A year after Macondo: the New World of drilling

By Linda Hsieh, managing editor

Editor’s note: DC spoke exclusively with Louisiana Sens. Mary Landrieu and David Vitter, as well as Louisiana Secretary of Natural Resources Scott Angelle, for this article.

There’s a new day in the Gulf of Mexico, and things are never going back to the way it used to be.

“Much more stringent regulations and a more lengthy permit time – those are foregone conclusions. That’s part of the new normal … and the new normal won’t look anything like the old normal,” Gary Luquette, president of Chevron North America E&P, said.

A lot more thought will be required in the design and planning stages than before. “Your designs will have to be much more robust. The drilling of the wells will be more deliberate. There will be more inspections, more verifications, more certifications. … You’re going to have to revise your oil spill response plans to include the more robust containment as well as new surface recovery, surface response and surface removal techniques,” he said. “From beginning to end, nothing really has been spared in terms of changes, expectations and requirements.”

Simply in terms of additional time for permitting, Mr Luquette estimates that at least three months and more likely six months will be needed going forward. “Longer term you’d like to think that you can work these longer timelines into your planning process such that you would just start earlier and still be able to drill your wells on time,” he said.

However, on top of that, the drilling process itself is likely to take 10% to 15% longer than before due to the new regulations that have been implemented over the past year. “And that’s something I don’t believe is going to go away, and that’s going to be an additional cost for these wells that you can’t plan your way out of. … I think wells will be 10 to 15% more expensive.”

Will Pecue, president of Louisiana-based independent Taylor Energy, said his company saw an additional $3 million impact on a per-well basis immediately following the application of new rules for well abandonment. “That cost was largely driven by a (new) requirement to apply both a pressure test and a weight test on every cement abandonment plug, along with the requirement to pull the BOPs to surface between every well – thereby eliminating the possibility of batch drilling wells,” he said.

Contracts across the Gulf are also being renegotiated to incorporate considerations of the New World, Mr Pecue said. “Who’s going to have financial exposure to what degree? How are we going to handle any kind of regulatory upset into operations in the future?”

Smaller companies, operator or contractor, can’t handle putting rigs on standby for long stretches of time, like what happened over this past year. “It absolutely can bankrupt them, and I think we’ve already seen that on the drilling contractor side.”

Mr Pecue added, “If Washington and domestic energy policy are not careful, we will literally restrict OCS waters to supermajors and foreign national oil companies, and I’m not sure that’s in the best interest of our country.”

Confusion also remains as to calculations of the worst-case discharge by well, Mr Pecue said. “You could have obtained a permit to drill a new well and met all the criteria for a worst-case discharge for the initial well. After you drill that initial well, you find you have a couple more payzones than first thought. Typically an operator has been able to notify BOEMRE (US Bureau of Ocean Energy Management, Regulation and Enforcement) and then obtain approval for a subsequent delineation sidetrack almost immediately.

“Now, because you’ve found a couple more elements that will add to the worst-case discharge theoretically, you have to resubmit your worst-case discharge for approval before you can even go back to submitting your well sundry for sidetrack approval. It’s cumbersome, and it’s confusing,” he said.

One thing that has become clear is deepwater operators will have to show access to one of the two well containment consortiums – Marine Well Containment Company or Helix Well Containment Group – to demonstrate their capacity to contain a subsea blowout. All 11 deepwater drilling permits issued as of 15 April had participation in one or both groups.

Louisiana Secretary of Natural Resources Scott Angelle, who has been actively engaged over the past year helping to restore drilling activity in the Gulf, said he’s particularly concerned about the role of environmental assessments (EAs) in the post-Macondo world.

“I think the federal government is going to be overwhelmed with applications and paperwork now that they’ve demonstrated they’re issuing permits and are open for business,” Mr Angelle said, adding that he believes the EA process will “choke this entire operation.” That’s why he is proposing to allow the BOEMRE to contract draft EAs out to the private sector. “I believe that represents the best, most aggressive way for us to compress the time without sacrificing environmental stewardship issues.”

