Heightened concern over the environment vied with renewed market optimism to take center stage at this year's Offshore Technology Conference in Houston last week.
Convincing the public that the petroleum industry wants to and can protect the offshore environment will require major commitments of funds and willpower.
That was the message of representatives from industry, government, and the environmental community speaking at the first of two OTC keynote sessions.
Optimism about increased activity and sales at OTC appeared to be at its highest level in several years.
Minerals Management Service offered a slightly rosier outlook of the Bush administration's offshore leasing strategy than has been seen in recent months.
Other speakers noted recent efforts by the Organization of Petroleum Exporting Countries to stabilize oil prices, as well as opportunities for international oil companies in expanding OPEC productive capacity.
Another panel spoke to the need for more government incentives to stimulate offshore oil and gas work.
Meantime, officials of U.S. service and supply companies blasted the U.K. and Norwegian governments for what they claimed were protectionist policies on offshore petroleum work. Petroleum ministers of the U.K. and Norway denied the allegations.
ENVIRONMENTAL CHALLENGE
Panelists at the keynote session focused on industry's need to improve its performance on offshore environmental issues as well as improving the public's perception of that performance.
Serving on the panel were U.S. Coast Guard Commandant Adm. Paul A. Yost Jr., Netherlands Inspector General of Mines of the Ministry of Economic Affairs G. Ockeloen, Center for Marine Conservation Pres. Roger McManus, and Chevron Corp. Vice-Chairman James N. Sullivan.
Yost praised industry's efforts in the Exxon Valdez oil spill cleanup, but said that major capital investment will be required to upgrade the U.S. spill contingency and response capabilities.
Yost said the only valid comparison for the massive mobilization is the Allies' World War 11 Normandy invasion.
"I've got to take my hat off to the industry, particularly Exxon, for being able to muster that kind of mobilization in an area far from any support, far from any labor pool, far from anything."
Coast Guard actions in response to the spill included an immediate review of spill contingency plans at major U.S. ports and a major study of vessel traffic systems (VTS), each costing about $20 million, for 23 ports, Yost noted.
Further, the Coast Guard redesigned plans, soon to go out for bid, for a new buoy tender vessel to include skimming and tankage capabilities.
Yost also urged passage of an international oil spill contingency accord that would increase oil spill liability limits and make available $250 million in non-government funds for use in the event of another massive spill.
ENVIRONMENTAL AUDITS
Ockeloen urged companies to adopt the same procedures for environmental audits of their operations as they do for safety and sound business practices.
Companies should set up a management structure for environmental care, he said. That would entail a system of internal controls consisting of an environmental policy statement, an inventory of environmental problems, a program with specific plans and targets, measurements and registration of successes, periodic reporting to authorities, and regular evaluation of the effectiveness of the system with an audit.
An environmental audit of operations should take place every 2-3 years, Ockeloen said. Companies should invite government inspectors and local authorities as well as representatives of the public and environmental activists into the auditing process, he contends.
Ockeloen maintains that existing patterns of management must change.
"Industry tends to be defensive, secretive, and insistent on legalistic approaches. Governments are opportunistic-reacting to activist pressures-inconsistent, imprecise, and slow." The public, therefore, receives mixed signals and the environment is the loser, he said.
INDUSTRY COMPROMISE NEEDED
McManus cited recent marine sanctuary rulings by Department of Interior as examples of why industry is perceived as disregarding congressional mandates for environmental protection.
McManus blasted what he claims were industry's behind the scene efforts to prevent designation of Monterey Bay, Calif., as a marine sanctuary after the U.S. Congress last year had specifically determined it be protected as a sanctuary.
The message that action sent to the environmental community was that the oil industry can't be trusted to accept even the most obvious sanctuary areas as off limits to drilling, he said.
McManus urged industry to adopt an attitude of compromise rather than confrontation and suggested changing offshore leasing procedures to make it easier on companies to give up producing in environmentally sensitive areas.
"Industry has got to give" in some areas of discussion, he warned. Otherwise, the environmental movement eventually will oppose every move industry makes, he said.
McManus also urged industry to publicly encourage energy conservation and acknowledge that the greatest national threat to the U.S. is a dwindling energy supply and lack of development of alternatives.
