Any disaster with loss of life and grave environmental damage is upsetting, but the Macondo blowout in the Gulf of Mexico has generated unprecedented rage and vindictiveness among both the public and elected officials toward not only the involved companies but the deepwater oil and gas industry as a whole.
US presidents often have had conflicts with various industry leaders, sometimes during wars, but none in living memory ever called for a specific business executive to be fired or threatened to "kick ass" as did President Barack Obama in connection with the blowout. And while most respondents to polls say they're against a ban on deepwater drilling, internet blogs and chat rooms are filled with harsh words and bad wishes for BP PLC in particular and the oil industry in general.
"There have been far worse oil spills, but the political outrage is such that it is clear there will be a slowing of what was the most rapidly moving and aggressive marginal oil exploration and production area in the world," said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC. The implications of the Macondo blowout in the deepwater gulf "are major," he said.
Deepwater oil production is dominated by just four regions: the US Gulf of Mexico, and offshore Brazil, Angola, and Nigeria, which collectively account for more than 90% of the world's current deepwater output. "While emergence of new deepwater territories is expected to see new sources of production emerge, not least from West Africa (but also such diverse places as Newfoundland and Malaysia), their impact on the overall deepwater market is likely to remain relatively modest, with the major four regions accounting for a still substantial 86% of estimated 2015 deepwater production," Sieminski said. "Clearly, for the governments of these four, the deep water has proven, and is likely to remain, a very important source of tax revenues. This fact is expected to temper the severity of new regulations that nevertheless could, in our view, add $5-10/bbl to the long-run equilibrium price of oil."
Jack Gerard, president and chief executive officer of the American Petroleum Institute, said of the Gulf of Mexico's energy resources, "Eighty percent of the oil and 45% of the natural gas come from deepwater areas. The 20 most prolific producing blocks in the gulf are located in deep water. Deep water is indispensable to a strong and secure energy future."
However, Barry Russell, president and chief executive officer of the Independent Petroleum Association of America, said, "Washington policymakers—with support from the White House—remain committed to blocking and impeding the responsible development of American oil and natural gas: higher taxes; burdensome, duplicative, and unnecessary regulations that will not add any environmental benefits; misguided actions that punish America's independent producers."
Other offshore disasters have brought increased regulation and changes in safety and environmental programs. But with Macondo, Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, "The analogy I would point to would be Three Mile Island, which had far reaching consequences on the nuclear industry. I believe, at the minimum, we are looking at Piper Alpha-type of consequences."
The Mar. 28, 1979, accident at the Three Mile Island nuclear power plant near Middletown, Pa., was the most serious in US commercial nuclear power industry. Although there were no deaths or injuries, it sparked sweeping changes in emergency response planning and caused the US Nuclear Regulatory Commission (NRC) to tighten its regulatory oversight. NRC officials said the changes enhanced safety. But there was also a jump in public fear and distrust that virtually crippled nuclear development in the US.
A comparison with four other major offshore accidents—Exxon Valdez, Ocean Ranger, Ocean Odyssey, and Piper Alpha—illustrates the difference in how those incidents were handled without personal confrontations involving national leaders.
Exxon Valdez
The Exxon Valdez supertanker struck Bligh Reef on Mar. 24, 1989, spilling 260,000-750,000 bbl of crude into Prince William Sound, Alas. It was the largest oil spill in US waters before Macondo. The area's pristine beauty made the spill even more regrettable, while its inaccessibility and sparse population made response and clean-up efforts difficult. There was harsh public and political criticism of Exxon at the time, but nothing like BP has faced.
Following that disaster, Congress passed the Oil Pollution Act of 1990 (OPA) that among other things scheduled a gradual phase-in of a double hull design for tankers. Although a double hull wouldn't have prevented the Valdez disaster, the US Coast Guard estimated it would have reduced the spill by 60%. While other companies waited for Congress to spell out its double-hull requirements, Constantine "Dino" Nicandros, president and chief executive officer of Conoco Inc., boldly announced his company unilaterally would build double-hulled tankers. "We can be both profitable and socially responsible," Nicandros said. "We can walk and chew gum at the same time."
OPA created the national Oil Spill Liability Trust Fund to provide as much as $1 billion/spill incident. The National Oil and Hazardous Substances Pollution Contingency Plan (NCP) was expanded into a three-tiered approach with the federal government required to direct all public and private response efforts for certain types of spills.
OPA increased penalties for regulatory noncompliance, broadened the response and enforcement authorities of the federal government, and preserved state authority to establish law governing oil spill prevention and response.
