Exxon Says '$25B Rule' Will Sink Deepwater Oil Drilling

Exxon Says '$25B Rule' Will Sink Deepwater Oil Drilling
The world's biggest oil explorers are fighting a US plan to toughen offshore drilling rules that ExxonMobil said will cost $25B over 10 years and render many offshore discoveries worthless.

(Bloomberg) -- The world’s biggest oil explorers are fighting a U.S. plan to toughen offshore drilling rules that Exxon Mobil Corp. said will cost $25 billion over 10 years and render many offshore discoveries worthless.

The Obama administration is expected to issue the sweeping new regulations Thursday, a person familiar with the decision said, as part of an effort to reduce the number of well blowouts after the explosion aboard the Deepwater Horizon rig in 2010. The government has pegged the rules’ costs at less than $1 billion.

The changes would arrive amid the worst oil slump in a generation. ConocoPhillips and Chevron Corp. have already abandoned some Gulf prospects because they wouldn’t be profitable at current prices. If the proposals are enacted, exploration outlays in the Gulf will tumble by 70 percent over the next two decades, wiping out as many as 190,000 jobs, according to consulting firm Wood Mackenzie Ltd.

“The Gulf of Mexico is already in a deep downturn as a result of lower oil prices,” said Robin Shoemaker, an industry analyst at Keybanc Capital Markets Inc. “Oil companies and the service providers are trying to come up with ways to reduce costs so the idea that they can absorb any additional expenses -- they’re not in that ballpark at all.”

The regulations, first proposed last year, have been in the final stage of review by the White House Office of Management and Budget. The proposal restricts the fluids pumped into wells, require redundant safety devices and stipulate continuous monitoring from shore. They’re needed because well blowouts have continued at about the same rate as before the explosion at  BP Plc’s Macondo well in 2010 that killed 11 and spewed millions of gallons of crude, the government says. 

Environmental groups say the new rules don’t go far enough to safeguard marine life and the people who depend on it for their livelihoods. Friends of the Earth has called on the government to halt all auctions of offshore drilling leases.

“There’s no such thing as safe offshore drilling,” said Marissa Knodel, a climate campaigner for the Washington-based group. “Tougher rules aren’t going to mitigate the human and environmental costs of allowing more drilling to occur.”

Government Shortcomings

In a closed-door meeting last month, BP, the largest driller in the U.S., said the government underestimated the time and complexity needed to implement the rules, ignored the reduced production and stranded reserves that would result, and added unneeded operations that could boost risks rather than decrease them. The comments came in slides Exxon presented at the meeting and were posted on a  government website.

The Deepwater Horizon disaster looms large over federal attempts to tighten requirements. The blowout at the $153 million well sank a $365 million drillship, paralyzed the Gulf region for months and cost BP more than $40 billion in penalties, compensation and restoration costs.

Exxon, in the closed-door meeting with White House and Interior Department officials on March 7, outlined its assertion that the rules will cost $25 billion and argued they would increase the danger of a blowout by wresting decision-making from on-site engineers with decades of experience. 

Increasing Risk

Some rock formations can’t handle the heft of drilling fluids that would be required, while the proposal for pouring cement around the steel pipe lining a well would boost the risk of dangerous air pockets and cracks, according to slides Exxon presented at the meeting.

Emily Cain, an Office of Management and Budget spokeswoman, declined to comment. Bill Holbrook, an Exxon spokesman, also declined to comment for this article.

“It is abundantly clear that despite post-Macondo improvements in safety and technological advancements, there are still issues that must be addressed,” Brian Salerno, director of the Bureau of Safety and Environmental Enforcement, said in December testimony before the Senate Energy and Natural Resources Committee.

In 2013 and 2014, drillers in the Gulf lost control of eight and seven wells, respectively, according to Salerno. One incident resulted in a blowout “that caused a massive explosion and fire on the rig,” he told the senators.

More Dire

Exxon’s $25 billion warning isn’t even the most dire forecast out there. An analysis conducted by consulting firms Quest Offshore and Blade Energy Partners on behalf of the industry-funded American Petroleum Institute estimated extra costs over 10 years at $31.8 billion and result in the the loss of the equivalent of 500,000 barrels of crude a day by 2030.

