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Interior’s Sweeping Offshore Drilling Rule Designed to Improve Safety, But Draws Industry Ire

The Obama administration's updated offshore drilling regulations issued Thursday, designed to overhaul safety practices and equipment to prevent another Macondo-like tragedy, were barely out of the gate before industry -- and its critics -- pounced. Producers said the costs are too high, while conservation groups say the rules don't go far enough.

The final well control rulemaking by Interior's Bureau of Safety and Environmental Enforcement (BSEE) was proposed a year ago, and comes nearly six years after BP plc's Macondo blowout, which killed 11 men, injured 17 other people and sent oil spewing through the Gulf of Mexico (GOM) for almost four months (see Daily GPIApril 13, 2015). The tragedy, which destroyed the Deepwater Horizon platform servicing the well, was determined to have been caused in part by a faulty blowout preventer (BOP) system.

The regulations, which underwent a review by the White House Office of Management and Budget (OMB), restrict the amount of fluid that may be pumped into wells drilled in the Outer Continental Shelf (OCS), require redundant BOP safety devices and stipulate continuous monitoring from shore.

During a conference call Thursday to discuss the final rulemaking, Interior Secretary Sally Jewell shared a microphone with BSEE Director Brian Salerno. The "prescriptive and performance-based" regulations "represent one of the most significant safety and environmental protection" reforms since the Macondo tragedy and build on reforms instituted since then to modernize offshore energy standards and oversight," Jewell said.

The rulemaking was a "herculean effort," she said, which took into consideration hundreds of comments, in-depth analyses and investigations by and with industry groups, equipment manufacturers, federal agencies, academia and environmental organizations (see Daily GPIJune 6, 2014). Previous investigations concluded that the BOP attached to the BP well failed. Experts previously had said if the blind sheer ram had been activated by the BOP at the time of the incident, it would have kept millions of barrels of oil from flowing into the GOM.

Well Control is Key

Specifically, the final rule addresses the "full range of systems and equipment related to well control operations," with a focus on BOP requirements, well design, well control casing, cementing, real-time monitoring and subsea containment. Key features include requirements for BOP systems, double shear rams, third party reviews of equipment, real-time monitoring data, safe drilling margins, centralizers, inspection intervals, and other reforms related to well design and control, casing, cementing and subsea containment.

It's not a mirror of the proposed rules, Salerno noted. Adjustments were made to preserve the stringent requirements regarding the safety drilling margin, interval testing and major inspections for BOPs, but they also incorporate criteria for alternative practices that are subject to review, justification and approval. The final rule allows for flexibility so that regulatory oversight keeps pace with technological changes, provided future innovations can meet the rule's standards for safety performance, he said.

It's "very clear" in the final rulemaking "that companies can provide justification from deviation" regarding real-time monitoring, Salerno said. The final rule is "more consistent with the original intent but we made it more clear that companies have the ability to develop a plan that best reflects their operations...

"In general, we added more risk-based and more performance-based language, which helps characterize the way activities actually run in the OCS...It's very important to note that we've looked very closely at the level of safety and environmental protection, and that was intended. we have not walked back from that at all. But there are more ways to achieve that than we envisioned and where it's appropriate, we've built in that flexibility."

The hundreds of hours that went into finalizing the rules "made it a priority to engage with industry to strengthen our understanding of emerging technology, to participate with standards development organizations and to seek out the perspectives of other stakeholders," Salerno said. "We collected best practices on preventing well control incidents and blowouts to inform the development of this rule. As a result, this is one of the most comprehensive offshore safety and environmental protection rules ever developed by the Department of the Interior."

The new rule also "is in harmony with industry's best practices, standards and equipment specifications." For example, new drilling rigs already are being built under updated industry standards that BSEE used as a foundation for the rule. Furthermore, most rigs comply with recognized engineering practices and original equipment manufacturers requirements related to repair and training.

For companies that may need time to bring their operations into compliance, most of the requirements do not become effective until three months after they are published in the Federal Register. Moreover, several requirements have more extended time frames to comply.

