Doig's Digest - Arctic Drilling

National Energy Board – Arctic drilling

Ian Doig, Doig’s Digest

July 2010 - Why the rush considering that so many of the issues that will be dealt with have been lying dormant for 20 years and there has never been any real interest, until now, in dealing with them? Or is this a case of a regulator being proactive to changes that will certainly come, necessitating a lot of legislative time? Whatever, the rules of the game will be changing.

On June 10th, the National Energy Board (NEB) issued notice that it would be conducting a review of Arctic safety and environmental offshore drilling requirements. The results will be used by the regulator for its review of future offshore drilling applications in that area. July 16th is the magic date for interested parties to register if they want to partake in this undertaking. The scope of the review will be held under the following four major headings: drilling safely while protecting the environment, responding effectively when things go wrong, learnings, and filing requirements.

The eye of the storm, of course, is the Macondo well in the U.S. Gulf of Mexico that blew on April 20th and the Deepwater Horizon semi-submersible drilling rig owned by Transocean Ltd., which went down two days later. In total, the lives of 11 workers were lost in the horrendous deepwater drilling venture that is headed by BP PLC. Thus, the NEB is opening its review 87 days after the blowout and months before the U.S. will have released its findings.

Although the NEB is opening up this public review into drilling operations in the Arctic offshore, it is hoped that Ottawa will also put serious time into devising a plan as to how it would deal with a blowout. For if the Mackenzie Gas Project proceeding was Ottawa at its best, then the federal government had better get to this chore quickly. A major problem in that exercise was that too many different Ministries got involved and muddied the waters and also a cheerleader attempting to move the project along to meet his own political agenda.

Just take a look at what happened with the Macondo well. Although BP’s performance in this blowout has been dreadful, so has Washington’s execution. At the federal level, it was a muddle as to who was really controlling the effort. There have been too many departments and agencies involved. One word sums it up: disorganization. Avoidable internal U.S. politics has made a bad situation worse.

Remember that the Mackenzie Gas Project wasn’t a ‘one only.’ It came after the Sable Offshore Energy Project (SOEP) application and hearing in the late 1990s showed that the regulatory model was broken and in need of repairs. The only thing that saved SOEP from collapse was the item that was never mentioned during the hearing – higher natural gas prices. If prices had stayed in the $2.00 per Mcf range, the offshore development, which commenced operations on December 31, 1999 would never have made it to Year 10 (where it is now).

One blowout that will certainly get a look during the NEB review is the Montara well that last year became Australia’s worst offshore oil production spill. Drilled by PTT Public Company Limited (now called PTTEP Australasia), a Thai company, in the Timor Sea in water depths of 80 metres, 250 kilometres off the Kimberly coast of Western Australia, the well was out of control between August 21 and November 3, 2009 – 74 days. The Australian Government estimated that the spill was as high as 2,000 b/d, five times the company’s estimate of 400 b/d (sound familiar). It took 21 days to bring in a rig to commence drilling the relief well.

The first four attempts to plug that oil leak, which took a month, failed. The well was finally brought under control when the drill bit hit the 10-inch casin. BP is trying to hit a 7-inch casing at approximately twice that distance below the seabed. Of note, a fire broke out on the West Atlas jackup owned by Atlas Drilling during its final attempt to plug the Montara leak. Also, the well had no blowout preventer on the sea floor. The government has conducted a commission of inquiry on the Montara blowout but the results haven’t been released yet.

The issues confronting drilling in the Canadian Beaufort Sea, a northern body of water that, at best, is open for drilling 150 days a season, are huge and have become even larger after the Deepwater Horizon episode. But most of these issues were on the radar screen years back and disregarded. Of note is that the playpen for the multinational oil companies is becoming smaller. Consider that national oil companies now hold more than 75% of the world’s oil reserves and major international oil companies now control less than 10% of the world’s resource base. The remaining reserves are in the hands of partnerships between national oil companies and multinationals.

No company has more riding on the outcome of this NEB exercise than Imperial Oil Limited, which once traveled with sensors that smelled trouble. However, that is no longer the case today. Not only did the company, ten years ago, reopen its long held attempt to get approval to produce and transport natural gas in the Mackenzie Delta, when a seasoned look would have confirmed that the plan faced serious problems; but it also bid on acreage in the Canadian Beaufort Sea three years ago, when the same seasoned look would have given the same answer – problems.

On July 19, 2007, Indian and Northern Affairs Canada accepted a bid of $585.0 million for a 205,321-hectare parcel in the Beaufort Sea from Imperial Oil Resources Ventures Limited (50%) and ExxonMobil Canada Properties (50%). The parcel is 120 kilometres offshore in water depths ranging between 60 to 1,200 metres. The two companies were awarded exploration license (EL) 446 on October 1, 2007, for a nine-year term. Under the terms of the license a well has to be drilled or started by 2012 although that time frame can be extended to 2013.

On August 24, 2009, Imperial Oil began pushing the NEB for an advanced ruling on the Same Season Relief Well (SSRW) issue, so it could drill an exploration well during the open-water season of 2013. The company requested that the NEB approve its drilling application by November 30, 2009, so it could commission the construction of a new Arctic drilling and several new marine support vessels in the first quarter of 2010. Accordingly, the company’s application for a separate review was turned down and the NEB decided to carry out a policy review by way of a written process with an oral technical conference.

But Imperial Oil didn’t stop stating that its application was in full compliance with the NEB’s oral policy on SSRW capability based on equivalency and that it should consider its application expeditiously, without waiting for the comprehensive SSRW capability policy review to be completed.

