Industry Execs See Higher Costs, Improved Safety with New Regulations
Oil and gas companies will face a tougher regulatory regime in the United States as the U.S. government introduces new rules over the next two years to improve industry safety following the 2010 Deepwater Horizon incident, according to the findings of a recent survey by GL Noble Denton.
The independent industry technical provider's new report "Reinventing Regulation: The impact of U.S. reform on the oil and gas industry" includes data gathered from over 100 senior oil and gas professionals and in-depth interviews with 10 industry executives, analysts and academics.
Eighty-five percent of survey respondents told GL Noble Denton they expected the U.S. regulatory regime to become much tougher over the next two years. Sixty-one percent said they believed the changing regime would have a somewhat or highly negative effect on their business during the next two years.
Operators face new regulations such as being able to demonstrate they are prepared to deal with a blowout and worst-case discharge. At the same time, they are being forced to revise their approaches to issues such as well design, workplace safety and corporate accountability.
As a result, the oil and gas professionals surveyed anticipate greater administrative workloads and higher compliance costs. Seventy-eight percent expect regulatory changes will lead to greater administrative workload, while 82 percent expected compliance costs to increase. Fifty-seven percent expect the changes to impact their appetite for risk-taking.
A strong regulatory reaction is inevitable following an event such as Macondo and incidents such as Piper Alpha, a North Sea production platform that exploded in 1988, killing 167 men, said Arthur Stoddart, GL Noble Denton's executive vice president for the Americas, in an interview with Rigzone.
“No government could fail to act in the wake of such an incident. The regulations being implemented in the United States present new challenges for oil and gas operators in terms of rising costs and workloads, but these charges are absolutely necessary to improve safety and prevent a future oil spill,” Stoddart said in a statement.
Smaller oil and gas companies are the most likely to face the brunt of increasing compliance costs, burgeoning legal risks and a greater administrative workload. With the U.S. regulatory environment expected to become more stringent over the next two years, oil and gas professionals surveyed anticipate a rise in mergers and acquisitions among oil and gas operators as growing compliance costs speeds up consolidation.
The report, the third by GL Noble Denton which measures industry sentiment, didn't get into specifics on the exact increase of compliance costs, although one executive interviewed anticipated a 10 to 20 percent cost increase. The exact cost may be harder to quantify - longer times for obtaining drilling permits are expected, which can add to cost. Higher insurance costs also are expected. An operator may experience higher costs if they have to keep a rig longer due to an inspection interrupting drilling. But in other cases, they may not incur any additional cost due to downtime that would have occurred anyway.
While 76 percent of those surveyed prefer a performance or goal-oriented approach to compliance versus the prescriptive approach taken by the U.S. government, these professionals also believe the United States will remain a major destination for oil and gas investment. However, oil and gas industry executives surveyed believe that new safety regulations will improve safety and restore confidence in the industry, the survey found.
Nearly half the executives surveyed expect the new regime to boost safety in the industry. However, only one in 10 of the survey respondents believe the U.S. government is taking the right approach to preparing the oil for new regulations.
While operators have until 2014 to adjust to the new SEMS II regulations, they must still meet inspection requirements under SEMS I by the Nov. 15 deadline. However, GL Noble Denton found the respondents felt their companies were highly or somewhat prepared to meet the new standards.
“There was a bit of a feeling that the authorities could have been clearer, but overall they felt prepared,” said Stoddart.
The impact of new post-Macondo regulations will not only be felt by the U.S.-based oil and gas industry, but regulatory regimes worldwide as countries with existing and emerging oil and gas industries look at the United States and ask them whether they are doing enough, Stoddart told Rigzone.
"It's common for countries to look to mature markets for guidance on rules," Stoddart noted, adding that the UK looked to Texas in the 1970s when North Sea oil and gas exploration began to increase.
While countries may not necessarily being adding specific new rules, the global oil and gas industry is reacting to the changes in the United States by making these new standards global, and using them as a competitive advantage, Stoddart noted.
The UK utilized a prescriptive approach to oil and gas regulations until the Piper Alpha incident in 1988. Like the United States, the UK responded to the incident with significant regulatory changes, including a separation of the management of health, safety and environment issues and production revenues.
The UK also adopted a goal-oriented approach to safety, in which the operator must demonstrate they are meeting their goal of safe, responsible production, but are not told specifically how to meet this goal, said Stoddart, who sees countries with emerging oil and gas industries more likely to adopt a goal-oriented safety regime. GL Noble Denton officials also believe a goal-oriented approach can accommodate changes in technology more easily than a prescriptive approach.
The shortage of skilled technical workers in the industry topped the list of concerns among oil and gas professionals for the first time in the study's three-year history. While skills shortage ranked among the top five concerns, the shortage is now viewed as the biggest barrier to oil and gas industry growth, and the higher competency requirements will exacerbate the shortage.
Both government regulatory agencies and operators are competing to hire technical inspectors from the same limited pool of qualified candidates. GL Noble Denton officials see this trend occurring not only in the United States, but in the UK as well. With oil and gas companies able to pay more than government agencies, the top flier candidates typically get hired by operators, Stoddart noted.
Technical inspectors come from a variety of backgrounds, but are mainly engineers. The shortage of college graduates in engineering and science, technology, engineering and mathematics degrees becoming technical inspectors exacerbating the shortage of workers with this skill set.
The shortage of qualified inspectors is also made worse by the fact that only the most experienced and technically qualified candidates are sought out. Typically, people learn to operate at the edge of their experience, but the new rules prevent that, Stoddart noted.
Inspectors now have to demonstrate they are fully qualified to perform a job before they are given responsibility. However, they can't get the experience they need unless they are given the chance to actually do the job. The trend of not handing over responsibility unless it's certain a worker can perform a job will limit learning through projects.
The increased liability associated with deepwater projects might be playing a role in why operators are seeking to expand their portfolios to U.S. onshore plays. While there are still risks associated with onshore, Stoddart said the risks are not as likely to damage a company the way that a major incident like Macondo could. Offshore projects are competing with onshore projects not only for capital but for talent as well.
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