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January 2013 Issue

Offshore Industry Capabilities Increase Even as Regulations Rise

By Randall Luthi
President, National Ocean Industries Association

A new year traditionally brings hope of a new beginning, renewed optimism and a general feeling of starting afresh. The presidential election in November offered an opportunity for a new beginning for the U.S. However, the re-election of President Barack Obama made it clear that a majority of U.S. voters were more comfortable staying with the current course. What does that mean for the offshore energy industry?

Federal Plans for the OCS
The 2012 to 2017 Outer Continental Shelf (OCS) Oil and Gas Leasing Plan produced last summer was another opportunity for a new beginning. For the first time in three decades, the secretary of the Interior had the chance to include new areas of the OCS for exploration and possible development. Long-standing congressional moratoria and a presidential withdrawal ceased in 2008, leaving the entire OCS on the table for inclusion in the new plan. Instead, the Obama administration approved a plan that continues to lock up approximately 85 percent of the OCS to oil and natural gas exploration, forcing industry to explore the same areas it has for the past three decades in just 15 percent of the OCS.

However, thanks to industry-driven advancements, technology will continue to improve methods for finding oil and natural gas in areas that were thought to be nearly played out. It has certainly happened in the past. In the 1980s, government estimates indicated that the Gulf of Mexico oil and natural gas fields had reached their peak, and it was expected that production would decline. Due to new technology, the offshore industry produced six times more oil as that decade's estimates predicted to have even existed, with billions of more barrels still yet to be harnessed.

This example illustrates tremendous possibilities for the 85 percent of the OCS not included in the administration's new offshore leasing plan. Resource estimates for these areas are decades-old due to the previously mentioned congressional moratoria and presidential withdrawal. The true resource potential for these areas will be unknown until surveys using modern technology are conducted, and the areas are open for active exploration and development.

On the bright side, industry activity in the Gulf of Mexico is on the rise, and 2013 may well be the year when we can positively state that exploration and production in the gulf has recovered from Macondo in 2010 and the post-spill moratoria. Drilling rigs are back, and more are slated to return in 2013.

Idle Iron
This year may also prove to be the year of idle iron, as companies, anglers, divers, and state and federal regulators continue to search for an acceptable solution beneficial to all parties. As production matures in many areas of the Gulf of Mexico, it is estimated that about one-third of the 3,600-plus offshore oil and natural gas platforms will be scheduled for decommissioning and removal in the next five years.

Companies are bound by their lease terms to properly plug wells no longer in use and remove the associated structures. However, many of those structures support coral and fish populations, which are a resource for anglers, divers and other recreationists. These platforms have created habitat and prime fishing spots where none existed before. Approximately 1,875 acres of coral reef habitat thrives on the structures, facing decommissioning and removal.

In addition, platforms damaged and toppled by hurricanes, such as Rita and Katrina, can also become reef bases for fish and coral. Operators have spent years and millions of dollars plugging the wells, where necessary, and now many are also planning to remove damaged and toppled structures. Unfortunately, removal of these structures will also permanently remove habitats.

Everyone agrees that offshore structures, whether upright or toppled, cannot be merely abandoned. Someone must remain financially responsible for maintenance and potential liability. Under federal law, it is the operators and subsequent owners of such structures who remain ultimately responsible. Therefore, in addition to the requirements of lease terms, companies also have a vested interest in removing structures. This gives them an opportunity to shut the liability book on a structure that could last for scores of years. In addition, there are many companies that specialize in decommissioning and removal work, with their business plans and livelihoods built on the premise that structures are to be safely and permanently removed.

Rigs-to-Reefs Program
The Bureau of Safety and Environmental Enforcement's (BSEE) Rigs-to-Reefs program has garnered industry support and has allowed many structures to be towed to artificial reef sites. In certain circumstances, some structures have been allowed to be reefed in place.

Once admitted to the Rigs-to-Reefs program, liability is transferred to the appropriate state. Other issues involved in reefing in place are physical spacing, interference with shrimpers and trawlers, and leaving adequate space for future pipelines. What can and cannot be left on the skeleton of a structure is also an area of discussion.

The permitting pace of reefing structures did not keep up with industry capacity for much of 2012. Hopefully, 2013 brings a streamlined permitting process whereby operators can choose to remove or reef more structures that have proven to provide fish and coral habitat. Certainly undersea technology will be a useful tool in determining candidates for either removal or reefing.

Offshore Policy and Regulations
The Bureau of Ocean Energy Management (BOEM) and BSEE, originally two-thirds of the Minerals Management Service, will celebrate their second anniversary in October 2013 and now have substantially increased funding—albeit, at least in part, through increased inspection fees.

However, increased measures instituted by the two agencies have resulted in the need for additional documentation and information from industry, requiring more time and personnel to review and approve or disapprove a permit, exploration plan, development and production plan, or decommissioning actions. Industry's growing capacity may outpace the ability of the regulators to review the many permits and new requirements instituted in the post-Macondo era. Could this make 2013 the year when permits that are being granted just in time come just a little too late?

We can be certain that 2013 will bring a continuation of new requirements for the offshore industry. During the last quarter of 2012, there was lively discussion around changes to blowout preventer regulations, additional requirements under the Safety and Environmental Management System, whether the 'should to must' issue has been successfully addressed, and whether and when BSEE should directly regulate contractors. The devilish details will likely carry over into 2013.

Looking Ahead
It is hoped that this year brings more open dialogue between BOEM, BSEE and the industry in a way that enhances the highly necessary coordination and cooperation between the regulators and industry.

This should be a year of sharing technological advances and an understanding of what can be accomplished when both industry and regulators work together to provide more domestic energy, jobs and energy security.

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