Mr Angelle is working on taking this proposal to the BOEMRE through the Back to Work Coalition, which evolved out of the Gulf Economic Survival Team that was created during last year’s drilling moratorium. “An EA is an EA is an EA, as long as it’s done according to a certain standard. … I think (the BOEMRE) will struggle to find employees to join their organization on a temporary basis, and then you have the training issue. We don’t have time to wait.”

For people who do not work in the energy business or who don’t live along the Gulf Coast, it might be easy to assume that everything went back to normal when the moratorium was formally lifted last October. Yet that is far from the truth – even now, a full year after the Macondo blowout.

Political and regulatory uncertainty remain, and permit approvals for both deepwater and shallow-water wells are still coming at a glacial pace. The BOEMRE has said that it is processing permits as soon as they come through the door, yet the numbers say different.

Louisiana senators David Vitter and Mary Landrieu both expressed concerns with the permit backlog and criticized the Obama Administration for pushing hydrocarbon production out of the Gulf of Mexico. Sen. Landrieu noted that the BOEMRE may be understaffed and underfunded, “but that should not be an excuse because that may be some time in coming because of budget difficulties. If they would just concentrate on making the new rules as clear as possible and stop changing them frequently, that would help.”

Something else that could help get rigs back to work is the ever-rising gas prices at the pump, now exceeding $4 a gallon in several states. Sen. Vitter believes the price increase is starting to put political pressure on the Administration to get Gulf production back up. “(Gas prices) have gone up about 96% since the president took office, but we’ll see if that really changes their will and focus in a major way,” Sen. Vitter said. “We saw in the summer of 2008 how quickly the American people can focus and demand action when it’s really hitting their pocketbook at the pumps. I think we’re entering a similar period of opportunity.”

On 31 March, Sen. Vitter rolled out the 3D: Domestic Jobs, Domestic Energy and Deficit Reduction Act of 2011. Among other things, the broad-based domestic energy access bill would open up access to offshore areas for exploration, including ANWR, and deem the 2010-2015 Planning Area as complete and move it forward. It also would limit environmental and judicial reviews to “a reasonable amount of time,” Sen. Vitter said.

One major frustration for the industry over the past year has been getting the BOEMRE to provide clear guidance for the new regulations, and in this regard, Taylor Energy’s Mr Pecue offered this advice: Set up a meeting with the Bureau to discuss your specific well and the associated issues. “Without exception, every operator who has requested that meeting and successfully gone through the dialogue fully understood what needed to be done and felt they had more insight into the new system,” he said.

Although there are understandably many companies requesting meetings, Mr Pecue said he knew of no party that felt frustrated because they hadn’t been able to get a BOEMRE audience. “I think the real issue is people aren’t asking,” he said. “Those guys (BOEMRE) are working as hard as they can just like industry, but we need to recognize that while they’re trying to add staff, they’re not at the point they want to be just yet.”

Chevron’s Mr Luquette also believes that there’s now a framework in place to get permits, and operators shouldn’t be hesitant about applying for them. “We’ve got templates in place. We’ve got the examples out there showing the things that are acceptable. My advice would be to get a hold of those examples, those templates, and design and plan on that. Don’t wait for the government to change its view of things. Get on with it. You’ve got to get into the new game and meet the expectations of the new norm.”

In late March, BOEMRE issued additional guidance for complying with the Drilling Safety Rule and NTL-10, as well as information on the Bureau’s process for evaluating subsea containment information. Although this document did not contain any additional regulatory requirements, that certainly doesn’t mean more rules aren’t forthcoming. In fact, Mr Luquette said, you can count on it.