Crude output from the U.S sector of the Gulf will reach a record 1.91 million barrels a day by the end of next year as discoveries dating as far back as 2005 come online after years of design, drilling and construction work, the Energy Information Administration said last month.

In the March 7 meeting, Exxon cited an industry review of 175 Gulf wells drilled since 2010 that concluded 63 percent couldn’t be drilled as designed if the new rules had been in place.

Other explorers, rig operators and equipment makers who sought and conducted closed-door meetings with bureau personnel included Chevron, Royal Dutch Shell Plc, Halliburton Co., Murphy Oil Corp., GE Oil & Gas, National Oilwell Varco Inc. and Transocean Ltd., according to attendance logs published on the government website.

A requirement that would set a safe drilling margin was a major point of contention. Concerns evolved over time, and, in the end, were less about the provision and more about how the agency would interpret it.

“We heard them loud and clear that that was a big issue,” Allyson Anderson Book, associate director of the Bureau of Safety and Environmental Enforcement, said. “We have taken that to heart,” she said, “and I think it will help them down the road when they have an understanding of how it would be implemented.”

--With assistance from Jennifer A. Dlouhy. To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Dan Stets, Carlos Caminada


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

michael mclaughlin  |  April 19, 2016
The big energy companies kick and fuss and keep on going. On the one hand some of you blame the government for no control of off shore drilling and then blame the government for too much regulations. You want clean air and water (or so you say) and yet you want no way to do it except from the goodness of the companys heart.. As soon as crude prices rise everyone will be happy in the oil business. and the rest of us can pay $4 for gasoline.
Conrad Maher  |  April 17, 2016
The oil industry has not gotten their act together to do sufficient planning to reduce the risk to that which is acceptable. (Whining) about government regulations does not help. Setting high standards and leading way in implementing those standards will help. Mr. Pritchard has it right. Knowing more about formations and how they react to different drilling fluids and drilling operations can go a long way towards preventing blowouts. More experienced personnel and good drilling programs will also help. Conditions are dynamic and there need(s) to be enough personnel on the rig to deal with the unexpected in sufficient time to avoid wells getting out of control. Because the wells are often near the pressure that will open existing fractures or induce new fractures, the personnel need to know about rock mechanics and fluid mechanics in more than a superficial way. They must know and understand their equipment to respond in seconds to an unexpected event with confidence. They should be managing the drilling operations and measurements in the well in a competent manner with the knowledge to mitigate against unexpected events.
Gene  |  April 17, 2016
Based on comments it is obvious that some Rigzone members are not employed in the oil and gas industry, and that their knowledge of drilling operations is sorely lacking. Some of you apparently believe whatever supports your hate for the O&G industry, without taking time to understand the facts. One glaring example of the policy that will increase, not decrease, the risk of losing control of a well, is the rule to maintain a safe margin, including when the BOP is removed from the well. This is not impossible in a well with a surface BOP stack, but it is not even close to feasible in deep waters where the BOP stack is on the ocean floor. The drilling fluid density required to achieve this would fracture the formations in most scenarios. Now think about this situation. How can well control be maintained when circulation is lost? This is the situation the rule would create almost universally, a disaster waiting to happen.
Jill  |  April 15, 2016
This will make offshore drilling so expensive that they will stop all but the best prospects. That will eliminate work for me and a whole lot of other people in the Gulf of Mexico and around the world. I have already been out of work for over 6 months (with no unemployment benefits). I have no hope of finding work until they start hiring offshore again. In my opinion, working offshore is not perfect, but it is safe enough. I want someone to tell me what IS perfect in this world? And why should the oil industry be the only one penalized into trying to be perfect? Like the environmentalists say, the only way to have safe offshore drilling, is to have NO offshore drilling. I think that is exactly what they (and Obama) want. No offshore drilling. I think we need it to continue, for jobs - both direct and indirect- and for a lot of other benefits like lower prices on a lot of things, ability for more people to travel, etc.
