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Post-Macondo GOM Oversight Warranted, LLOG Exec Tells House Committee

Developing oil and natural gas resources in the Gulf of Mexico hasn't been hindered by rules enacted since the Macondo well blowout that clearly were needed, an offshore industry executive told Republican House members Tuesday in New Orleans.

GOP members of the House Committee on Natural Resources held an oversight hearing on the impacts of federal policies on energy production and economic growth in the offshore, with the politicians spending close to an hour claiming the Obama administration had overstepped its regulatory approach since BP plc's Macondo well disaster in 2010. A six-month moratorium prevented any permits from being issued following the tragedy, which killed 11 men and injured 17 others.

In the aftermath, more stringent offshore regulations were proposed, with some already enacted. One proposal would require updated blowout preventers (BOP), one of which was found to have failed following the Macondo blowout (see Daily GPIJune 6, 2014). Experts have concluded that if the blind shear ram had been activated by the BOP at the time of the incident, millions of barrels of crude oil would not have escaped the well.

House members and invited GOP Louisiana Sens. David Vitter and Bill Cassidy directed their ire at the proposed well control rule issued by Interior's Bureau of Safety and Environmental Enforcement (BSEE), which would require BOPs to be outfitted with double-shear rams (see Daily GPIApril 13). The rule also would require more rigorous third-party certification, real-time monitoring of deepwater and high temperature/high pressure drilling activities, as well as the use of accepted engineering principles.

"Some federal regulatory measures, such as the well control rule, have the potential to not only hinder future growth in the Gulf -- but cause another unintended moratorium in offshore activity," said House Chairman Rob Bishop (R-UT). "These unintended consequences have the potential to once again cripple the Gulf region and our entire nation."

Interior, Bishop said, "has been dead wrong" in its "so-called 'management' of federal lands," including "the Obama administration's 2010 moratorium, which shut down all drilling in the Gulf for months after the Macondo incident. Thankfully, that costly mistake was eventually overturned by the courts -- but not without severe economic consequences."

In reality and despite the political oratory, while the moratorium caused many operators to suffer economic losses, drilling successes have been higher and more rigs were moved to the region post-Macondo. Average discovery sizes in the GOM after the moratorium grew by 30%, even as the discovery count fell by about half, according to a recent report by Wood Mackenzie (see Shale DailyAug. 10).

LLOG Exploration Co. LLC's Joe Leimkuhler, vice president of drilling, proved to not be a partisan witness. He agreed that the post-Macondo rules are costing more money for the subsea operator, whose biggest business is in the GOM deepwater. "Clearly" the tragedy led to more oversight, he said. "It happened, but there should be more oversight since Macondo." He also didn't criticize the real-time monitoring aspect of the well control rules. LLOG already uses real-time monitoring, he said, which ensures safer operations.

LLOG, a privately held subsea operator, views the rules as "improvements to federal policy" by BSEE and its sister arm, the Bureau of Ocean Energy Management (BOEM).

"We are now one month away from the five-year anniversary of the end of the moratorium, yet we continue to receive our well-related permits -- drilling as well as completion and workover -- just in time," he said. "This is not due to a lack of effort by the BSEE and BOEM staff, but in my opinion an understaffed situation at BOEM and BSEE, despite the best efforts of BSEE and BOEM district and regional management to retain and recruit talent. The overall approval cycle could be improved with an increase in agency technical capacity."

LLOG has found "that the more knowledgeable staff are retiring, which leaves the current staff short-handed and overworked, not to mention the lack of experience among the younger staff," part of the "larger 'big crew change,' which is a challenge not only for industry but also for federal regulators. Because of this situation, permits are being approved with a short window prior to commencement of operations, which makes it difficult for operators to conduct operations that require a long lead time for planning and sequential approvals."

Instead of bashing the government, Leimkuhler said "additional capable" staff would equal "additional permit approvals, additional production revenue and additional economic development. An innovative compensation/recruitment plan, as well as the current industry downturn is likely to provide an opportunity for BSEE and BOEM to recruit experienced staff and should be leveraged to increase the permit approval capacity of the bureaus."

BSEE's Lars Herbst, GOM regional director, also made the case that oversight of offshore producers has proved a positive for both industry and the public. Regulators expect GOM production "to continue increasing, with several large projects expanding and other new projects coming online." He pointed to Royal Dutch Shell plc's Olympus facility as one example. Olympus is one of Shell's eight production platforms and its second-largest in the GOM (see Daily GPIJuly 1Feb. 4, 2014).

"When production began in 2014, it produced 35,000 b/d of oil. By 2016, production is expected to increase to 80,000 b/d." He also cited Anadarko Petroleum Corp.'s Lucius field, which reported first oil production in January and quickly ramped up to 80,000 b/d in 2Q2015 (see Daily GPIJune 2).

The point is, said Herbst, offshore production is rising, even as more regulations are imposed. BSEE estimates that in 2016 nearly 1.7 million b/d will be produced from the GOM alone, putting annual oil production near 620 million bbl per year -- 110 million bbl higher than in 2014, and the highest rate in 10 years.

Federal regulators, state governments and the industry "have worked together" to craft regulations such as the well control rule, which he said was an important step.

"The necessity of the well control rule is demonstrated by the fact that the number of loss of well control incidents has increased in the last two years and thus, these incidents are still occurring with a frequency that is comparable to that which existed prior to the Macondo blowout," Herbst said. "Six of the last seven investigations completed by BSEE for loss of well control incidents found that the root cause of each incident was tied to equipment difficulties, in particular the design specifications of wells."

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