,” Oil & Gas UK CEO Malcolm Webb said. “This can only increase costs on the UKCS, where operating costs have increased sharply ... and last year saw a rise of 15.5% to an all-time record of $8.9 billion, and new developments are facing similar cost pressures.”

Oil & Gas UK led industry cheers for the government’s decision to relax taxes on HPHT wells drilled in the UK North Sea, describing it as a “game changer” for mature and technically challenging prospects. Webb said the relaxation was long overdue, for an industry that faces marginal tax rates of 62% to 81% on oil and gas production, which, he says, are unsustainable in a mature basin. With estimates of up to 24 billion boe still recoverable offshore the UK, the trade group said that the tax allowance has the potential to attract up to $6 billion in near-term investment.

The earlier cheers were just as quickly drowned out by the realization that the chartering tax measure could send the expected investment hike going the way of other misguided bureaucratic stunts. “We fear that this move will drive drilling rigs, already in short supply, out of the UKCS,” Webb argues. “Exploration over the last three years has been at its lowest in the entire history of the industry in the United Kingdom, with only 15 exploration wells drilled in 2013.” wo-box_blue.gif

About the Authors
Jim Redden
Contributing Editor
Jim Redden is a Houston-based consultant and a journalism graduate of Marshall University, has more than 40 years of experience as a writer, editor and corporate communicator, primarily on the upstream oil and gas industry.
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