No joy in troubled oil patch

Sam Fletcher
OGJ Senior Writer

It’s the holiday season—a time to be jolly and to look back at the accomplishments of the past year. But there’s been no joy in the oil patch since Apr. 20 when the deepwater Macondo well blew out in the Gulf of Mexico, sank the Deepwater Horizon semisubmersible rig, and for all practical purposes pulled the US offshore drilling industry down with it. 

No one would deny the biggest oil spill in US waters, resulting in the death of 11 industry workers, was an unmitigated disaster. But the rush to judgment by the US Congress and President Barack Obama’s administration appeared to many to be aimed more at punishing the industry than improving offshore safety. 

To cite but one example, offshore oil companies are facing higher costs with the Bureau of Ocean Energy Management, Regulations, and Enforcement (BOEMRE) pushes operators to plug and abandon nonproducing wells and decommission idle platforms on the Gulf of Mexico’s outer continental shelf over the next 5 years. 

There have been no blowouts of abandoned wells in the gulf or even confirmation that any of the “more than 27,000 abandoned oil and gas wells” are leaking, as the Associated Press speculated in July. 

Yet BOEMRE “seems intent on enforcing and accelerating” abandonment of offshore wells under guidelines issued Sept. 15 in Notice to Lessees 2010-G05. Although the bureau “will need to add some teeth to the NTL to effectively enforce the new regulations, it will likely succeed,” said 
analysts in the Houston office of Raymond James & Associates Inc. 

This means offshore oil and gas companies in the gulf must increase their annual P&A budgets by 30-150% “over the next few years,” spending more than they did in the last 10, said Raymond James analysts. 

But industry capacity restraints may emerge in 2012, they said, driving up P&A costs. Even if prices don’t rise, the P&A requirements will siphon off funds that otherwise would go into exploration and development. 

Current policy requires only that wells be plugged within a year after an operator’s block lease expires. But new BOEMRE officials decreed operators in the gulf must within 3 years plug all wells that have been idle for 5 years or more. This “is a significant departure from historic requirements and, as far as we are aware, is the first regulation across any offshore basin to require infrastructure to be decommissioned after production ceases for a fixed period of time,” said Mark J. Kaiser and Yunke Yu at the Center for Energy Studies, Louisiana State University (OGJ, Nov. 1, 2010, p. 26). 

BOEMRE sees such wells only as unprofitable, apparently not knowing virtually all wells go in or out of production in their lifetimes or that some can be revived or used for other purposes. Experienced regulators under the old Minerals Management Service did know such things, however, and were aware $775 million to $2.3 billion in government royalties could be lost via early abandonment of wells that otherwise could be brought back in production.

US diplomatic leaks
While not directly linked to energy, many traders were concerned at the end of November about the massive leak of US diplomatic secrets via the WikiLeaks web site over the Thanksgiving weekend, fearing it could affect Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries. Leaders of Israel, Bahrain, Saudi Arabia, and the UAE were revealed as urging both the George W. Bush and Obama administrations to be more forceful with Iran over its nuclear power program. 

“The release of the US diplomatic cable lays bare the tension among the gulf countries regarding Iranian nuclear program. Although this is unlikely to cause any immediate supply disruption, the media reports once again push to the forefront the constant geopolitical risk supply of oil is exposed to,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

(Online Nov. 29, 2010; author’s e-mail:

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