McManus also believes that environmental impact statements that accompany the leasing process are not credible because sales are made before much is known about the areas up for lease. Companies therefore are put in a financial bind if an area is later deemed too sensitive to be developed.
"Why not allow a company a tax credit if it explores a region but cannot proceed with development because of environmental concerns?"
McManus also urged an offshore U.S. exclusive economic zone managed for multiple use by one governmental agency much as public land is currently managed.
CHEVRON'S APPROACH
Sullivan advised companies to incorporate environmental issues into all business decisions, noting that the "only way to enhance our credibility is through superior performance."
He cited Chevron's efforts to improve environmental protection in its operations following the Exxon Valdez spill.
After an extensive review of operations, Chevron focused on these areas for special emphasis:
- Corrosion and erosion. Chevron strengthened existing control programs and conducted a survey of pipelines, risers, and offshore storage tanks to determine high risk areas.
- Mechanical failure. Chevron is reinforcing programs of preventive maintenance and quality control of new equipment.
- Human error. Chevron is undertaking a study of ways to reduce human error. That includes training on how diet affects alertness, how shift work affects sleep patterns, the benefits of stress management, and the importance of additional emergency drills.
- Communications problems. Because communications problems were cited as a major factor in the July 1988 Piper Alpha platform disaster, Chevron is looking at ways to improve communications among operations personnel.
Sullivan also acknowledged a need to upgrade and replace an aging shipping fleet. While double hulled vessels are no panacea for making ships safer for transporting oil, Chevron has for many years had double hulled vessels, he said.
But such vessels have potential problems with possible leakage of hydrocarbon vapors into the interhull space or an outer hull rupture causing ballast problems in an accident, Sullivan noted.
He encouraged Congress to await a National Academy of Sciences study before mandating any tanker design changes.
Sullivan also recommended mandatory industry participation in Coast Guard VTS systems.
Further, the industry should favor U.S. ratification of the International Convention on Standards of Training and Certification of Watchkeepers and support uniform federal regulation of all pilots who operate vessels in U.S. waters, he said.
Because of intense public scrutiny and distrust of the offshore petroleum industry, Sullivan thinks industry should wait 1-2 years before aggressively pursuing leasing activities in the more highly controversial offshore regions.
Sullivan supports the Bush administration's plans to lease the most promising areas but reserve the most environmentally sensitive areas off the California coast. He did not specify those areas.
MARKET LOOKING UP
Paul Kelly, vice-president of Rowan Companies Inc., said that Rowan is "more optimistic about offshore industry opportunities than we have been in about 8 years."
He cited OPEC's ability to generally stabilize prices at a level that encourages investment.
Another factor expected to buoy oil prices in the short term may not be as significant as expected.
Shutdowns in the U.K. North Sea this summer, primarily for safety maintenance work, still will allow total U.K. production in 1990 to be slightly higher than in 1989, said Peter Morrison, U.K. Minister of Energy.
Morrison estimated capital investment in the U.K. North Sea would be about $6.2 billion in 1990 vs. $4.3 billion last year.
He has approved seven new projects, 15 are up for approval, and another 25-30 are not yet submitted.
Kelly also cited a recent survey that showed oil company operators have targeted 718 potential new offshore fields outside the U.S. for development during 1990-95.
The 1992-97 U.S. OCS leasing plan, though bad news for U.S. frontier oil and gas development, is good news for revitalizing exploration and development activity in the Gulf of Mexico, Kelly said.
He expects the plan to contain about 18 lease sales, mostly in the Gulf of Mexico, with some sales in the Chukchi and Beaufort seas. Kelly also does not expect lease sales to proceed off California until late in the plan and is skeptical about sales in other frontier areas, notably Florida.
MMS STRATEGIES
Under the 1992-97 OCS leasing plan being formulated, Minerals Management Service will push for access to the Chukchi and Beaufort seas and the mid-Atlantic region, according to MMS Director Barry Williamson.
And though it must be approved by Congress, leasing of Alaska's Arctic National Wildlife Refuge is in the budget for 1993.
Williamson thinks the next session of Congress could move on ANWR, but he expects no activity this session.
Completion of the 5 year plan must await President Bush's announcement of his position on three controversial lease sales off California and Florida.
Williamson said that decision is expected "within weeks." The draft of the MMS plan will be ready 3-4 months later.
