BSEE’s well control rule is wrong approach toward the right goals

“We lost 11 lives during the Deepwater Horizon disaster and have lost 25% of the oil and gas jobs in the state of Louisiana over the last 14 months. Misguided regulations like this only add to these tragedies. This is a perfect example of uninformed bureaucrats attempting to write highly technical rules and entirely missing the mark.” — Congressman Garret Graves (R–La.), March 22, 2016.

Fig. 1. In a headlong rush to avoid another accident like the Deepwater Horizon, the recent waves of ill-conceived U.S. governmental regulations are hampering E&P work in the resource-rich Gulf of Mexico, and also costing jobs. Photo: U.S. Department of the Interior.

At 9:49 p.m., April 20, 2010, an employee monitoring the DPS on the Deepwater Horizon semisubmersible rig felt an unexpected jolt that shook the entire vessel. Warning lights, indicating a dangerous level of gas intrusion into the drillstem, began flashing on her screen.

Within a few moments, a mixture of oil, gas and concrete began exploding up through the wellbore, setting the deck and other parts of the platform afire. In all, the explosion and subsequent fire resulted in the tragic deaths of 11 workers, with 17 more injured. The blowout preventer (BOP) stack in use on the well failed, and repeated efforts to close the BOP, or otherwise cap the well in the coming months, also failed, Fig. 1. By the time that BP, the operator, was able to declare the well officially and permanently sealed on Sept. 19, 2010, one of the largest oil spills in U.S. history had taken place in the Gulf of Mexico.

On May 30, the Obama administration announced a six-month moratorium on new drilling in the deepwater Gulf of Mexico, through Nov. 30. The administration subsequently lifted the moratorium in October of that year, but no company had received a single new permit to drill by February 2011. Since that time, permitting in the deep waters—and even the shallow federal waters—of the Gulf has ground to a historically slow pace, as the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), and subsequently the Bureau of Safety and Environmental Enforcement (BSEE), have focused on issuing a steady stream of increasingly restrictive new regulations.

Intentionally or not, these new regulations have resulted in significantly reduced drilling and production from one of the country’s most resource-rich basins.

BSEE’s PROPOSED WELL CONTROL RULE

“The well control rule is a solution in search of a problem. While we all agree on the goal of a safe work environment in the Gulf of Mexico, the Obama administration is approaching this problem from a punitive—not practical—standpoint. Not only does the oil and gas industry continue to warn this rule, as implemented, would have no demonstrable safety benefit, it would cost thousands of jobs, precisely while the industry is struggling.” — Congressman Charles Bustany (R–La.), March 22, 2016.

Fig. 2. BSEE’s poorly conceived, proposed rule would cost many more E&P jobs, in its quest to micro-manage the design, manufacture, usage, repair and maintenance of BOPs. Photo: Cameron.

BSEE introduced its proposed Rule on Well Control in April 2015, and it has been making its way steadily through the administrative process since that time. It likely will become a final rule this year, barring any further administrative delays. Unfortunately, like so many of the myriad regulatory actions that the various agencies of the Obama administration have hastily tried to shove through the process during its final years in office, this regulation is viewed by the industry as ill-considered, poorly written and overly burdensome, Fig. 2.

Per BSEE’s own literature, the new regulation’s main goals are to:

• Incorporate the latest industry standards that establish minimum baseline requirements for the design, manufacture, repair and maintenance of BOPs
• Require more controls over the maintenance and repair of BOPs
• Require the use of BOPs with double shear rams, which is now a baseline standard (API Standard 53)
• Require more rigorous third-party certification of the shearing capability of BOPs
• Require real-time monitoring capability for deepwater and HPHT drilling activities.

Given the severity of the Deepwater Horizon incident and its causes, few would argue against these as being reasonable goals. Indeed—the Center for Offshore Safety (COS)—established by the industry in 2011 as a unified effort to improve safety in offshore drilling operations, through improved technology and sharing of best practices—said in late 2015 that “Industry shares the government’s desire for safe offshore operations. As has been demonstrated over the last five years, we are aligned on the objective, and industry has made the investments necessary to ensure the safest operations in the world. However, there are a number of reasons why the currently proposed Well Control Rule does not achieve this goal, and ultimately could increase risk and decrease safety.”

