April 2018

Offshore in depth

Mixed messages from the Gulf of Mexico.
Ron Bitto / Contributing Editor

The oil and gas industry in Gulf of Mexico still shows signs of life. In 2017 the GOM produced 1.66 MMbpd—17% of the U.S. total—and 2.9 Bcfgd—5% of the country’s natural gas. In January, Shell announced the Whale discovery in Alaminos Canyon, and Chevron announced the Ballymore discovery in Mississippi Canyon, both described as significant deepwater finds. Over the past year operators have made seven other promising discoveries in deepwater blocks.

Lackluster lease sale. However, these discoveries didn’t spark great enthusiasm for the March 2018 region-wide Gulf of Mexico Lease Sale 250, covering 77 million acres, an area 60% larger than the August 2017 sale. Only moderately successful, the sale generated $124.8 million in high bids for 148 tracts. Chevron won 24 leases with $29.4 million in bids, BP bought 27 leases by bidding $20 million, Shell paid $22.9 million for 16 leases, and Total won nine leases for $15.1 million. The total value of winning bids was about even with the $121 million in winning bids generated by the August sale. Drilling activity in the Gulf of Mexico is sparse. Baker Hughes reported 12 active rigs on March 29, down from 22 last year.

In an attempt to encourage shallow-water drilling on the shelf, BOEM reduced the federal royalties on new offshore production to 12.5% from 18.5%. The agency is considering the same discount for new deepwater fields.

Aging platforms. The New York Times published two articles in March about the aging platforms on the GOM’s shelf, which are now primarily operated by independent companies that acquired these assets from larger operators. In some cases, these companies have assembled portfolios that include hundreds of platforms, with a low-cost production strategy that defers some maintenance procedures. Without proper maintenance, these offshore facilities might pose safety risks for offshore workers and possibly environmental issues. Decommissioning is another potential problem that looms over the GOM. Of the approximately 2,400 platforms located of Texas and Louisiana, BSEE has designated 240 as “idle iron” whose wells must be plugged and whose structures must removed. Under the prior administration, the BOEM estimated that it would ultimately cost $40 billion to decommission all of the gulf’s facilities.

The agency also determined that operators had only $2.9 billion of bonds to cover decommissioning costs. In July 2016, BOEM issued new requirements requiring lease owners to demonstrate the financial resources to decommission all of their facilities, so taxpayers would not be burdened with the expense of platform removal. While major oil companies can readily meet these obligations, independents argued that they do not have sufficient credit to meet the new requirements. After clarifying the rules in December 2016, BOEM – under the new administration—withdrew them in February 2017, leaving the decommissioning problem in limbo.

Regulatory review. The current U.S. administration also has taken steps to reduce “undue burdens” on offshore operators by relaxing safety rules. Following an executive order from the president in April 2017, Interior Secretary Zinke directed BSEE to review oil rig safety regulations “from bow to stern.”

In late December, BSEE announced that it would revise safety regulations that had been prepared during a six-year period in response to the Deepwater Horizon incident and promulgated by the prior administration in July 2016.

Among other changes, the revised rules would no longer require third-party inspections on blowout preventers and would cancel the requirement for operators to submit real-time production data to regulators. The revised regulations were available for public comment during a 60-day review period. BSEE received strong opposition from some environmental groups.

Risk based inspections. At CERA Week in Houston, Secretary Zinke and BSEE Director Scott Angelle were adamant about the Interior Department’s commitment to offshore safety. Mr. Zinke said that the bureau is conducting “risk-based” inspections, using trend data to identify performance issues with equipment and operations. He also noted that inspectors’ work schedules have been changed to more efficiently use helicopters and increase the time inspectors spend at offshore facilities. The secretary also said that BSEE would increase its engagement with industry; find the safest available equipment; adapt regulations to match changing technologies; and consider ISO certification for BSEE’s inspection program.

Changing agency roles. One of the most important and fundamental improvements in offshore regulation took place in May 2010, when the Minerals Management Service (MMS) was split into the Bureau of Safety and Environmental Enforcement (BSEE) and the Bureau of Ocean Energy Management (BOEM). The MMS had the dual and conflicting roles of promoting economic development of the gulf’s resources and regulating the industry’s safety. BOEM was formed to handle leasing and commercial aspects of Gulf of Mexico development, and BSEE took the role of objective safety and environmental overseer.

This division of labor has been changed somewhat by the current administration. BSEE Director Angelle’s speeches to industry groups emphasize his commitment to helping operators “cut costs and grow their businesses” with regulatory changes that could save them $1.3 billion. “What appears to be going on is a redefinition of the agency’s mission,” said Michael R. Bromwich, the first BSEE director, “This is a safety and environmental protection agency. It is not part of the agency’s mission or mandate to increase production of oil or gas.” wo-box_blue.gif

About the Authors
Ron Bitto
Contributing Editor
Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM
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