Though the 5 year plan will include fewer leases-it's been described as slower, more defined, and more focused-it will offer a "sufficient amount of acreage in tune with energy company planning," Williamson said.
The shift to less frequent sales and away from the areawide leasing concept reflects changes in the industry's demand for leases, Williamson contends.
He said that areawide leasing is neither good nor bad, but that a new approach is needed in today's environment. He also acknowledged that the administration's environmental posture is one reason for proposing a slower leasing schedule.
Despite the fact that the "U.S. offshore oil business is the cleanest energy business in the world," it's difficult to make the proper distinction between tanker spills and domestic offshore drilling, Williamson said.
"We have to deal with perceptions."
Demand for leases will be the key to determining how much acreage is made available, but that demand won't be allowed "to outstrip environmental concerns," he said.
MORE OPEC PRODUCTION
There is little risk of a world oil shortage in the next decade, said Fadhil J. Al-Chalabi, former deputy secretary general of OPEC.
But without cooperation between Persian Gulf producers and international oil companies to boost productive capacity in the region, "a crisis may not be averted," he warned.
Al-Chalabi said that OPEC's current productive capacity of 25-26 million b/d will not be sufficient to meet expected demand growth in the 1990s.
Increasing capacity will require technology and capital, and much of both will have to come from outside the gulf countries, said Al-Chalabi, currently executive director of the Centre for Global Energy Studies, London.
Whether crude prices are low or high, the world will have to rely on gulf producers to meet incremental demand growth in the 1990s, he said.
Al-Chalabi said that countries needing technology and capital from international companies must determine the basis under which the companies will be asked to work. Price, as well as access to crude, will be a key element of these new agreements.
Because of the lead time involved in putting expansions on stream, time may be running short to avoid a productive capacity crunch.
Not all projects will be delayed without this cooperation, Al-Chalabi said. Kuwait, Saudi Arabia, and the United Arab Emirates may not need outside help to increase capacity.
Iraq, Iran, and Saudi Arabia have announced expansion plans totaling more than 5 million b/d of capacity.
OPEC productive capacity averaged 31 million b/d in 1979 and has fallen to 26 million b/d today. Meanwhile, the call on OPEC oil has increased by 50% in the past 5 years, and most countries are producing at capacity, Al-Chalabi said.
If demand continues to grow while productive capacity eroded, a shortage would threaten.
"But such an apprehension is unfounded," said Al-Chalabi, in view of Persian Gulf producers adding 285 billion bbl of reserves in the past 5 years and world oil reserves currently totaling about 1 trillion bbl, enough for 48 years of production.
"Talk of an oil shortage is unjustified pessimism," he said.
OPEC PRICE DILEMMA
Still, OPEC faces a dilemma over the direction of oil prices amid conflicting member needs, Al-Chalabi contends.
OPEC members with large reserves are more interested in carving out additional market share now in order to increase revenue from higher volumes in the future, he said. And those with significant marketing outlets can withstand a wider swing in prices and thus are less interested in higher near term crude prices.
Most members, though, have limited reserves or currently large revenue needs and want price increases.
Al-Chalabi offers one possible solution: increasing prices at about the inflation rate so as not to trigger a reversal of demand growth and non-OPEC capacity declines. But to control prices, OPEC must have sufficient productive capacity. And the cost of adding that capacity will be "horrendous," Al-Chalabi said.
OFFSHORE INCENTIVES
Offshore operators must contend with sharply rising costs as they venture into deeper, more remote waters, employ new technologies, and contend with tighter environmental and safety rules, said Orville Gaither, president of Amoco Production Co.'s Africa-Middle East region.
Those are reasons why governments should adjust contract terms to allow industry to obtain a reasonable rate of return, he said.
Possible incentives include extended producing terms, excess cost sharing, elimination of price caps, limited government participation, reasonable profit splits, reasonable tax rates, and avoidance of regressive taxes.
Even with higher costs and lower oil prices, industry has maintained a strong offshore effort in recent years because many major and independent oil companies still consider offshore exploration economics attractive outside North America, said H. Le Leuch, head of the economics department of Beicip, a subsidiary of the French Petroleum Institute.
