OTC: Farquhar says 'political people' don't interfere with permitting

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 6 -- “Political people don’t pay attention to individual permits. They don’t interfere with permitting for political purposes,” Ned Farquhar, deputy assistant secretary for land and minerals management in the US Department of the Interior, told energy professionals May 5 at the Offshore Technology Conference in Houston.

In a panel discussion of risk management on the last day of OTC, he said the General Accounting Office for the first time has included Interior’s oil and gas program in its high risk category among government agencies that may not meet their goals.

Although DOI’s receipts for commercial development of federal land previously has been second only to income tax in raising government revenue, its large revenue flow apparently is now at risk.

Farquhar didn’t address the possibility the cash flow reduction might relate to the department’s slow permitting of offshore drilling in the Gulf of Mexico, but he did raise the issue of whether Interior has “the staff, time, and information” for the proper analysis leading to issuing permits for proposed drilling projects on government lands.

Farquhar said “so much of the process” that the Bureau of Ocean Energy Management, Regulation, and Enforcement is “trying to inculcate” into the oil and gas industry is “thinking about safety.” He said, “Risks can be reduced by sensible regulation.”

He also said, “Everyone [in the oil and gas industry] has got to commit to a certain level of safety.”

A new risk environment
Measuring known risks against an uncertain future is difficult, especially in the oil and gas industry with large upfront costs and long-lived projects, said industry experts on that panel.

The risk environment has changed since the Macondo blowout last year, with new regulations “still a work in progress,” said Michael Sigman, managing director of the risk group at Denham Capital Management LP, a private equity firm.

Risks associated with drilling a well and its eventual outcome can be measured. But political risk remains “an uncertainty,” Sigman said.

Most business decisions are made in partial ignorance between assessments of statistical odds vs. uncertainty “where odds cannot be objectively created without useable information,” he said. A bottle manufacturer cannot predict if a certain bottle going through the manufacturing process will break, but he knows generally how much breakage he can expect when manufacturing 10,000 bottles.

Sigman advised, “A new culture of collaboration that brings together a variety of viewpoints and experience is the best answer to uncertainty.”

When investing in oil and gas projects, Denham Capital must have “some control over” the governance, operation, and its eventual exit from the project, Sigman said. Due to the very nature of private equity providers, he said, “We can’t stay in a project forever.”

For well-funded producers, high-risk projects requiring high technology “are the way to go,” Sigman said, because of the potential high return on that investment. But small producers can’t afford to gamble the company on a high-risk project.

Better risk management can give a company a competitive advantage, said Jan Karlsen, senior vice-president of corporate strategy and analysis at Statoil ASA.

If a company manages only individual risks as they arise, the firm will probably over-hedge. But hedge expenses could be reduced if company executives look at total risks, instead of individual risks, Karlsen said. He’s a member of Statoil’s corporate risk committee dedicated to evaluation of overall risks and advises the chief financial officer and the chief executive officer.

Unconventional resources such as shale gas involve entirely different risks than deepwater oil projects, Karlsen pointed out. For one thing, the price risk has changed with the current low correlation between oil and US gas prices.

However, many projects share some major risks. Constrained access to areas for exploration and production is “probably a fact for the future,” he said.

Henry Pettingill, exploration director at Noble Energy Inc., said a company’s corporate strategy must be “omnipresent” and well communicated. He also said good company and individual values are necessary to successful management of E&P risks.

Contact Sam Fletcher at samf@ogjonline.com.

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