Nick Snow
Washington Editor
Randall B. Luthi became president of the Washington-based National Ocean Industries Association on Mar. 1, 2010. The deepwater Macondo well blowout, which ignited a fire that took 11 lives and destroyed the Deepwater Horizon semisubmersible drilling rig in the Gulf of Mexico, occurred a little more than a month and a half later, on Apr. 20. A recorded 4.9 million bbl of crude flowed into the gulf and reached several US Gulf Coast states’ shorelines before it finally was contained on Sept. 19.
“It was eye-opening not just for the public, but for the oil and gas and other offshore industries because it was deeper and bigger than previous spills,” he recalled on June 28. “The rig’s blowout preventers quit working, and containment quickly became an issue. Most response equipment was geared to oil on the water’s surface. It was a miracle that the oil and gas industry put the necessary equipment together to respond in about 3 months.”
The Obama administration’s attitude toward US offshore oil and gas activity turned 180° from considering opening the Mid-Atlantic Outer Continental Shelf to possible evaluation and leasing to placing a moratorium on all oil and gas activity in the gulf, Luthi said.
—Randall B. Luthi
“We then entered an era where inspectors at the newly formed Bureau of Ocean Energy Management, Regulation, and Enforcement actually carried firearms out to rigs,” he told OGJ. “But the industry reunited. It focused on how a spill needed to be contained effectively and oil and gas produced safely. We’re still working on that.”
A Wyoming native who was director of what then was the US Minerals Management Service from July 2007 through January 2009, Luthi reflected recently on that turbulent 4½-month period in 2010 and what has happened since before he completed his more than 9-year tenure at NOIA at the end of June and returned to Wyoming to be chief energy advisor to Gov. Mark Gordon (R).
Industry’s quick reaction
“When an accident takes 11 lives, a government regulator can tend to impose draconian rules. But the industry quickly formed the Center for Offshore Safety, which grew largely from efforts by then-American Petroleum Institute Pres. Jack N. Gerard and me after the House Natural Resources Committee asked us what would happen next,” Luthi said. “That led to API and NOIA’s working together to come up with an effective answer.”
Two 5-year OCS oil and gas leasing plans have come and gone in the time since with no more access to acreage, Luthi said. In fact, the percentage that is off-limits has increased to 94% from 85%, he said. “The Trump administration has proposed an expansive draft plan, but we’re not going to see that this year,” he told OGJ. “Meanwhile, every Democratic presidential candidate seems to be promising that no new leases will be issued. It fits overall US politics, even though the country has become the world’s largest crude oil producer.”
Even with the Deepwater Horizon’s destruction and subsequent crude oil leak, the US still has a great offshore oil and gas development record, Luthi maintained. “The way forward may be finding ways to reduce emissions further. But we can’t even have a conversation. There are two different camps which don’t want to talk about it,” Luthi said. “We need to recognize that a national energy policy must include old fuels, new fuels, and technologies to begin to reduce emissions.”
Ending further federal offshore leasing would only increase imports for the foreseeable future because renewable energy would not be able to take up the slack, he warned. “California already imports 52% of the oil it consumes, mostly from the Middle East,” Luthi said.
Offshore industries transformed
The nation’s offshore industries have transformed in the meantime as member companies have merged, gone bankrupt, or simply gone out of business, Luthi noted. “Most operators now are not solely offshore, so they’re dividing their capital between onshore operations, which get most of the money, and offshore,” he said. “The ones which are pursuing offshore resources are working in known and developed fields. I don’t think there’s been a brand new discovery in a US frontier offshore area in 5 years.”
When he arrived at NOIA, offshore activity produced 30% of the nation’s crude and 15% of its gas, he told OGJ. Now, the offshore shares of total US production are 15% for crude and 7% for gas. “Those still are significant amounts that have helped the US become the world’s leading oil and gas producers. But if the country wants to continue making offshore more relevant, it will need to make some policy changes,” Luthi said.
Prices that have fluctuated from $147/bbl to $40/bbl before settling in a $60/bbl range clearly have had an impact, he observed. “Offshore companies say that they can make more money on sidetracks and developing existing fields more thoroughly,” he said.
“Most offshore fields, once they’re discovered, are big. They can produce for more than 40 years. But the price needs to be more than $60/bbl, or the US government will need to institute policies which will encourage companies to enter these fields. Royalty reform is one possibility,” said Luthi.
The Trump administration took a small step when it reduced the shallow offshore well royalty rate to 19.5%, Luthi said. “But for shallow water, that’s not a complete answer,” he said. “Companies need to go very deep or squeeze more oil from existing fields, which is always expensive. Government needs to make it easier to apply for special case, end-of-life relief. That would help everybody.”
Other possible steps
Another possible approach would be to reduce royalties on production from a new field to help recover some of the operator’s costs, Luthi said. “Maybe more companies should be allowed to do joint bids. And, of course, there needs to be access to new areas,” Luthi said.
More states need to become part of the process, Luthi recommended. “Without that, new access actually is a dream. While the US seems to be doing everything possible to discourage this, countries like Mexico and Guyana are doing everything possible to increase access,” Luthi said. “Most of the remaining offshore companies are multinationals that want to stay in the US, where the sanctity of contracts still matters.”
The other important new development is the growth of offshore wind power, Luthi said. “The technology is the same. Seismic surveys determine where to put the offshore wind plant’s pylons, which have to be anchored on a flat ocean bed which is no different for a production or drilling platform,” Luthi said.
Asked if he questioned then-US Interior Sec. Kenneth L. Salazar’s push to break up MMS after the Macondo well blowout, fire, and subsequent leak, Luthi said he understood why it was necessary to move the agency’s revenue collection responsibilities into a new Office of Natural Resources Revenue.
He’s not so certain that breaking MMS’s responsibilities for leasing and for safety and environmental enforcement into two separate new agencies was such a good idea because it can create confusion about which agency is responsible through an offshore well’s life.
“Generally, I expect offshore oil and gas and other industries to survive. But this is a tough political climate,” Luthi told OGJ. “I do have faith that people are going to see the need for all kinds of energy and things will move forward.”