The US Environmental Protection Agency is the lead federal response agency for oil spills in inland waters, and USCG is the lead response agency for spills in coastal waters and deepwater ports.
Ocean Ranger
Ocean Ranger was a semisubmersible rig that sank in a storm off Newfoundland where it was drilling an exploratory well in the Grand Banks area on Feb. 15, 1982. All 84 workers aboard perished.
One of the largest semisubmersibles working in the early 1980s, Ocean Ranger was designed by Ocean Drilling & Exploration Co. Inc. (Odeco) and constructed in 1976 by Mitsubishi Heavy Industries. It was designed to withstand extremely harsh conditions, including 100-knot winds and 110-ft waves.
On Feb. 14, the Ocean Ranger and two other nearby rigs were notified of an approaching storm. In later radio transmissions, the Ocean Ranger reported breakage of a unique porthole window in one of the rig's columns 28 ft above mean sea level at a time when it was experiencing 100-knot winds and 65-ft waves. Later radio messages said the rig's ballast control panel appeared to be opening and closing of its own accord. Then moments before 1 a.m. on Feb. 15, the Ocean Ranger broadcast a Mayday call reporting a severe list to port and requesting immediate assistance. At 1:30 a.m., it transmitted its last message: "We are going to lifeboat stations." As the crew attempted to escape, some were washed overboard and others were thrown into the water when their lifeboats broke apart. Workers aboard support vessels were untrained and unequipped to rescue men from the icy water. Without survival suits, they all died before the Ocean Ranger sank some 90 min later.
In its subsequent investigation, the Canadian Royal Commission found the crew was not properly trained, the safety equipment was inadequate, there were no safety protocols for the supply ship, and that the rig itself had a number of design flaws. In addition to key recommendations for Canada's offshore operations, the commission suggested annual investment by the federal government into research and development for search and rescue technologies. That commitment has been met in every fiscal year since 1982.
The Ocean Ranger disaster led to several improvements in offshore safety, including a new method for launching lifeboats, special training for ballast control operators, and the requirement for survival suits in areas of frigid waters.
Ocean Odyssey
Built for Odeco in 1983 by Sumitomo Heavy Industries, the Ocean Odyssey was one of the most advanced semis of its day, designed to work on high-pressure wells in harsh environments off Alaska and in the North Sea. Its derrick was enclosed as was its heated rig floor for work in cold areas; it had a reinforced column construction and caged riser.
On Sept. 21, 1988, it had drilled exploratory well 22/30b-3 to 16,160 ft in Shearwater field on Block 22 on the UK Continental Shelf, but drilling was curtailed due to a loss of circulation. About dawn on Sept. 22 with limited mud supplies remaining, the representative of the rig's customer, ARCO Oil & Gas Co., decided against the advice of others on board to pull out of the hole in an effort to regain circulation. Some 70 bbl were gained as the bit tripped out to 13,200 ft. At that point, the ARCO representative decided to stop and circulate. With additional gains, workers tried to control the well via the choke.
Shortly afterward, there was a rapid rise in casing pressure with substantial mud returns, and an influx of gas into the well, causing it to flow. Most of the crew were ordered to lifeboat stations as a precaution.
Then there was an explosion, and the four remaining workers on the rig floor headed for the lifeboats. The well was not completely shut in by the lower rams, and within a few minutes a catastrophic choke hose failure released large quantities of gas that fueled fires both on the rig and the sea surface beneath it.
At some point between mustering at the lifeboats and the first explosion, the off-duty radio operator was ordered by the offshore installation manager (OIM) to return to the radio room to continue communications. He subsequently died from the effects of smoke and fire in the pilot house while trying to evacuate the rig.
The other 67 workers on board escaped, including 8 who jumped into the sea. It was the most serious blowout in the central North Sea in recent decades.
An inquiry by the Aberdeen's sheriff court was critical of both the OIM and ARCO's handling of the incident. It concluded the ARCO representative had not followed safe and correct drilling practices, including failure to shut in the well when it began flowing uncontrollably. For several years after the Odyssey accident, the UK effectively banned drilling in areas with anticipated reservoir pressures in excess of 10,000 psi.
Piper Alpha
The deadly explosion on the Piper Alpha platform in the North Sea on July 6, 1988, was the worst disaster ever with respect to loss of life in the offshore industry. It began with routine maintenance of a pressure safety valve on a backup propane condensate pump in the processing area. Unable to complete the work during their shift, the workers sealed the tube with a plate until they could resume work the next day.
