INSIGHT: BP disaster may mean indefinite offshore shutdown

03 June 2010 17:42  [Source: ICIS news]

BP spill may trigger long US shutdown of offshore drillingBy Joe Kamalick

WASHINGTON (ICIS news)--The legal and regulatory consequences of the still developing BP oil well disaster in the Gulf of Mexico could mean a prolonged, perhaps indefinite shutdown of all US offshore drilling and an increase in US energy imports.

That is the combined assessment of energy industry officials, investment advisors and political leaders in energy-producing US states.

The prospect of an indefinite, perhaps decades-long shutdown of US offshore drilling became more likely in the wake of the Obama administration’s decision to extend its month-old moratorium on deepwater operations for another six months.

The Interior Department ordered a six-month moratorium on drilling in waters deeper than 500 feet, saying it was needed to allow investigations to go forward and to improve the safety of ocean-area oil and gas development.

The department simultaneously cancelled a pending lease sale in the Gulf of Mexico and a proposed lease sale off the coast of Virginia, and suspended proposed exploratory drilling in Arctic waters off the coast of Alaska.

The six-month suspension of deepwater drilling not only applies to pending or future development permits, but also to permitted wells already being drilled in deep waters. The department said those projects have to halt drilling at the first safe stopping point, “and then take steps to secure the well”.

The deepwater drilling ban, said Interior Secretary Ken Salazar, will give President Barack Obama’s newly formed “National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling” time to complete its six-month study of the disaster. 

In addition to establishing why the BP rig exploded and sank, triggering the well rupture and leak, the commission’s report is to propose measures to ensure that similar accidents do not happen again.

The Independent Petroleum Association of America (IPAA) was quick to warn that such a six-month shutdown of deepwater operations - along with other pending legislative and regulatory proposals - could have a profound and long-lasting impact on US energy development far beyond that intended by policymakers.

“The administration should not make hasty decisions and advocate legislative and regulatory initiatives that could result in severe limitations to offshore drilling in America, [leading to] consequences that can further harm the Gulf Coast economy,” IPAA chairman Bruce Vincent said.

Vincent also cited legislation being moved in Congress “that will have profound, negative consequences for independent producers”, including a proposed increase in the liability cap for offshore drilling spills from the current $75m (€61.5m) to $10bn or $20bn or even to unlimited liability.

“These unrealistic liability legislative proposals will empower multinational and foreign oil companies while creating an impossible financial challenge to other American companies who compete with these corporations in the offshore [arena],” Vincent said.

“It will result in thousands of lost American jobs and increased reliance on foreign oil,” he added.

Investment advisory firm Raymond James sees similar results from the six-month moratorium and proposed increases in liability exposure, insurance and taxes.

Noting that there are 35 floating oil rigs currently available to drill in the Gulf, with two more contracted to begin drilling within six months, a Raymond James analysis said that “putting a six-month halt on Gulf of Mexico drilling is not a small deal for the industry”.

“To the extent that it is possible, many operators may simply choose to mobilize contracted rigs to drill international prospects elsewhere,” said Raymond James.

The investment advisors said the six-month deepwater moratorium along with related regulatory and tax uncertainties “will have significant effects on the entire offshore industry”, not just the deepwater drillers.

“Some insurance companies have already suggested that shallow water rates could increase by up to 25%, while deepwater insurance premiums could see a 50% or more increase,” Raymond James said.

In a worst-case scenario, said the company’s industry analysts, the entire offshore drilling insurance market could dry up, “forcing smaller E&P companies that can’t afford the risk of self-insuring to either increase their size or leave the market entirely”.

“These smaller companies are primarily shallow water operators,” Raymond James noted, so US inshore as well as deepwater energy development could be facing a long hiatus.

Both deepwater and shallow drillers also face an added disincentive - if and when the moratorium is lifted - of proposed tax increases. Legislation pending in Congress would raise oil production taxes three-fold, from $0.08/bbl to $0.32/bbl.

“There will also be more layers of bureaucracy, which will likely delay drilling programmes further,” the investment advisors cautioned.

The Interior Department has already signalled its intention to introduce additional layers of bureaucracy and regulation.

In announcing the six-month moratorium, the cancellation of lease sales in the Gulf and off Virginia and the indefinite suspension of exploratory drilling in US Arctic waters, Secretary Salazar also said that more short-term and long-term regulatory controls and limits will be coming.

“Other measures,” he said, “are more appropriate to address initially through a formal rulemaking process.”

“The department will issue an interim final rule within 120 days to address these measures,” he added.

This means that two months before the six-month moratorium is scheduled to end, the department will be issuing a new set of offshore development rules and regulations, which will likely trigger an extension of the moratorium until the new requirements can be made final, perhaps in early to mid-2011.

Separately, the Obama administration has announced that it is exploring criminal prosecution against those found responsible for the BP rig disaster.  The Justice Department ordered all parties involved in the Deepwater Horizon explosion and resulting spill to preserve all documents and other materials related or possibly connected to the accident.

This development might give pause even to those now working to shut down the broken BP well, raising the possibility that their actions, decisions, e-mails and other records may be subject to compelled discovery under criminal prosecutions.

The potential for criminal liability in the Deepwater Horizon accident cannot help but raise the risk level for future offshore energy undertakings, with developers now on notice that in addition to higher financial liability risks, higher insurance costs and increased taxes, drilling in US waters might pose jail sentences for those involved in spills.

Alaska Governor Sean Parnell (Republican) charged in a recent editorial that the BP rig disaster has played into what he regards as an Obama administration campaign to shut down domestic hydrocarbon production.

In an editorial written for The Wall Street Journal, Parnell cautioned that the “crisis in the Gulf should not be used to implement a misguided strategy that shuts down the opportunities to develop resources and that further endangers our nation’s long-term energy security”.

He said he fears that a series of moves by the Obama administration before and since the Gulf accident are “part of a much broader agenda at play (directed by the anti-development Environmental Protection Agency) to shut down increased domestic oil and gas production”.

He said his state is prepared to file suit against the federal government “to ensure that it does not make arbitrary and capricious decisions at the expense of state sovereignty and wise energy policy”.

($1 = €0.82)

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By: Joe Kamalick
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