http://www.nytimes.com/gwire/2010/10/08/08greenwire-obama-admin-says-new-offshore-safety-rules-may-19250.html
Greenwire
By KATIE HOWELL of Greenwire
Published: October 8, 2010
The Obama administration is acknowledging that its new offshore drilling safety regulations will raise costs for the oil and gas industry — and may also delay some offshore development, slightly increase gas prices and kill some jobs.
The new rules unveiled last week would increase operating costs by an estimated $1.42 million for each new deepwater well drilled with a floating rig, $170,000 for each new deepwater well drilled with a platform rig and $90,000 for each new shallow-water well, according to an Interior Department notice released yesterday.
Interior says the cost of compliance with the new rules is “not an insignificant amount” but would add on less than 2 percent of the cost of drilling a well in deep water and 1 percent for shallow-water wells. Typical deepwater wells drilled with floating platforms usually cost about $90 million to $100 million, Interior says in the notice to be published next week in the Federal Register.
“The rule does have an effect on energy supply, distribution, or use because its provisions may delay development of some OCS oil and gas resources,” the notice says. “The recurring costs imposed on new drilling by this rule are very small (2 percent) relative to the cost of drilling a well in deepwater. In view of the high risk-reward associated with deepwater exploration in general, we do not expect this small regulatory surcharge from this rule to result in meaningful reduction in discoveries.”
But the cost of compliance could cause a slight increase in oil and gas prices and could drive up U.S. dependence on foreign oil, the notice says, although not enough to affect world markets. It could also lead to job losses at the more than 130 companies that own active leases in federal waters and more than a dozen drilling contractors and their suppliers.
“A meaningful increase in costs as a result of more stringent regulations and increased drilling costs may result in a reduction in the pace of deepwater drilling activity on marginal offshore fields, and reduce investment in our domestic energy resources from what it otherwise would be, thereby reducing employment in [outer continental shelf] and related support industries,” Interior’s notice says.
But those negative risks are worth it, Interior says, and environmentalists agree. “The measures codified in this rule will reduce the likelihood of such an event in the future, at a cost that is not prohibitive, and therefore this rulemaking is justified,” the rule says.
But industry says the increased cost of compliance could be tough for smaller operators to bear.
“When you look at this issue of increased compliance cost, increased regulation coupled with discussions of unlimited liability … all make, certainly, some amount of uncertainty for our producers, if not flat-out stop them. They’ll have to take a very serious look at whether to continue operating in the Gulf of Mexico,” said Dan Naatz, vice president of federal resources at the Independent Petroleum Association of America. “Will it stop activity in the Gulf? I’m not saying that, but it certainly will make us take a serious look.”
Interior, too, says smaller producers could be negatively affected by the increased compliance costs, but that the brunt of the increased costs will be borne by larger companies.
“The overwhelming share of the cost imposed by these regulations will fall on companies drilling deepwater wells, which are predominantly the larger companies,” the notice says. “In fact, 90 percent of the total costs will be imposed on deepwater lessees and operators where small business only hold 12 percent of the leases.”
Interior says the economic effect on small businesses will be analyzed more thoroughly in a separate analysis.
The American Petroleum Institute, the industry’s main trade group, is still reviewing the details of the new rules but warned against implementing new regulations that could stifle the domestic oil and gas industry.
“There has to be a clear, practical and certain process for project review that will protect the environment,” API’s upstream director Erik Milito said in an e-mailed statement. “We cannot have an approval process that creates unpredictable delays that could place at risk the flow of domestic energy in our country.”
Interior is imposing the new rules in the wake of this summer’s oil spill in the Gulf of Mexico. The drilling safety rule will take effect immediately once it is published in the Federal Register on Thursday.
It details the cementing, casing and drilling fluid procedures that drillers should use in order to maintain wellbore integrity while drilling. It also strengthens oversight of equipment, like blowout preventers, used to shut off the flow of oil and gas.
Interior is also imposing a rule on workplace safety that will take effect next Friday.
Special thanks to Richard Charter