That evening with a different group of workers on duty, the primary condensate pump failed and the new crew started the backup pump, unaware a vital part of the machine was removed. Gas blew through the hole left by the valve at high pressure and exploded, blowing through the firewalls. The fire then spread through damaged firewalls and soon large quantities of stored oil were burning out of control. The automatic deluge system to contain or extinguish a fire was never activated because it had been turned off.
As previously instructed, most of the crew fled to the accommodation module to await instructions for evacuation, which never came. The accommodations were not smoke-proof, and conditions became so desperate that some decided to leap into the sea. That went against all safety procedures they were previously told, but it brought 62 men to safety, while 81 men died of smoke inhalation in the crew quarters. The only survivors were those who disobeyed previous safety instructions.
The government named a committee headed by Lord Cullen, the Lord Justice-General of Scotland, to investigate the tragedy. Its report in July 1988 resulted in the Offshore Installations (Safety Case) Regulations requiring every offshore company in the UK sector of the North Sea to develop and document effective safety management systems for each of its offshore installations. A permit-to-work system was established, creating a "paper trail" for any maintenance procedure to promote communication between shifts. The Cullen report concluded the firewalls in the crew areas on Piper Alpha could have stopped the spread of a fire but were not built to withstand an explosion. Investigators said workers were not adequately trained in emergency procedures, and management was not able to provide good leadership in a crisis.
Committee members called for a temporary safe refuge for workers on each installation to protect against fire and smoke and with multiple escape routes to helicopters and lifeboats. The Cullen report led British operators to complete $7.5 billion in upgrades to offshore installations to improve safety (OGJ, Dec. 4, 1995, p. 42).
Oil & Gas UK
When the European Union energy commissioner recently called for a moratorium on new drilling in European waters, Malcolm Webb, chief executive of Oil & Gas UK, termed it "a wholly unjustifiable, knee-jerk reaction to events in the Gulf of Mexico." He said, "In the UK, our regime for safety is clearly more advanced than that applying in the US. It is controlled by highly technically competent and professional regulators. The idea that the EU Commission should be seeking to control the affairs of the UK Offshore Safety Division quite frankly concerns me. Furthermore, given that the cause of the incident in the US is still unclear, the rush to judgment and the suggestion of a moratorium on drilling in UK waters is, in my view, wholly unwarranted." OGUK is the leading representative body for the UK offshore oil and gas industry.
In the UK, the Health and Safety Executive (HSE) uses a goal-setting approach to safety, requiring companies to manage all risks but allowing them the flexibility to choose the best methods or equipment available. OGUK guidelines aid this process by promoting best practices across the industry.
This differs from the prescriptive style favored by US legislators and regulators in which they dictate a fixed check list of things that must be done to meet a statutory requirement.
Goal-setting "enables a more responsive approach because it allows companies to implement the latest technology as it becomes available rather than waiting for regulations to be updated," OGUK officials said. "There are no specific requirements for a certain type of blowout preventer to be used. Instead, UK operators are required to work towards the objective of preventing escape of well fluids from the 'pressure envelope' using the technology they believe is most effective. This constitutes a risk-based approach to regulation."
Whether there will be any changes in UK regulations "depends on the findings of the investigations into the Macondo blowout. It will be for HSE to consider whether any changes to the safety regime in the UK are required," OGUK said. The group has formed an advisory committee to coordinate work on oil spill prevention and response practice in UK waters.
In a June 4 opinion piece in the Wall Street Journal, BP Chief Executive Tony Hayward noted the oil industry learns from its mistakes and outlined three lessons so far from the Macondo blowout.
"First, we need better safety technology. We in the industry have long had great confidence in the blowout preventer as the ultimate failsafe piece of safety equipment. Yet on this occasion it failed, with disastrous consequences," Hayward said.
Second, he said, "We need to be better prepared for a subsea disaster. It is clear that our industry should be better prepared to address deep sea accidents of this type and magnitude."
The third step would be for the industry to reevaluate business practices. "For decades, exploration and production companies have relied on outsourcing work to specialized contractors. There's much that makes sense about this kind of structure, and lots of talented people and well-run companies are a part of it. But the question after the Deepwater Horizon accident is how all involved parties—including exploration and production companies and drilling contractors—can work even more closely together to better understand and significantly reduce the various risks associated with drilling operations," Hayward said.