“I expect additional regulation over time to address other aspects of prevention and risk mitigation,” he said. Hopefully, though, additional regulations from now on will go through a more open and systematic process. “It hasn’t been a very effective rulemaking process in the period since Macondo, and we’re hoping that they go back to the normal rulemaking process so everybody has a chance to participate.”

Even if that process does resume, however, the relationship between industry and regulators in the New World will not go back to the way it was. The BOEMRE continues to be concerned about the perception that regulators and industry worked too closely together in the past, and has been intentionally keeping industry at arm’s length. Although Mr Luquette is convinced this relationship can and will be improved as we get farther from the Macondo tragedy, this – like everything else – is going to assume a new normal. “I don’t think we’re going to go back to the former collaborative way. There will be less collaboration. There will be some, but it will be less,” he said.

Looking over the past year, it seems beyond a doubt that the moratorium and “permitorium” have resulted in severe economic damage, with the Gulf Coast being the hardest hit. Sens. Vitter and Landrieu and Mr Angelle all say that the regional economy has been devastated over the past year.

Louisiana, especially, was doing relatively well compared with the nation through the recession, Sen. Vitter said. “We were consistently a good 2.5 points below the national unemployment average. However, starting with the Deepwater Horizon disaster, that began to change, and until recently we had nine straight months of increasing unemployment in the state. … The only big factor that explains this is the Gulf shutdown, and that’s a huge impact on our overall Louisiana economy.”

The oil spill made people sad, but the moratorium made people mad, Mr Angelle said, and that’s part of the message he’s been trying to take to Washington. He believes there are several thousand people who are under-employed – working a minimum number of hours to stay employed with hopes that there will be a breakthrough on permitting. “I realize that politically I can’t win by making the faces of the moratorium Shell and Chevron and BP. … In my world, where I’m from, I need to make this about the hotel worker, I need to make this about the auto mechanic, I need to make it about the boat hand,” he said.

Looking at the here and now, although things appear to be looking up (relatively speaking) and permits approvals are trickling out, industry is still striving to reach a critical mass of drilling activity that would restore confidence in the Gulf of Mexico market. As it is now, Mr Luquette believes that the extra time and cost required for all future OCS operations could mean the elimination of wells that were already at their economic limit. “I don’t know if that is sufficient enough to cause operators to leave (the Gulf of Mexico) completely, but I do have a concern that it’s going to have an adverse impact on well count,” he said. Fewer wells mean fewer rigs mean fewer contracts.

“Given the uncertainty we’ve seen here on the regulatory side and the increased cost of operation, you do see an enhanced drive for people to pursue other opportunities outside the Gulf,” Mr Pecue said. Several rigs have already departed for drilling projects in other provinces around the world, and once they’re gone, they could be gone for a year, a decade or forever.

In the post-Macondo world, Mr Pecue believes that industry must restore reliability to E&P operations so that it is safe, predictable and repeatable, and this can only be achieved by focusing on three interrelated components: processes, equipment and people. Macondo has already instigated tremendous process change in the industry while notable equipment changes have also been made – although Mr Pecue would like to see more focus on technology applications on the preventive side rather than the response side, such as containment equipment.

“If we look at the people component of reliability, the only way that we’re going to be successful in this in the long run is we’ll have to use the process and equipment side to minimize the frequency where both office-based and rig-based personnel are forced to make an instantaneous high-stakes decision in a high-stress condition,” Mr Pecue said.

In the New World, more consistency on the operators’ side will also be an industry goal, Mr Luquette said. This means moving toward a more standard and common approach to designing, constructing and completing wells to make it easier for drilling contractors to comply with all the new expectations and requirement, Mr Luquette said.

“The other thing we’ve learned from Macondo is that we want to reinforce to everyone in the industry – and clearly the drilling community has a key role in this – is that everybody needs to feel a strong responsibility to stop work when they see or feel that something is unsafe,” Mr Luquette said. “If we can reinforce that stop-work responsibility and reduce the variability between the operators around practices and procedures, I think the drilling community is going to be in great shape.”