Is drilling at pre-BP disaster levels yet?

Twenty-nine months after the BP-operated Macondo prospect well blew out in the Gulf of Mexico, the future of deep-water drilling in federal Outer Continental Shelf waters off the local shore and beyond is no less muddled.

The disaster that claimed 11 lives and spilled an estimated 4.9 million barrels of oil into the Gulf of Mexico did not spawn rancor regarding energy development’s merits, but the calamity derailed plans and the fallout continues to play an omnipresent role in regulatory and policy shifts under consideration.

Exploration and development plans and permits are flowing more quickly than last year as the industry comes to grips with what is now expected of them, but some fear the bureaucracy of federal agencies remains at conflict with industry’s mission and could prompt further restraints.

And the recent release of the five-year OCS lease sale schedule, absent continental U.S. waters outside the Gulf of Mexico, prompted sharp criticism toward the Obama administration and congressional wrangling over what additional OCS regions should be fair game.

While these issues are being hashed out, a presidential election and congressional seats hang in the balance.

The Outer Continental Shelf contains all federally owned waters in the Atlantic, Pacific, Gulf and Alaska regions.

Energy exploration and development in these territories are managed and regulated by the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement. These two agencies were formerly one unit called the Bureau of Ocean Energy Management, Regulation and Enforcement and, before that, Mineral Management Services.

The agencies are under the Department of the Interior umbrella and were reorganized following the BP Deepwater Horizon disaster.

Government oversight over the double-edged industry, one that drives the regional economy and threatens its environment, has triggered public debate regarding an industry that concerns almost every aspect of locals’ lives, a push-pull chasm intensified by the 2010 BP Deepwater Horizon explosion.

The top-nine property taxpayers in Lafourche Parish are intertwined with the oil and gas industry. Together they paid $17.3 million in 2011, according to the assessor’s office.

In Terrebonne, seven of the top-10 property taxpayers are related to the oil and gas industry, and they combined to pay $11.8 million in 2011.

And don’t forget Port Fourchon, which services about 90 percent of deep-water Gulf of Mexico drilling activity, according to port commission Executive Director Chet Chiasson.

This revenue funds myriad local government services, from education, to flood protection, to libraries, hospitals and fire departments.

Local government revenue doesn’t solely originate from oil-related assets, but a large portion of it does, without even considering the sales and property tax generated from the jobs in the industry and its supporting businesses.

Simply put, the oilfield is everybody’s concern.

 

The familiar risk

The federal government hasn’t recalculated regulations and limited territory to draw the ire of the “Drill, Baby, Drill” crowd.

After the ecological disaster, and an admission from Department of the Interior Secretary Ken Salazar that the fundamental procedures of what was then Mineral Management Services were flawed, change was certain.

Just as fervent as the industry crowd, environmental organizations have advocated for less expansion and more concern for ecosystems while portraying oil exploration and development as reckless, greed driven and short sighted.

The Southern Environmental Law Center is representing four environmental groups in two lawsuits challenging federal agencies that oversee energy regulation. SELC announced the lawsuits two days before the 39 million-acre central Gulf of Mexico lease sale in June, illustrating their discontent with resuming activity.

“The government is gambling with the Gulf by encouraging even more offshore drilling in the same exceedingly deep waters that have already proven to be treacherous, rather than investing in safer clean energy that creates jobs without risking lives and livelihoods,” said Jacqueline Savitz, vice president for North America at Oceana, when the suit was filed. “This move sets us up for another disastrous oil spill, threatening more human lives, livelihoods, industries and marine life, including endangered species, in the greedy rush to expand offshore drilling.”

The lawsuit challenges lease sales this year and last year, which SELC says were conducted before regulators thoroughly investigated the risks to wildlife and environment in the wake of Deepwater Horizon’s explosion. In addition to the courtroom battle, SELC says it is urging legislation that is more precautious, more strongly enforced and develops clean and renewable energy sources.

One of the provisions of a development-friendly bill introduced by Senators Dan Coats (R-Indiana) and David Vitter (R-Metairie) would exempt organizations that file lawsuits against the federal government in matters pertaining to energy production from a provision that currently allows them to recoup attorneys’ fees in the event they prevail in the suit.