David Pritchard  |  April 15, 2016
In deepwater drilling, predictions as to drilling margin are just that: predictions. Drilling teams often need to calibrate predictions in real time in concert with the geoscientists. Statistics prove that many incidents of lost circulation, kicks and stuck pipe are a hierarchy of what amounts to a failure of the entire rig and geoscience teams to understand that the drilling margin is dynamic and always uncertain. If one looks at the forensics of many GOM DW failures, and I have, then the root causes of failures would be clear: Drilling too fast to clean the hole, load it with cuttings and fracturing the wellbore, which can then lead to kicks, stuck pipe, side tracks, even lost wells. Halliburton estimates that wellbore instability costs the industry over 8 billion a year, and I submit is a very low number. I contend the facts prove that better management of the drilling margin and awareness will actually save money, not cost money. We are having far too many incidents that again, if one looks at the data, and understands the changing dynamics of the drilling margin in real times, drilling reliability will improve.
Jake Ames  |  April 15, 2016
Dont blame the EPA for doing its job. People still use oil and workers in the most economical oil segments will still have jobs. SOMETHING has to be obsolete when the price of oil drops. For all the publicity, it looks like the frackers have a pretty robust business. When prices come up a little, frackers will go back to work in the choicest places. The Athbasca Tar Sands and deep sea drilling involve environmental risks no one wants to pay for. Let that oil stay in the ground until we figure out cheaper ways to get it safely. Political partisans still want us to use high sulfur coal. There's no sense shutting in fracking wells just to annoy regulators. The Great Leap to the Right has jumped the shark.
Brook  |  April 14, 2016
Legislation through regulation. That has been Obama's governing method since the Dems lost control of Congress. Clearly, he and his Chicago machine despise the oil industry and desire to raise the cost of energy such that alternative energy will be profitable for providers and unaffordable for low and middle income Americans. I hope the oil industry will sue BSEE immediately and tie up this ridiculous regulation for as long as necessary. BSEE bureaucrats and their ... engineers must be stopped.
eclogite  |  April 14, 2016
So the oil patch goes elsewhere and the greens got what they wanted, so everybody is happy.
Robert  |  April 14, 2016
You want to talk about people making rules for an industry they know nothing about? How about someone checking into the trucking industry and what the FMCSA has been doing to truckers for decades now. And they barely break even, much less make billions in profits like the oil and gas industry does. I worked in both industries, as an independent trucker and as an offshore service company worker in the GOM deepwater, and I can tell you from firsthand knowledge that truckers get the shaft and oil and gas gets treated with kids gloves in comparison.
Colin Weller  |  April 14, 2016
Oh no $25 billion over the next 10 years...thats only about half of exxons annual profit in 1 year! Wow a 12 year old could figure out how to spread that out over 10 years and still have plenty of money. Thats only about 5% of their annual profit each year over ten.
Nolan  |  April 14, 2016
How many of the people making these regulations even know what technology is used in offshore drilling? Another government agency the has no expertise in the field making rules that cost the consumer in the end. Get the government out of the oil industry they will only ruin it like they have healthcare.
BARRY SINANAN  |  April 14, 2016
USA will never be energy independent.
Turd_Ferguson  |  April 14, 2016
This is going to make oil SO SO expensive. Probably part of Obamas intention to make renewables more competitive. The US industry will probably get another two decades before its regulated out of business. About my retirement time. Then you can watch everyone cry when they can longer afford to buy milk, pineapple, sushi, imported cheese and wine or orange juice because its too expensive to ship it to the grocery stores from half way around the world. No one in the US had any of those things before cheap oil made it possible to have them in your local market by about the 1920s.
Barry Hines  |  April 14, 2016
You killing only jobs of the blue collar working class. The CEOs will be fine.
Gail  |  April 14, 2016
It's real hard for me to feel sorry for the oil industry ... And since Katrina when gasoline jumped to $4 a gallon and hasn't gone down until the last year, they should have been saving their money instead of buying politicians. It's time for some regulation before they drop another million of gallons of oil in the ocean.
Melvin McCallum  |  April 13, 2016
I think the government should stay out of the oil business.

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