Study estimates costs of congested offshore permitting process

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 22 -- Swift action to reduce the growing deepwater exploration plan backlog in the Gulf of Mexico and the approval pace for those plans and associated drilling permits would increase employment in almost every US state; boost tax and royalty revenue for federal, state, and local governments; and improve US energy security, a new study by IHS-CERA and IHS Global Insight concluded.

“These benefits could materialize rapidly,” the study said. “Early alignment between the capacity to properly regulate oil and gas activities, and the pace and scale of investment opportunities would capture the largest possible share of the activity gap.”

Closing this gap between what the study’s authors said was a current slow-recovery scenario, and one in which offshore permits were approved at a rate matching the US oil and gas industry’s production and investment potential would produce 230,000 more jobs, more than $44 billion of gross domestic product, nearly $12 billion in taxes and royalties to federal and state governments, and an additional 400,000 boe/d of production by 2012.

It also would reduce the US crude oil import bill next year by about $15 billion, it added. Since the deepwater drilling moratorium—imposed by US Interior Sec. Ken Salazar following the Macondo well accident and subsequent oil spill—expired in October, the dramatically slower approval process caused by new regulations and procedures has cost the US about 1 billion bbl/year of new supplies, the study said.

“It’s a new regulatory environment,” said James Burkhard, managing director of IHS-CERA’s global oil group, in a July 21 teleconference. “Our job was to identify the congestion points to help inform the debate about bringing the regulatory capacity in line with the industry’s capacity to invest. There’s a mismatch between the two. Right now, the regulatory capacity is a constraint.”

Basis of comparison
The study, “Restarting the Engine: Securing American Jobs, Investment, and Energy Security,” was commissioned by the Gulf Economic Survival Team, an independent nonprofit group that serves as a liaison between the oil and gas industry and federal, state, and local in an effort to resolve federal permitting issues that are delaying a return to previous drilling and production levels in the gulf. IHS said it compared current activity with what could be achieved with appropriate resources consistent with the industry’s capacity to operate safely and in an environmentally responsible manner in the gulf based on its historic behavior.

“It’s quite clear that after last year’s accident and spill, there’s no going back to the old regulatory regime,” said IHS-CERA Chairman Daniel Yergin. “We didn’t try to say what the reason was, but where the congestion was. There obviously are different viewpoints on what’s causing it and what needs to be done.”

The study examined plan and permit activity levels in the 6 months since the lifting of the moratorium in the gulf in October 2010. It found an 86% decline in the pace of regulatory approvals for plans, a 38% increase in the time to secure each regulatory approval, a 250% increase in the backlog of deepwater plans pending approval (from an average of 18/year to a current pace of 67/year), and a 60% decline in drilling permits issued (combined shallow water and deepwater).

“There’s a new regulatory environment, institutional change, and new safety and environmental requirements,” said Burkhard. “That regulatory capacity could be aligned in a more beneficial way. It will take time and effort, and closer collaboration between government and industry.”

Strong commitment
The study said the significant increase in the number of plans pending and the slower pace of plan and permit approvals demonstrates that the oil and gas industry’s commitment and desire to continue investing in the gulf remains strong, and that it is trying to proactive work through and adapt to new safety requirements and the new regulatory environment. It also shows that the revised regulatory process is not yet working smoothly as the US Bureau of Ocean Energy Management, Regulation, and Enforcement struggles with a growing backlog and implementation of new processes, the study indicated.

“Our analysis demonstrates that the slower pace of plan and permit approvals (regardless of the cause) is resulting in lower activity levels than the operational capacity of the industry,” it said. “Successfully restoring the activity levels in a safe and environmentally responsible fashion will have significant benefits for America’s energy independence and continued economic recovery.”

Burkhard said, “This is a new regulatory environment, with more responsibilities. That would seem to indicate a need for more capacity to oversee these new regulations. The growing number of plans pending approval reflects the industry’s plan to continue making investment, but there seems to be some frustration in meeting requirements.”

Yergin added, “A lot has been evolving, including the regulatory system and structure. The well containment capability was not in place a year ago. There also has been a tendency to see this as an economic issue focused on the gulf, but it affects all the states. The model doesn’t capture all the impacts, but it does bring very clearly that in a larger economic context, the nationwide impacts are substantial.”

Responding to the study, National Ocean Industries Association Pres. Randall B. Luthi said it complements one commissioned by the American Petroleum Institute and NOIA of the gulf oil and gas industry’s economic impacts. “Both confirm that the jobs and economic benefits generated by gulf offshore industry stretch nationwide,” Luthi said, adding, “Both also confirm how a slow permitting process has diminished these benefits. Clearly, stoking the engine of the gulf offshore oil and gas industry will provide American energy, fuel the American economy, and create American jobs.”

Contact Nick Snow at nicks@pennwell.com.

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