The Obama administration last week conceded that its new drilling safety regulations will cost producers more to develop wells, delay the production of energy on the Outer Continental Shelf (OCS) and increase consumer energy costs.

The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM) estimated the proposed final rule on safety measures would add $1.42 million to each new deepwater well drilled and completed with a floating rig, $170,000 for each new deepwater well drilled with a platform rig and $90,000 for each new shallow water well.

Industry-wide, the Interior Department agency said compliance with the interim final rule, which was published in the Federal Register Thursday, would be $183 million annually, and that the cost to the industry of avoiding a catastrophic spill (benefit) would be $631.4 million a year. "Our concern is that the actual costs could exceed BOEM's estimate," said Dan Naatz, vice president of federal resources for the Independent Petroleum Association of America, (IPAA) which represents independent producers.

The IPAA believes the compliance costs will be ultimately higher than $183 million, he said. The regulations "put new hurdles in place for producers" operating on the OCS, Naatz noted. While the IPAA applauded the administration's lifting of the moratorium on deepwater drilling last Wednesday, he said where the "rubber is going to meet the road" is with the issuance of permits.

"The impact on domestic deepwater hydrocarbon production as a result of these regulations is expected to be negative, but the size of the impact is not expected to materially impact the world oil markets," BOEM said."Therefore the increase in the price of hydrocarbon products to consumers from the increased cost to drill and operate on the OCS is expected to be minimal."

The agency conceded that the interim rule may have "adverse effects" on employment, investment and productivity. "The additional regulatory requirements in this rulemaking will increase drilling costs and add to the time it takes to drill deepwater wells. The resulting reduction in profitability of drilling operations may cause some declines in related investment and employment," BOEM said.

The interim could apply to 130 active federal oil and natural gas lessees and more than a dozen drilling contractors and their suppliers, according to the BOEM. Of the $183 million in anticipated costs for the industry to comply with the rule, the agency estimated that $20 million will apply to small businesses in deepwater and $9 million in shallow water. This means that about 15.8% of the new regulations would be borne by small companies.

The interim final rule implements certain safety measures recommended by Interior Secretary Ken Salazar in a report to President Obama. The recommendations pertain most to well control, including subsea and surface blowout preventers, well casing and cementing, secondary intervention, unplanned disconnects, record keeping, well completions and well plugging.

The interim rule took effect last Thursday (Oct. 14). The BOEM said it will consider comments received prior to Dec. 13.

In addition to the interim rule, the BOEM Friday published a final rule in the Federal Register that would require operators to develop and implement a comprehensive Safety and Environmental Management Systems (SEMS) for oil and natural gas and sulphur operations in the OCS. Among other things, the SEMS would apply to all OCS facilities, including drilling, production, construction, well workover, well completion and Interior pipeline activities. A SEMS program would include hazards analysis, operarating procedures, safe work practices, training procedures, assurance of quality and mechanical integrity of critical equipment, a pre-startup review, emergency response and environmental management program, an audit of safety and environmental management program.

The BOEM estimates that total one-time implementation of SEMS for both moderate and low activity operators would cost about $655,000. No costs are identified for implementation of a SEMS program by high activity operators because all of them currently have a SEMS program in place, according to BOEM. Total annual maintenance for all operators, including high activity operators, would be approximately $1.97 million, the agency said.

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