Musings: Oil Industry Confronts Ghost of Future Regulation

At the National Ocean Industries Association (NOIA) fall meeting held at the end of October, the audience of executives from oil and gas companies and oilfield service companies with a strong focus on drilling and producing in U.S. waters were treated to a presentation from Michael Bromwich, the new director of the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE, sometimes shortened to BOEM). The conference program for that day was adjusted to squeeze in an extra 30 minutes of presentation time to accommodate Director Bromwich. 

The meeting room was filled by all the attending members in anticipation of the presentation. There had been considerable speculation about what he would say and the tone he would use. There were thoughts that Director Bromwich would use this conference of offshore industry executives to spell out more about his views on how quickly permits would be issued for drilling in the Gulf of Mexico. There were other, more skeptical views suggesting that the presentation would be treated as more an obligatory necessity with little new and/or revolutionary information in his message. 

With great anticipation, the audience took its seats. The session chairperson strode to the podium and began the introduction. She forewarned the audience that Director Bromwich was on a tight schedule and only had 30 minutes with us, thus the reason why she was starting a bit early and wanted everyone's attention. After the requisite background comments highlighting Director Bromwich's legal career and government service, including the highly-praised investigation of the Houston Medical Examiner's Office, the introduction concluded. Director Bromwich appeared from behind the stage and walked up to the podium. After acknowledging the introductory comments and how he had met and gotten to know a number of industry executives in the audience as a result of the numerous hearings his organization had held with the industry dealing with the investigation of the Deepwater Horizon accident and the BP oil spill and the need for changes in offshore drilling procedures and safety rules, he launched into his prepared remarks. 

The opening thrust of the presentation was that there was a fundamental shortcoming in offshore drilling resources and capability to control a deepwater blowout compared to what the regulators had been led to believe. The spill response effort was deemed inadequate and not acceptable. He said neither the offshore industry nor the nation was prepared for the magnitude of the event that occurred. The nearly 60 year safety and environmental record of the offshore oil and gas industry he attributed to luck!  If there was any statement that grated every member of the audience that was it. All the advances in drilling, production and safety practices along with the technology developments were all the result of chance according to Director Bromwich. 

After swallowing that bitter pill, the audience waited for insights about when the first deepwater exploration drilling permits might be issued.  While the industry welcomed the lifting of the deepwater drilling moratorium, they have found it has only been replaced with a "permitorium." As the saying goes, a 'rose by any other name is still a rose.' A suspension of drilling activity, i.e., a moratorium, is still a suspension as long as the government won't, or can't, issue permits to drill. Until permits start flowing, the Gulf of Mexico will truly bear the historical designation as the Dead Sea given it by long-time Tidewater (TDW-NYSE) Chairman John Laborde back in the late 1980s when oil and gas prices were severely depressed. 

Director Bromwich generated optimism among some in the audience with his comments about the timing of the granting of deepwater drilling permits. He said he believed that a permit will be issued before year-end, but the reason for the timing was due to the agency having thrown all available resources on the issue. But he acknowledged that the BOEMRE had only received one permit application so far. We found in our discussions with attendees that virtually every major oil company was preparing an application, so it is hard to know who might be the lottery winner.

The optimism about the deepwater drilling permit situation was generated by the fact that Director Bromwich had not rejected the potential of an award before year-end. Since he had previously said that the moratorium would likely be lifted early, which it was, his statement about a permit grant soon was treated as a positive prediction. We understand the logic of this optimistic view, but would caveat that the decision to lift the deepwater drilling moratorium was driven by an entirely different set of circumstances, principally that there was an election and eliminating a voter irritant for some Gulf Coast Democratic Congressmen might help their re-election chances. This action was just as politically motivated as the Environmental Protection Agency's (EPA) decision to approve an increase in the percentage of ethanol that can be blended into motor gasoline from 10% to 15% for modern cars a few weeks ago.  One merely needs to note that there are some key Iowa and other corn-growing state congressional races that would be helped by improving the financial lot of farmers and ethanol plant owners. 

After discussing the reorganization of the former Minerals Management Service (MMS) into three separate and focused departments that eliminate the conflicts of interest and the potential for cozy regulatory relations, Director Bromwich went on to talk about his plans for the regulatory organization. He would like to increase the regulatory staff by 200 inspectors and engineers. To do that the agency has been contacting retired oil company offshore drilling and production engineers in hopes of getting some of them to return to the industry as a public service. Of course, any returning retiree will present a huge conflict of interest management challenge for BOEMRE. They certainly couldn't oversee operations of their former employer or employers, but more importantly they would likely be conflicted from regulating any of their former employer's joint venture partners, too. The agency is also recruiting on college campuses where there are established petroleum education programs. 

While it is admirable seeing the effort of BOEMRE to attempt to recruit additional staff, one has to wonder how easily and quickly the effort will expand the capability of the agency. Recent petroleum study graduates will certainly need extensive time and training before they will be prepared to do offshore inspections. And recruiting retirees presents its own set of management challenges outlined above. We had received an email from an industry participant two weeks ago pointing out that the BOEMRE web site listed only four job openings in the Gulf Coast region – one IT specialist, two interns and one engineer. Last week, the listings had doubled to include two IT people, two interns and four engineers and inspectors. At that recruitment pace it will take a while before 200 new engineers and inspectors are hired and trained.

At the end of his prepared remarks, Director Bromwich answered two questions posed by the session chairperson. We assume that these questions had been previously prepared. Then the session was opened up to questions from the audience. The first question was somewhat unfriendly, although not presented that way, but its essence rested on certain premises that Director Bromwich took issue with. The more insightful question involved the extension of leases due to the moratorium. Director Bromwich said that there would be no blanket extension but rather they would be taken up on a case by case basis. The determination would be whether the moratorium actually delayed drilling on the lease. So while all drilling could be stopped by the moratorium, not all leases would be extended. Although we don't expect Todd Hornbeck and his team to be leading the charge to the courthouse on this issue, we certainly expect some producer will take the government to court over the inequity of this action.

After taking the two audience questions, Director Bromwich left the podium and exited by going behind the stage. We were taken aback by this arrogant display by an industry regulator, but viewed it as part of the message he was delivering – we are here to regulate you and as such we will be judge and jury, which means we cannot mingle. 

We may be proven wrong, but it is our belief that Director Bromwich's arrogant appearance at the NOIA meeting signals a more adversarial relationship between BOEMRE and the industry. Clearly we are only just beginning to see the new offshore drilling and safety regulations. But it was clear from Director Bromwich's comments that more regulations are coming and they have yet to be written. If you want to chill oil industry spending, create an environment where no one knows the rules. We haven't even addressed the impact on offshore activity from higher producer liability limits and other rules that will limit the number of oil and gas companies that can operate in the Gulf of Mexico. It is hard to see any quick return to offshore activity levels that approach those that existed before the Deepwater Horizon disaster. We see at best a long, slow recovery in Gulf of Mexico activity.