New U.S. Drilling Moratorium: Same Song, Different Verse

Secretary of the Interior Ken Salazar on Monday directed the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM) to issue new suspensions of deepwater drilling on the Outer Continental Shelf (OCS), including the Gulf of Mexico and Pacific regions through Nov. 30 of this year.

The new drilling suspensions marks Salazar and BOEM's second effort to suspend deepwater drilling operations in the U.S. Gulf in response to the BP oil spill. The first moratorium, issued in late May, was lifted by a district judge on June 22; a panel of federal district judges refused BOEM's appeal to reverse the lower court's decision.

The new suspensions would apply to drilling operations that use subsea blowout preventers (BOP) or surface BOPs on floating facilities. Secretary Salazar has further directed BOEM to cease the approval of pending and future applications for permits to drill wells using subsea or surface BOPs on a floating facility.

While the May 27 moratorium suspended drilling activity by water depths, the new moratorium would not suspend activity based on water depth, but on the basis of drilling configurations and technologies.

"While the new version is effectively the same as the old one, it appears the DOI's legal team used the new version as a rebuttal to the recent legal proceedings, with more evidence to address the deficiencies of the old moratorium," said Jefferies & Co. Inc. Analyst Judson E. Bailey in a recent report. Bailey described the new moratorium as the "same package wrapped in different paper."

Salazar said the latest suspensions are based on new evidence regarding safety concerns, blowout containment shortcomings within the industry, and spill response capabilities that are constrained by the BP oil spill. Salazar also said this information indicated that allowing new deepwater drilling to commence would pose a threat of serious, irreparable, or immediate harm or damage to the marine, coastal and human environment.

"More than eighty days into the BP oil spill, a pause on deepwater drilling is essential and appropriate to protect communities, coasts, and wildlife from the risks that deepwater drilling currently pose," said Secretary Salazar. "I am basing my decision on evidence that grows every day of the industry's inability in the deepwater to contain a catastrophic blowout, respond to an oil spill, and to operate safely."

In a decision memorandum to BOEM Director Michael R. Bromwich, Salazar said that a temporary pause on deepwater drilling will provide time to implement recent safety reforms and for:

  • The submission of evidence by operators demonstrating that they have the ability to respond effectively to a potential oil spill in the Gulf, given the unprecedented commitment of available oil spill response resources that are now being dedicated to the BP oil spill;
  • The assessment of wild well intervention and blowout containment resources to determine the strategies and methods by which they can be made more readily available should another blowout occur; and
  • The collection and analysis of key evidence regarding the potential causes of the April 20, 2010 explosion and sinking of the Deepwater Horizon offshore drilling rig, including information collected by the Presidential Commission and other investigations.

In his decision memo, Secretary Salazar said that the inspection of blowout preventers on the new Macondo relief wells identified unexpected performance problems. During ROV hot stab testing, the Lower Marine Riser Package disconnect function was unsuccessful because of a leaking shuttle valve.

Inspections also found that a failed shuttle valve caused an unsuccessful test of the All Stabs Retract function; a failure of the dead-man test was found because a shuttle valve was installed that should not have been; and a broken solenoid connection was encountered on the blue pod that prevented that pod from closing the casing shear rams.

In this period, the Department and BOEM will also be issuing and implementing interim safety rules in accordance with recommendations in the 30-Day Safety Report that Secretary Salazar submitted to the President on May 27, 2010.

The new decision by the Secretary also establishes a process through which BOEM will gather and analyze new information from the public, experts, stakeholders, and the industry on safety and response issues, which could potentially provide the basis for identifying conditions for resuming certain deepwater drilling activities.

"I remain open to modifying the new deepwater drilling suspensions based on new information," said Secretary Salazar, "but industry must raise the bar on its practices and answer fundamental questions about deepwater safety, blowout prevention and containment, and oil spill response."

Shallow water drilling activities that use different technologies do not present the same type or level of risks as deepwater drilling operations and can continue to move forward if operators are in compliance with all safety and environmental requirements, including new safety and environmental requirements implemented through recent Notices to Lessees. Production activities in federal waters of the Gulf are not affected by the deepwater drilling suspensions.

BOEM has been tracking shallow water drilling permit requests and well modification permit requests that are required to include the information outlined in NTL-N05 (Safety NTL) and/or NTL-N06 (Environmental NTL).

For those applications required to comply only with NTL-N05, 16 applications have been approved and 16 are pending. For those applications required to comply with NTL –N05 and NTL-N06, 12 requests are pending.

In addition, since June 8, BOEM has approved 18 other shallow water permits, and 4 others are pending, to which there were no permit-specific requirements in either NTL. However, the applicants had to comply with NTL-N05's general (company-wide) certification requirements before these applications could be processed.

Bailey said the new moratorium to halt drilling will result in continuing uncertainty on offshore drillers and Gulf of Mexico-centered offshore supply vessel companies as the moratorium does not provide a meaningful likelihood of deepwater activity resuming before early 2011.

One bright note is the new moratorium's official end date of Nov. 30, 2010, which is a couple of months shorter than the earlier moratorium's implied deadline and follows the newly established report deadline of Oct. 31. "The Secretary did allow some wiggle room in the time-line if he receives sufficient evidence of information that justifies a modification to the deadline," Bailey said.

While Bailey expects the new moratorium to be challenged in court and quite possibly be overruled again, "we expect to see continued movement of floaters outside the GOM, further force majeure declarations and contract renegotiations for rigs staying in the GOM."

Houston-based drilling company Diamond Offshore has announced that two of its floaters, Ocean Endeavor and Ocean Confidence, will leave the Gulf for drilling contracts offshore Egypt and the Congo. While Ocean Confidence is expected to return to the Gulf for its original work scope in Africa, Ocean Endeavor is not expected to return, Bailey noted.


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