By the end of 2009, the company had made investments in excess of $150 million to acquire 3-D seismic data, secure long lead delivery equipment, prepare detailed engineering of a new Arctic drillship, acquire baseline engineering and environmental data, and communicate its plan to the North.

Up until the Gulf of Mexico incident, the NEB had been moving towards a full hearing (MH-1-2010) on the SSRW issues as it pertains to drilling in the Beaufort Sea. Interestingly, this was one of the matters studied by an industry/government group in the early 1990s with recommendations submitted to Ottawa for action. Twenty years later, these reports, which also discussed liability and environmental and infrastructure matters, sit in the federal capital gathering dust.

Mercifully on May 11th, three weeks after the Deepwater Horizon went down, the NEB called a halt to the MH- 1-2010 proceeding and said that it would be initiating this review of Arctic safety and environmental drilling requirements. The Chairman of the NEB has admitted that the U.S. fallout from the blowout will be the driving force affecting future events in the Canadian Beaufort Sea. It is now likely that the area won’t see a drilling rig for at least 10 years. The cleanup of outstanding historical issues are that deep.

So there you are; Imperial Oil’s asking for an expeditious drilling application approval for a well to be drilled by a rig that hasn’t been built yet or even passed an independent inspection test to be allowed to drill in the Canadian Beaufort Sea and possibly a new blowout apparatus called the “Alternative Well Kill System” that is being advanced by Chevron Corporation. Unfortunately, neither has advanced beyond the planning stage.

Just imagine if there was a Beaufort Sea blowout and federal investigators came across the following in their examination of documents as to what went wrong: “..requests that the NEB, as it has done in the past, exercise its regulatory mandate and consider Imperial’s SSRW application expeditiously, without waiting for the comprehensive SSRW capability policy review to be completed” and “stating that its (Imperial Oil’s) application was in full compliance with the NEB’s oral policy on SSRW capability based on equivalency.” Not pretty but that is exactly what Imperial Oil was saying to the NEB in the fall of 2009 as it exerted pressure to get its drilling application approved and approved quickly.

So there you have it. Approximately 40% along on the time line of 60 months it had to drill a well or have started to drill a well on EL 446, somebody at Imperial Oil finally awoke to the fact that it is much easier to make a work bonus bid for land in the Beaufort Sea than to actual fulfill the requirements to get the drilling application approved.

Imperial Oil now says that it wants to drill on the Ajurak structure, which lies 120 kilometres offshore in water depths of 650 metres but not until 2014 or 2015, which are beyond the time limits on its EL. The company was trying to get its application across the finish line like Devon Canada Corporation did five years earlier when it was allowed to drill the Paktoa C-60 well in 11 metres of water just offshore on the Tuktoyaktuk Peninsula. But now, all the issues that were disregarded in the drilling of that well will now go under the magnifying glass.

Nobody knows for sure what happened on the Deepwater Horizon, and until that is cleared up the necessary remedial legislative changes won’t be enacted. There is no doubting that what happens in the U.S. will have a great bearing on what happens in Canada. Ottawa won’t be leading this charge.

What’s known for sure is that the legislative safe guards that were passed by Washington after the midnight ride of the Exxon Valdez in 1989 are showing themselves to be inadequate. Now an industry that now travels without public trust prepares for massive legislative changes before it gets back into further deepwater exploration drilling.

Unfortunately, things aren’t any better in Canada where the Canadian Arctic drilling file is being handled by the Minister of Environment, Jim Prentice, who claims that the country has plenty of time to learn the lessons from the BP blowout before Beaufort Sea drilling is to get underway in 2014.

Wow! If Mr. Prentice had spent five minutes on the file he would have known that Imperial Oil wants an answer now, not in the future, so it can meet an open-water 2014 time schedule. As it stands, the company has to drill a well on EL 446 by October 1, 2012, that can be extended to October 1, 2013. As with the Mackenzie Gas Project file, the Minister needs a primer on the operations of the Canadian oil industry.

So really, the NEB exercise is only an introduction. The heavy lifting that needs to be done won’t start until Washington’s National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling has completed and released its findings. In setting up this Commission on May 21st, the U.S. federal government called for findings and options for consideration within six months. It will most likely take longer. But the report, when issued, will be the litmus test that Canada will follow. The Canadian oil industry is on record as noting the significance of the blowout and wanting to fully understand what caused it. Only at that point can the lesson be applied to Canadian practices that, like those in the U.S. are badly in need of a major upgrade.

Note, the National Commission has set the deepwater marker at 152 metres.

Hopefully, the NEB can place some sanity around the liability issue that needs a serious rethink. The $40 million cap under the Arctic Water Pollution Prevention Act wasn’t reasonable 20 years ago and is even less so today. The decimal point must be moved much further to the right. At the present rate, the $40 million cap represents less than 0.5% of the market capitalization of Imperial Oil and BP, the two companies holding considerable acreage offshore in the Canadian Beaufort Sea.

The ridiculousness of the Canadian liability cap of $40 million shows is evident. To both Imperial Oil and BP it represents less than 0.5% of each company’s market capitalization. At the end of last month, the U.S. Senate Committee on Energy & Natural Resources voted unanimously to eliminate the $75 million liability cap that presently applies to offshore oil spill damages. Of even greater interest, this change, if enacted into law, will apply retroactively. Hopefully, Canada quickly follows suit in the same direction.

As it enters this review, the NEB is facing the same question confronting U.S. regulators: How do you legislate against human errors in deepwater exercises?