One of COS’s biggest concerns is that the rule, as written, would confer a great deal of control over day-to-day operations in the Gulf to BSEE staff, who aren’t present on the drilling rig. Such bureaucratic insertion into daily operations is unprecedented in the U.S., and would be very unlikely to do anything to enhance safety. As COS puts it, “Their [proposed] role supplants that of the offshore rig personnel, who have the most complete picture of the current operation, and the key risks and critical considerations needed to take appropriate actions. The use of real-time monitoring must not supplant the ability of the rig personnel to make effective, real-time decisions, using their experience in active operations, which is critical to maintaining safe operations and responding to emergency operations.”

Also of major concern to COS is the proposed rule’s 90-day time frame for companies to acquire and install new equipment required by the regulation. In some cases, the envisioned equipment does not exist, and would have to be designed, manufactured and tested before it would be available for installation. Such a process could realistically take years, not a few months as BSEE envisions. Not only that, but many existing drilling rigs would likely have to be re-engineered before they would be capable of accepting this new equipment. Again, this is not a 90-day process.

BSEE’s own staffing and budget also would become a significant concern for the industry, were this rule to become final in its most current form. The rule’s vision of having what would presumably be a large number of the agency’s own staff involved in the day-to-day decision-making in the many drilling operations in the Gulf would no doubt require an initial increase in its staffing, and the ability to maintain that higher staffing level into the future.

Congressional priorities for funding any agency of the federal government tend to ebb and flow as presidential administrations come and go, and economic conditions rise and fall. One can easily imagine the industry being placed constantly in a situation of having to become advocates for funding BSEE at ever-higher levels as time goes on, something that is never the proper role for any regulated industry.

MASSIVE NEGATIVE ECONOMIC IMPACT

Fig. 3. If BSEE’s proposed rule is implemented, there will be a significant hit to the offshore sector of the U.S. E&P industry, both financially and in activity levels, the effects of which will last for many years. Photo: Anadarko Petroleum.

Any new regulation containing so many obvious major flaws, and written to give regulators the sort of intrusive authority envisioned in this proposed Well Control Rule (WCR), would come at a massive cost to the regulated industry, and to the government as well. Indeed, a study issued earlier this year by the respected consulting firm, Wood MacKenzie, demonstrates just how costly this rule would be, Fig. 3.

Among other impacts, the report estimates that based on the analysis, the most notable impacts of the WCR could be:

• Exploration drilling would decrease 35% to 55%, or up to 10 wells/year
• Industry investment would reduce by up to $11 billion/year, on average
• Production at risk by 2030 would be >1 MMboed (~35%)
• Jobs at risk by 2030 would total 105,000 to 190,000
• Cumulative GDP reduction of $260 billion to $390 billion through 2030, and GDP could decrease by $27 billion to $45 billion (25% to 40%) in 2030
• Government taxes would drop cumulatively by up to $70 billion (20%) through 2030
• Lease sale bonuses would reduce by $3.5 billion (>40%) over the period through 2025
• Rig usage would decline 25% to 50% by 2030.

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

These estimated impacts are based on a reference price of $80/bbl. While most in the industry would love to believe that the oil price could recover and sustain itself at that level, on average, through the year 2030, the current, depressed state of the commodity makes such an optimistic scenario seem unlikely.

Of course, the lower the actual commodity price, the more severe these impacts would likely become. And in a time of half-trillion-dollar annual budget deficits, projected out as far as the eye can see, can the federal government really afford to voluntarily forego $70 billion in taxes and many billions more in potential royalty collections over the next 14 years?

A MORE REASONABLE APPROACH

To its credit, COS does not propose that BSEE do nothing, where new well control regulation is concerned. Rather, it suggests, “With the extensive measures government and industry have put in place since 2010, the better approach for this proposed rule would be for BSEE to rigorously examine the safety improvements made since 2010, identify any gaps that may exist, and focus on risk-based actions to address those gaps identified.”

If the goal of this regulatory exercise was to produce a set of new rules that are effective, efficient, and based on sound science and industry practices, the approach suggested by COS would be pretty hard to argue with. The fact that BSEE is intent upon charging ahead in a rush to get such an unsound and unworkable regulation in place, as soon as possible, tells us that its actual goals are entirely different.