After six months of hearings the presidential commission on the Macondo well disaster released its final report last Tuesday, calling for major safety reforms in the offshore oil and natural gas industry, including the creation of an industry-run offshore safety institute. Producers were divided on some of the report’s conclusions and recommendations.

Producers took issue with the commission’s finding that the problems that contributed to the fatal explosion aboard the BP plc-leased Deepwater Horizon rig on April 20 were not isolated, but rather were evident throughout the industry. The disaster unveiled “systemic failures” in both the oil and gas industry and the federal government that regulates producers, said commission Co-Chair Bob Graham, a former senator and governor from Florida, during a press briefing on the report’s findings and recommendations.

Over the past 20 years there has been a “rapid movement by the oil and gas industry to…deeper, riskier and riskier areas of the Gulf of Mexico,” and “we became lulled into a sense of inevitable success,” he said. On April 20, “after a long period of rolling the dice, our luck ran out,” Graham said.

“It seems to me to be indisputable that the solution to the problem is industry wide,” said commission Co-Chair William Reilly, who was administrator of the Environmental Protection Agency under President George H.W. Bush. In addition to “bad decisions” and “blunders” made by BP, Halliburton and Transocean, a “culture of complacency that affected [both] government and industry” contributed to the blowout of the Macondo well and ultimate explosion.

BP was majority owner and the Macondo well operator when the blowout happened. Transocean Ltd. owned the Deepwater Horizon rig, which BP leased to drill the well; and Halliburton was the primary service operator. The explosion on April 20 killed 11 people and decimated a large portion of the Gulf Coast region commercially (see NGI, April 26, 2010). Halliburton disputed the report’s characterization of its February and April foam stability tests related to the cement pump on the Macondo well.

Reilly said the oil and gas industry may not have been a “high-risk” industry in shallow waters, but it has become one as it has moved into the deep waters of the Gulf.

“We object to the commission’s insistence on there being a ‘systemic’ problem throughout the industry. This is not supported by the facts. Over 43,000 wells have been drilled in the Gulf of Mexico without a Macondo-like accident,” said Randal Luthi, president of the National Ocean Industries Association (NOIA), which represents the offshore industry.

“Nor does this disaster-free record show a culture of complacency. The April 20 accident cannot be taken lightly, but it should not be used as a dam to halt efforts for energy security and reliability,” he said.

“The report is not an indictment of offshore oil and gas production. While many opposed to offshore exploration will undoubtedly use the report to bolster their calls to stop offshore oil and gas development, even the commission members themselves recognize the importance of moving ahead with additional development,” Luthi said. Both Graham and Reilly have been critical of the moratorium, saying it was “excessive and lasted too long,” Reilly pointed out.

Likewise, Erik Milito, upstream director of the American Petroleum Institute (API), said he was concerned that the report casts doubt on an entire industry based on its study of a single incident. “This does a great disservice to the thousands of men and women who work in the industry and have the highest personal and professional commitment to safety.”

The report calls for the creation of a safety agency within the Interior Department, which would have enforcement authority to oversee all aspects of offshore drilling safety. The agency would be headed by someone with a background in science and management.

It also recommends that funding for the Bureau of Energy Management, Regulation and Enforcement (BOEM) be increased to step up inspections of rigs and platforms.The additional funds, it suggests, could come from fees on new or existing leases. It’s “sad to say” that part of the reason for the Deepwater Horizon rig explosion was that “our government let it happen…Our regulators were considerably outmatched,” Graham said.

The commission also proposed the establishment of a “safety institute that is entirely controlled and managed by industry, which enforces best practice, which evaluates, which audits and which grades the performance of various companies,” Reilly said. The safety institute would supplement the government’s oversight of industry operations.

It is “essential [the] safety institute operate apart from API,” which it said is “culturally ill-suited to drive a safety revolution in the industry.” The report added that API has an “established record of opposing reform and modernization of safety regulations.”

There has been resistance from both industry and Congress to the concept of a safety institute, but Reilly said, “we’re going to make a lot of noise” to win support this time around. Both co-chairs plan to testify before the Senate Energy and Natural Resources Committee and House Natural Resources Committee later this month.

NOIA’s Luthi said the report “rightfully points out that we in the oil and gas industry, as in any walk of life, should always be striving to improve safety.” He said industry efforts to improve safety were under way even before the presidential commission was formed.