To do this, the Coats-Vitter bill would again reorganize the federal agencies in charge of deep-water regulation, moving the groups from the Interior into the Department of Energy under a newly created Office of Federal Energy Production.

It would also exempt the Department of Energy from the Equal Access to Justice Act, a law that entitles winning parties against the federal government to legal and attorney fees. The law was initially passed to give citizens and small organizations the opportunity to challenge federal law, but many say environmental groups have abused the law.

In addition to giving organizations the leeway to file frivolous lawsuits, the U.S. government has been too willing to settle with environmental groups, according to Vitter (“They’re hardly opposing groups in court. They’re sort of far-left and medium-left,” he said.). Settlements trigger the EAJA provision.

“This EPA, for instance, and this Interior Department, will happily settle in favor of these environmental groups in many instances,” Vitter said, “so it’s a real scam, in my opinion, to make the taxpayer fund all of this activity.”

Even if the less-drilling sentiment runs against economic wants, locals can sympathize with the fears.

In the months following the oil spill, commercial and recreational fishing were severely restricted.

Photographs of oiled wildlife came across the wires.

Businesses and households that lost revenue attributable to the spill had to walk financial tightropes while maneuvering through the often-difficult claims process.

Others claimed compounds in the oil and the chemicals deployed to clean it made them sick.

Coastal erosion was hastened, according to a Proceedings of the National Academy of Sciences study.

And just last month large “tar mats” were found along Fourchon Beach following Hurricane Isaac.

The severity of Deepwater Horizon provoked new safety-oriented requirements. Operators now have to forecast hypothetical worst-case discharge calculations for a blowout scenario, including a flow-rate estimate, total volume and maximum duration of a blowout, and the plan to nullify and avoid the blowout.

BSEE published what is referred to as its final rule – replacing the interim rule handed down immediately after the spill – on Aug. 22.

The new rule requires new casing and cementing requirements, third-party inspections of blowout preventing equipment, additional tests, documentation for blow-out preventer inspections and maintenance and new requirements for well-control training to include deep-water operations.

It is expected to cost the industry $131 million per year, according to a BSEE report. Because it affects lessees, operators of leases and drilling contractors, small businesses in the deep-water will combine to spend about $23.9 million, according to the report.

U.S. Rep. Jeff Landry, an outspoken critic of the federal government regarding the pace of permitting throughout his first term, said he is reluctantly optimistic that deep-water activity is making a rebound, but he doesn’t believe the new rules make offshore drilling safer.

The New Iberia Republican instead said the industry’s post-Deepwater Horizon spill-response capabilities are enough to “greatly reduce” the chances of a similar disaster and many of the “hurdles” put in place would have been installed by operators anyway.

“I’m tired of these agencies promulgating regulations at a whim,” Landry said. “The regulating authority in this country is supposed to be Congress, so I would like to see Congress be more active in its oversight in looking through these regulations that were knee-jerk reactions so that we can roll back those types of regulations and bring some certainty to the industry.”

 

The Permitting Pace

“I don’t believe we will ever see the permitting process the way it was (before Macondo),” said Chris John, president of industry trade group Louisiana Mid-Continent Oil and Gas Association. “I think there is both some good and bad in it. The bad is it will take a little more time. The good is it makes us much more safety conscious. It is all about getting used to a process and what is expected of you. That was the frustration.”

The federal government responded to the BP disaster by not issuing a unique deep-water exploration or development permit in the Gulf for nearly 10 months and by developing stricter safety regulations, moves that critics say have restricted the industry’s growth, increased the nation’s reliance on foreign oil and deprived it from deep-water development royalties.

Industry’s ire intensified last year as permits failed to clear through the reorganized federal agencies. There were none until four months after the six-month moratorium was lifted. Authorizations began to trickle through last year, and it wasn’t until recently that industry changed its tone regarding the pace of approvals.

“We understand the permitting process better,” John said. “It still is not perfect, but we understand it.”

The Bureau of Safety and Environmental Enforcement is tasked with approving permits, and the Bureau of Ocean Energy Management must clear companies’ plans to operate on the OCS. Each agency publishes online every approval in the Gulf of Mexico.

