Critics of the Interior Department's proposed Well Control Rule told a Senate panel Tuesday that regulators are taking a one-size-fits-all approach that will only provide a modest improvement to offshore drilling safety. But the government fired back, saying the industry had conducted a "bad analysis" and inflated the overall cost of the rule: $883 million, versus $32 billion.

Meanwhile, the director of Interior's Bureau of Safety and Environmental Enforcement (BSEE) told the Senate Committee on Energy and Natural Resources that the agency believes oil and gas development can be performed safely in the Arctic offshore and was in the process of finalizing a new Arctic rule for drilling there. But a consultant testified that the Arctic rule runs afoul of a series of executive orders requiring that the benefits from new regulations not be outweighed by the costs to the oil and gas industry.

Well Control Rule

The BSEE unveiled its proposed Well Control Rule last April (see Daily GPI,April 13). It included requirements that blowout preventers (BOP) be outfitted with double-shear rams; more rigorous third-party certification of the shearing capability of BOPs; real-time monitoring of deepwater and high-temperature or high-pressure drilling activities; and requiring the use of accepted engineering principles for drilling and completion equipment.

BSEE Director Brian Salerno said the agency was reviewing more than 5,000 pages of technical comments on the Well Control Rule and would make adjustments where appropriate. He declined to go into specifics, but did reveal that the agency had asked the industry for comments on the testing frequency for BOPs.

"In some cases, it's currently seven days," Salerno said. "We've proposed going to 14 days, so that represents an economic benefit to the industry. We've asked for comments on whether that could be extended further, to 21 days. We've not made any decisions on that, but we have received a lot of comments on that area.

"Obviously, the greater the interval, the less cost to industry. But that would be offset by other measures, such as increased maintenance provisions, recordkeeping provisions and third-party oversight."

Those costs were estimated by BSEE to be $883 million over a 10-year period. But according to the American Petroleum Institute (API), an independent cost assessment performed by Blade Energy Partners and Quest Offshore found the cumulative 10-year costs to the industry are closer to $32 billion.

While Erik Milito, director of upstream and industry operations for API, emphasized the focus of the rule should be on improving safety, "we wanted to make sure we understood where the government's cost estimates matched up with what independent engineering consultants would come up with. We saw the disparity between $883 million versus $[32] billion and felt that in and of itself is a compelling reason that should really force us all to relook at the rule."

Among the findings by Blade and Quest, the number of wells drilled in the offshore Gulf of Mexico (GOM) would decline 26% annually; capital investment in the GOM would decline 10% annually; oil and gas production in the GOM would decline by 500,000 boe by 2030; and 50,000 jobs supported by GOM development would be lost as early as 2027.

But Salerno took issue with the findings. "There's no intent to shut down drilling with this rule," he said. "The intent is to make it safer and to be more environmentally responsible. This is a misinterpretation of certain provisions of the rule, [and they're making] assumptions that we will make certain types of drilling impossible. It's a bad analysis."

Jacqueline Savitz, vice president for U.S. Oceans at Oceana, an international advocacy group focused on ocean conservation, said that while the group doesn't believe the Well Control Rule would necessarily prevent an oil spill, it would improve the status quo.

"It makes drilling a little safer. It doesn't mean drilling is safe," Savitz said. "For instance, in the Deepwater Horizon [disaster] we had blind shear rams that didn't succeed in severing the drill pipe and creating a barrier to flow. There's no redundancy in the requirement for blind shear rams in this rule, so there's still some things that need to be looked at and strengthened."

Arctic Rule

According to Salerno's written testimony, the BSEE's proposed Arctic Rule, which is in the process of being finalized, "revises and adds requirements for exploratory drilling operations on the Arctic Outer Continental Shelf [OCS]" -- specifically, the Beaufort Sea and Chukchi Sea Planning Areas -- "where the extreme environmental conditions, geographic remoteness, lack of fixed infrastructure, and sensitive marine environment require heightened safety requirements and measures that are specifically tailored to the operational and environmental challenges of the Arctic OCS."

Salerno told the Senate panel that the BSEE does believe Arctic development is possible, and can "operate safely and in an environmentally sound manner. That's why we issued permits this past season to Shell [see Daily GPIAug. 18July 22].”

"But the Arctic is different," Salerno added. "It's a much more difficult place to operate. Unlike the GOM, there is no infrastructure should something happen. You need specialized capabilities, and you really have to have it in the theater. In the GOM, it's readily available and within easy reach. Not so in the Arctic, and that does place an increased burden on the operator to provide that equipment in case of an emergency."

But Mark Rockel, principal consultant for Ramboll Environ Inc., called that requirement -- also known as the Same Season Relief Rig (SSRR) requirement -- "pretty egregious to the industry." Under the SSRR, all Arctic operators would be required to have a second rig capable of drilling a relief well under contract and within proximity to the theater before the onset of winter ice. He estimated that over a 20-year exploration and appraisal phase, the SSRR requirement would currently cost a lessee nearly $3.2 billion.

"However, keeping it as a performance standard would be adequate," Rockel said. "If you could allow that flexibility then you could extend the season, which when you look at the opportunity cost of those days off, over time they can be significant in terms of billions of dollars."

According to Rockel's written testimony, a series of executive orders by the Obama administration "has dictated that the benefits of new regulations not be outweighed by the costs of compliance, and not ultimately serve to stifle innovation, creativity or the efficient function of markets." But the SSRR, seasonal drilling limitations and a 100% mechanical recovery capacity requirement do just that.

"The United States needs to be a leader in the Arctic," Rockel said. "We need to be able to demonstrate that we can have a safe, viable Arctic drilling program that other countries can look at and say 'they're doing it the right way and they're doing it the safe way.'"

BSEE is also in the process of finalizing a Production Safety Systems Rule and a Crane Safety Rule. According to Salerno's written testimony, the former "amends and updates BSEE regulations pertaining to safety and pollution prevention systems," while the latter "proposes to incorporate the latest industry standard for the design and operation of cranes mounted on offshore platforms with the goal of reducing the risk of lifting incidents."

Last September, Royal Dutch Shell plc announced that it was abandoning further activity in the Alaskan Arctic "for the foreseeable future" after disappointing results from an exploratory well in Alaska's Chukchi Sea (see Daily GPISept. 28). Two months later, Norway's Statoil ASA announced it was also exiting the Chukchi (see Daily GPI,Nov. 17). During Tuesday's hearing, committee chairman Sen. Lisa Murkowski (R-AK) said Statoil would return its leases to Interior.