“Some of the major companies have established the Marine Well Containment Corporation, which will continue technology research and development in deepwater containment efforts. Other companies have made immediate efforts to have the best available containment and response equipment more available now,” Luthi said.

He further said the recommendation to establish a self-regulating safety institute is “certainly worth more discussion and study.” However, “any such institute must have the full support of all aspects of the industry, from the smallest service company to the largest multinational corporations.”

The commission also proposed that a $75 million liability cap on offshore damages be lifted, saying it is “totally inadequate.” But the panel did not go as far as to recommend an unlimited liability. It said that was up to Congress to decide. Reilly believes that “some sort of compromise” will have to be worked out so that smaller producers are not driven out of the Gulf.

If there has to be a liability cap, Graham suggested that it be variable, depending on whether a producer is operating in shallow waters or ultradeep waters.

In response, the API said it has already begun the process of creating an industry safety program for deepwater operations that will build on API RP 75, a safety practice that was recently adopted by BOEM. That program will draw from the best practices in the nuclear and chemical industries and will use independent, third-party auditing to measure performance, the API said.

In May the Interior Department split the Minerals Management Service into three separate entities to ensure that enforcement, energy development and revenue collection responsibility were separate (see NGI, May 24, 2010). However, “We think it’s not enough,” said Reilly. He believes more must be done to ensure that revenues do not influence issues related to safety.

Congressional lawmakers were far from united in their reaction to the findings and recommendations in the final commission report. Sen. Mary Landrieu (D-LA) found the report to be largely favorable to the oil and gas industry and Gulf Coast states. “The Commission calls for raising the oil spill liability cap on [offshore producers] above the current level of $75 million. I agree that the cap should be raised and that $75 million is too low.

“But the cap should not be raised to a level that will put small, independent companies out of business. For months I have been working with several of my Senate colleagues to facilitate a mutual insurance system to fairly spread the risk among offshore operators. This type of liability system will preserve the ability of smaller independent operators to develop oil and gas offshore, while ensuring that taxpayers never have to pick up the tab for an oil spill,” she said.

Congress last year proposed raising the offshore liability limits to $10 billion, $20 billion or removing the cap altogether, all of which were “unreasonable,” said the Independent Petroleum Association of America.

Moreover, Landrieu said she supported the commission’s recommendation for “more money and manpower” to bolster the Bureau of Ocean Energy Management, Regulation and Enforcement’s (BOEM) ability to regulate offshore drilling, particularly in the Gulf of Mexico. The additional funding, it suggested, could come from fees on new or existing leases.

“The agency’s presence in the Gulf must be dramatically increased. Currently the Pacific Region BOEM office employs five inspectors to inspect 23 production facilities, a ratio of one inspector for every five facilities. By contrast, the Gulf of Mexico regional BOEM office employs 55 inspectors to inspect about 3,000 production facilities — a ratio of one inspector for every 54 facilities,” she noted.

Landrieu, however, said she objected to the commission’s recommendation that the BOEM have 90 days, rather than the existing 30 days, to process an application to drill. “We have successfully drilled more than 58,000 wells using a 30-day approval window, and if we strengthen BOEM’s ability to oversee drilling it should not be necessary to add another 60 days to the approval process.”

“Several of the recommendations put forward [by the commission] deserve real consideration and will be more closely examined during our committee hearings,” said Rep. Doc Hastings (R-WA), the new chairman of the House Natural Resources Committee. But, he warned, that “proposals that prolong the de facto moratorium in the Gulf, cost American jobs or delay future energy production will be viewed skeptically in both the House and Senate.”

Likewise Rep. Fred Upton (R-MI), the new chairman of the House Energy and Commerce Committee, criticized the report. “It is disappointing that, even after completing its final report, the commission has left unanswered the fundamental question of what went wrong. Rather than clearly identifying the root cause of this unprecedented disaster, the commission’s report is limited to general assertions about the enforcement agencies and industry as a whole,” he said.

“Neither this nor any investigation should be used as political justification for a pre-determined agenda to limit affordable energy options for America. Without clear and specific evidence of what went wrong with this isolated well, unlike the tens of thousands that have never experienced similar failures, we will not learn the lessons needed to ensure a disaster like this will never happen again.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.