The breadth of numbers and arguments regarding OCS Gulf drilling can be overwhelming. Influenced by a variety of factors – rate of application, adherence to regulations, clarity in exploration plans, delay in turnover – it’s difficult to gauge the pace of permitting and plan approvals and attribute the cause to one aspect.

As of May 31, the last time regional economic alliance Greater New Orleans Inc., released its Gulf Permit Index (the 30th since the spill), deep-water permit approvals in May (15) were 150 percent more than the average per month through the three years prior to the oil spill (7) and 114 percent more than the per-month average in 2009, the year before the spill (6).

From June through August, a total of 17 new well permits were granted, an average slightly more than 5 and fewer than both thresholds, according to figures on the BSEE website.

From Feb. 1 through Sept. 18 this year, BSEE approved 71 new well permits, the most over that seven and a half month span since 2006. That year 72 new well permits were approved during that stretch, the peak over the course of the past eight years and a number that preceded three consecutive years of decline in permits prior to the Deepwater Horizon explosion. (See chart on B5.)

The timeframe examined – Feb. 1 through Sept. 18 of every year since 2005 – was chosen to maintain consistency considering the first unique post-Deepwater Horizon permit on the OCS was not issued until February 2011.

Twenty new well permits followed through Sept. 18 last year.

But strictly reciting the per-month and per-year permit stats glosses over the variables, such as the bottlenecking that occurred last year, with its bolstering effect on the 2012 tallies, and the number of pending and returned permit applications – 18 and nine, respectively, as of Sept. 18.

Where the predominant pacing issue seems to be now is the approval rate for exploration plans, massive documents that outline every facet of intended operations and contingencies in case of a well blowout.

According to the GPI, as of May 31, the average time for such approval was 100 days, 64 percent, or 39 days, more than the average time the five years before the BP oil spill.

In 2011, the average time was 190 days.

Although the turnaround time remains longer than historic averages, only three deep-water initial exploration plans were pending Sept. 18, and one was deemed submitted, a designation that gives BOEM 30 days to analyze and evaluate the plan.

More encouraging to industry is last week’s report published by natural resources experts GlobalData, who said “a recent surge in issued permits indicates the return of large-scale deepwater drilling to the area,” and predicted that Gulf deep-water drilling will return to pre-Macondo levels by the end of the year.

Still, industry mouthpieces say they are concerned that regulators could continue to curtail progress.

In addition to the lack of communication between regulators and industry that operators feel slowed down permit approvals last year, operators have expressed concern that the agencies’ structure is a rocky foundation for deep-water drilling’s future.

Curtis Hagerty, a specialist in energy and natural resources policy, authored a Congressional Research Service report on last year’s reorganization of ocean energy programs. He surmised that reorganization did not result in major permitting delays, but said the industry remains uncertain on what regulatory changes will follow.

“At issue for Congress is whether, absent legislative action, administrative directives are the best mechanism for resolving perceived management issues within DOI offshore programs,” Hagerty wrote in the study published July 11.

The Coats-Vitter legislation would target the organizational structure.

Vitter emphasized the department the Coats-Vitter bill would create, the Office of Federal Energy Production, which would be “devoted to responsibly developing and producing domestic energy under the Energy Department versus this bureaucracy and attitude in the Interior Department, which is all about sort of protecting and sheltering federal land and federal offshore, not producing energy,” he said.

 

Untapped waters

While the calls for quicker application approval are down significantly from one year ago, the volume has risen on demands for the federal government to expand OCS acreage open to exploration and development.

Eighty-seven percent of federal waters are off limits to oil companies, according to numbers culled by the American Petroleum Institute. Outside of the Gulf – itself off-limits within 125 miles of Florida’s coastline – and segments of Alaskan coast, OCS drilling is closed.

“This is all about leadership from the top, who’s in charge and the sort of mentality they go about it with,” Vitter said. “This crowd, this administration, is just not focused on safely but aggressively developing our domestic energy resources in the Gulf and elsewhere.”

Disdain of the president’s OCS energy agenda was enhanced last month, when Salazar issued final approval on the 2012-17 OCS lease sale schedule. The plan proposes 15 sales, 12 of which are in Gulf territories. (The other three were in Alaska.) The total number is fewer than any of its seven predecessors, according to a report by the Congressional Research Service.