Analysts at FBR Capital Markets & Co., Arlington, Va., report one "power shift" has occurred since the Macondo blowout. "We have learned that the service companies have become far more assertive in their relationships with their customers, particularly offshore. We have heard of several instances where an operator attempted to change a large service company's cementing recommendations for deepwater wells. Past practice would have been to come to a consensus procedure, but now we are hearing of service company insistence on following their optimized designs, even to the point of informing the operator that deviation from these procedures will shift any and all liability to the operator. This change in the relationship should lead to higher pricing and margins for the service companies over time," they said.
"The Macondo spill will almost certainly bring a host of technologies and procedures into more common use," said Pritchard Capital analysts. "We think liner drilling could gain traction. The use of liner provides an additional barrier (seals) compared to casing." They said, "The main benefit of drilling with liner is a reduction in nonproductive time."
Brian Uhlmer, director of research and senior services analyst at Pritchard Capital, thinks the "minimum" safely requirements the US government may impose on offshore drilling will require BOPs to have two shear rams, placed at least 4 ft apart. He expects the government will require "an acoustic control valve to shut the BOP or else a remotely operated underwater vehicle always hooked to the BOP to close manually." BOP stab testing with ROVs likely will be completed weekly, he said.
He also expects a requirement that "a government inspector must be on the rig for operations, potentially fulltime, definitely for inspecting critical points, such as cement logs, which will be mandatory from now on."
The successor of the US Minerals Management Service—the US Bureau of Ocean Energy Management, Regulation, and Enforcement (BOE)—likely will no longer approve well design changes via e-mail. Instead, operators likely "must follow a formal review process similar to initial permit, adding days to drilling time if changes are made," Uhlmer said.
Improvement or punishment
However, many observers and participants in deepwater exploration and production see signs that the administration and Congress are more interested in punishing the industry than in improving it. Executives of EOG Resources Inc. early on expressed fear the backlash from the Macondo spill could provide the impetus for the Obama administration to enact more stringent regulation of the energy industry. For instance, they said, pressure pumping is more likely to be subsumed under the regulation of the EPA rather than remain under state supervision, resulting in inefficiencies and delays.
The administration also has talked of rolling back tax breaks for oil and gas companies related to deductibility of intangible drilling costs, which have been in place nearly 90 years, raising the cost of drilling by roughly one-third. "Both moves would likely curtail natural gas development, especially from higher cost conventional sources, and supplies, while leading to higher prices over the next 1-2 years," said EOG officials. "The deepwater drilling moratorium and heightened attention to shallow water permitting will negatively impact supply in the near term."
Representatives of the Free Enterprise Project under the National Center for Public Policy Research, a nonprofit, free-market think-tank, said, "The disaster…will only exacerbate problems for the oil and chemical companies. Obama's war on fossil fuels will likely chase more companies overseas, leading to slower economic growth and higher unemployment."
Even the Energy Information Administration reported US oil production next year is expected to be cut by 82,000 b/d or almost 30 million bbl total, due to delayed or canceled drilling caused by the moratorium. Monthly production losses could reach nearly 100,000 b/d by December 2011, EIA said.
Some industry representatives claim the real goal of House Energy and Commerce Committee Chairman Henry A. Waxman (D-Calif.) and Energy and Environment Subcommittee Chairman Edward J. Markey (D-Mass.) "is to shut down oil and gas production," adding, "They don't think it can be safe (OGJ Online, July 6, 2010)."
The House Natural Resources Committee under Chairman Nick Rahall (D-W.Va.) approved legislation for sweeping changes in leasing federal lands and waters for energy production after legislators added in markup provisions to punish energy companies with poor safety records.
Michael R. Bromwich, Director of BOE, announced July 19 he will lead a series of public meetings to collect information and views about deepwater drilling safety reforms, blowout containment, and oil spill response. In that announcement, he said, "It's important that we hear from those who have been directly affected by the BP oil spill, as well as from other stakeholders, including the conservation community and the oil and gas industry itself."
But in virtually the next breath, Bromwich said, "We need to know that industry got the message, and that they are quickly taking steps to ensure deepwater drilling operations are safe. They also have to demonstrate to us that they can contain a catastrophic blowout similar to BP oil spill as well as respond appropriately in the event of another oil spill."
Meanwhile, the House Natural Resources Committee voted to ban BP from receiving new offshore leases or drilling permits, indicating the company's political isolation because of the catastrophic spill. Rep. George Miller's (D-Calif.) amendment to a wider bill to toughen offshore drilling oversight does not mention BP by name but plainly targets the firm in denying leases to oil companies that have had accidents in the last 7 years—stemming from violations of health and safety laws—that killed 10 or more people.
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