Contributing to the better economic climate for offshore E&D are generally eased contractual and fiscal terms in addition to savings from lower drilling costs, improved offshore development plans, and research and development aimed at cost-cutting. In some North Sea projects, costs have been trimmed by about 25-30%.
Le Leuch cited these examples of improved terms:
- For new projects, reduced royalty rates through introduction of a progressive, sliding scale royalty rate as in Thailand or full exemption from royalty as in the U.K., Norway, Ireland, Denmark, Spain, and Australia.
- Accelerated depreciation and in a few cases possibilities of uplift or investment credit with respect to some spending categories.
- A larger tax consolidation ring fence that can extend to the whole territory of a country and not be restricted to exploration expenditures. Included would be such provisions as the right in Norway to deduct capital allowances of a new field against current income from producing fields.
- Reduction in general income tax rates that now are 34% in the U.S., 35% in the U.K., and 39% in Australia.
- Priority for higher cost recovery ceilings to prevent delays in cost recovery because of low oil prices. Malaysia has increased the cost recovery cap to 50% for oil and 60% for gas from 30 and 35% respectively.
- Bonuses have been cut or eliminated in Malaysia and India or are payable in installments during exploration as in China and Egypt.
- Changes in the trigger for profit based agreements. In India, Libya, Peru, and Tunisia the trigger is now a ratio that is a multiple of the cumulative net cash flow and cumulative capital expenditure achieved at the end of each year of a project.
The U.K.'s Morrison attributed his country's offshore success to the open market concept and the government's stable and sensitive fiscal and political framework.
Morrison said that bidding likely will be very competitive in the recently announced 12th round of licensing of 120 blocks. He also is optimistic about the new, two phase licenses for 11 deepwater blocks, north and west of Scotland.
A first license phase covers seismic work, the second, drilling.
PROTECTIONISM CHARGED
Service and supply companies' charges of unfair trade practices come on the heels of plans announced last month by U.S. Department of Energy Deputy Energy Sec. Henson Moore to promote exports of U.S. oil field equipment and services (OGJ, Apr. 23, p. 32).
Gary D. Nicholson, president and chief executive officer of LTV Energy Products Co. and president of the Petroleum Equipment Suppliers Association, noted that about 50% of PESA members' sales are in international markets now vs. one third during the early 1980s.
He cites as an important problem affecting every U.S. manufacturer the European Community directive permitting EC companies and governments to reject a bid if more than half the purchase price consists of products manufactured or services provided outside the EC. The directive also mandates a 3% price preference for all EC bids competing with non-EC bids.
Thomas Bowersox, Zapata Offshore Co. chairman, pointed to the U.K. requirement that oil companies desiring favorable treatment in obtaining acreage would have to ensure that 87% of the content of goods and service in their projects was of British origin.
He also claimed Norwegian rules and regulations were protectionist.
The U.K.'s Morrison said he wants to achieve a level playing field where the best technology will pass into the U.K. in a way that will enhance the U.K. oil & gas industry.
British exhibitors at OTC told him they were now able "to beat the world" in offshore technology.
Morrison said he doesn't believe there is anything to the protectionism issue and that he has told the Bush administration if it can provide evidence of it, he will investigate.
In addition, Morrison said he had asked a group of U.S. service and supply firms at a private luncheon in Houston last week whether they had encountered protectionism in any form in British waters.
" I was deafened by the silence," he said.
Eivind Reiten, Norwegian Minister of Petroleum and Energy said only 50-60% of Norwegian offshore expenditures have been going to Norwegian companies. U.S. companies " are quite free to compete as any other participant," he said.
LACK OF U.S. INCENTIVES
Rowan's Kelly contends the U.S. is the only coastal country with hydrocarbon resources not trying to create incentives for offshore exploration and development.
The U.S. Congress has in fact shut off most frontier development, he said.
As a result, the deemphasis on domestic production opens opportunities in the U.S. for oil exporting countries, Kelly said.
"I believe many of these exporters are already factoring growth of the U.S. market into their expansion plans and their capital requirements," he said
"One saving grace in all of this is that when exporters come to the U.S. to propose new projects involving the importation of new oil or gas supplies into the U.S., the Bush administration will likely demand, as a quid pro quo, a level playing field on which American contractors can compete for work in the exporting countries' oil and gas fields."
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