As a result, a bi-partisan effort is under way in Congress to reshape the plan. Both Louisiana senators, in separate bills, have signed legislation that could lead to changes.

Sen. Mary Landrieu, a Democrat member of the Committee on Energy and Natural Resources, is one of eight co-sponsors of the Offshore Petroleum Expansion Now (OPEN) Act of 2012.

The bill, signed by four Republicans and four Democrats, would add 11 sales to the 2012-2017 plan and remove none. The additional OCS sales would occur in the Mid-Atlantic region, off Alaska’s coast and in Southern California. One more would be added to the Gulf, in the Eastern region.

The bill would give 37.5 percent of government revenues from leases to states with energy production off their coast and would eliminate the $500 million revenue cap imposed on each state.

The bill will likely need to be restructured because the California delegation is “adamantly opposed” to any coastal drilling, Landrieu said, but it does have a legitimate chance of passing the Senate because of the revenue sharing.

“Expanding drilling without revenue sharing will not have my support, and it will not have a lot of people’s support,” Landrieu said. “I cannot support anything that expands drilling without revenue sharing.”

Although it opens additional areas in the Atlantic and Pacific regions, the Open Act is not as aggressive as a House-approved bill – titled “Congressional Replacement of President Obama’s Energy-Restricting and Job-Limiting Offshore Drilling Plan” – that would add 14 sales in areas including the North Atlantic and South Atlantic with Senate concurrence. It does not offer revenue sharing to coastal states.

“By saying no to exploration in the OCS, President Obama has also said no to thousands of American jobs while making our country more dependent on Middle Eastern oil,” U.S. Rep. Steve Scalise, R-Jefferson, said after voting in favor of the bill in July.

Also in the Senate, in addition to reorganizing the regulatory agencies under the Department of Energy, the Coats-Vitter legislation would give the Energy secretary – currently Steven Chu – the authority to modify or reject the Interior’s five-year plan.

It would also allow the secretary to amend a five-year plan if the Energy Information Administration determines that the U.S. “will require more than 1 million barrels of oil per day for the next fiscal year from foreign sources other than Canada and Mexico.”

The United States imported 5.6 million barrels of oil per day in 2011 from sources other than Canada and Mexico, according to the Energy Information Administration.

“Moving the office would immediately allow us to revisit that five-year plan, which we need to do,” Vitter said.

Obama has seen the bulk of the criticism for the 2012-2017 plan and the Bush administration blueprint he amended after taking office.

The Bush plan originally included 21 scheduled sales, but only 11 were held over the five-year period mostly overseen by Obama.

That 10-sale difference is attributed to a variety of factors: Five sales off the coast of Alaska were scrapped following a court decision in Center for Biological Diversity v. Department of the Interior; two more in Alaska were cancelled “due to lack of interest” so that researchers could further review the environment; one in the Western Gulf and one in the Mid-Atlantic were cancelled after the Deepwater Horizon disaster; and two sales in the Central Gulf were consolidated into one.

Just 2.4 million acres of the 39.3 million acres offered in the merged Central Gulf sales solicited bids. The sale attracted $1.7 billion in high-bid sales, the most in the Central Gulf since 2008’s $3.6 billion sale. A 2007 sale brought in $2.9 billion.

For context, the Landrieu-backed Senate legislation would schedule lease sales in the three Alaskan regions that were stripped following the court decision. It would also add four sales in the Mid-Atlantic and three in Southern California.

Suspended above all, the BP Deepwater Horizon disaster continues to impact all debate pertaining to offshore drilling: From safety regulations, to wanted environmental restrictions, to local and national economies, to quenching the nation’s crude-oil thirst and weaning its reliance on foreign sources, it changed the landscape and frames every debate.

“Just prior to the explosion, the Obama administration was literally getting ready to step forward and expand drilling into Virginia and other places, and the accident – which is BP and the other operators, their fault – knocked that plan completely off the shelf,” Landrieu said. “It has taken us several years to juggle back and to get back into a position for expanding drilling.”

Congressional attempts are under way in the House and the Senate to expand the amount of Outer Continental Shelf acres open to oil and natural gas exploration and development. Targeted areas for expansion include the Eastern Gulf, Mid-Atlantic and Southern California in addition to re-opening waters bordering Alaska that were closed after a court ruling.

FILE PHOTO