Costs in Question

Cost-wise, BSEE's original estimate is about the same, with around $1.1 billion estimated for benefits from the rule and $696 million to implement it over a decade, setting a net cost of around $890 million, Salerno said.

"Others have made assessments on the cost of the rule," he said. "We've made assumptions in our baseline that we think are well founded. Others have chosen different assumptions. We reviewed them with a great deal of rigor and we are confident that they are a true reflection of the cost."

Despite its intention to improve offshore safety, the rulemaking has come under withering assault by industry and many Republican lawmakers (seeDaily GPIDec. 1, 2015). And BSEE's cost estimate to comply is way too low, according to some of the biggest offshore operators.

In closed-door meetings with OMB last month, BP said the time and complexity needed to implement the rules was underestimated, while the rules would constrain production and lead unnecessary operations. ExxonMobil Corp. suggested it would cost closer to $25 billion to over a 10-year period, and it argued the rules would increase the danger of a blowout by wresting decisionmaking from on-site engineers with decades of experience.

ExxonMobil officials said they based their estimate of the potential impacts of the proposed rules over 10 years "on a number of BSEE's baseline schedule and operating rate assumptions in combination with the anticipated minimum costs associated with some of the more significant proposals in the rule."

Key assumptions used by ExxonMobil include the number of wells (320/year); number of rigs (40 subsea BOP rigs, 50 surface BOP rigs); and the estimated spread rates ($1 million/day for subsea BOP rigs, $200,000/day for surface BOP rigs). ExxonMobil also cited an industry review of 175 GOM wells drilled since 2010 that concluded 63% could not be drilled as designed if the new rules had been in place.

The "overly prescriptive rules," according to ExxonMobil, "would prevent operators from applying the most fit-for-purpose well design." The provisions for BOPs also "may not be feasible" because current infrastructure cannot accommodate the changes.

Many offshore operators have pulled back on development since the commodity price downturn. However, the new rules come at a precarious time regardless as offshore projects, unlike unconventional onshore wells, take several years to develop.

Too Much Regulation or Not Enough?

A spokeswoman for the industry-based Gulf Economic Survival Team, Lori LeBlanc, said the measures "will require the majority of wells to get a variance or waiver," which could prove "catastrophic."

The American Petroleum Institute (API) issued its criticism preemptively on Wednesday, calling the proposal too expensive and unnecessary.

"The Well Control rule will affect offshore energy projects for years to come," API upstream group director Erik Milito said. "If left unchanged from the proposal, the flaws in the rule could lead to increased risks and decreased safety in offshore operations."

At a news conference Wednesday, House Majority Whip Steve Scalise (R-LA) noted that "people that actually drill for a living safely pointed out how this rule, a one-size-fits-all rule from Washington, could actually make it less safe for drilling in places like the Gulf of Mexico. That's the last thing we need at a time when we're closer to energy independence -- when our country is creating thousands of jobs."

Louisiana Republican Sen. Bill Cassidy added that the rulemaking involves "an extremely complex and technical issue" and there are concerns it would not address safety adequately.

"The administration needs to address the geological and engineering concerns raised and continue to work with stakeholders to get this right," Cassidy said. "If this rule is finalized without addressing the outstanding concerns made by technical experts, I fear this rule could have unintended consequences that could increase risk for offshore workers."        

However, Oceana's Jacqueline Savitz, vice president for the United States, said it was "about time" for the government to tighten safety rules. The conservation group also is advocating for moving away from offshore drilling toward renewable energy.

"The proposed rule is absolutely not sufficient to protect our oceans, but it is a significant improvement over the status quo and addresses some of the blowout-related concerns raised by various commissions following the BP disaster in 2010," Savitz said. "The only way to truly ensure there will never be another disaster of the magnitude of Deepwater Horizon is to stop drilling offshore."

Friends of the Earth also called on the federal government's offshore oil and gas auctions to cease. "There's no such thing as safe offshore drilling," said spokeswoman Marissa Knodel. "Tougher rules aren't going to mitigate the human and environmental costs of allowing more drilling to occur."

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