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Deep Water, Deep Trouble

By Angela Henshall
The Wall Street Journal
The explosion of the Deepwater Horizon oil rig in the Gulf of Mexico illustrates the unique challenges now facing the energy industry. In fact, stakeholders are now looking for evidence that companies have robust spill contingency plans and clear guidelines for contractor selection and oversight, according to Ceres' Oil Industry Program Director Andrew Logan.

While there has been no shortage of industries that have shown themselves to be susceptible to a variety of risks in the past year, the explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, which claimed 11 lives, illustrates the unique challenges facing the energy industry as it tries to tap deposits in deeper and more hostile environments.

Technological advances mean that previously inaccessible oil is now reachable. But that doesn't make it easy to extract. A mile under the water, at the kind of depths of the Macondo well, no sunlight can pierce the gloom, the water is near freezing and the pressure is great enough to crush a submarine.

Those dangers were clearly illustrated in the accident on April 20 this year, which resulted in the largest – and, potentially, most expensive – accidental marine oil spill in the history of the petroleum industry. Questions are now being raised about whether the industry needs to improve its risk management procedures to prevent any repetition. Shareholders are especially focusing their attention on governance, compliance, and the management systems needed to minimize risk in deepwater offshore oil and gas developments around the world.

The BP oil disaster sparked a flurry of letters from more than 50 global investors to oil companies operating in both the Gulf of Mexico and the North Sea demanding information about their response plans for dealing with offshore accidents.

Detailed Information

Andrew Logan, oil industry program director at CERES, a group of investors and environmentalists involved with the correspondence, says stakeholders are now looking for evidence that companies have robust spill contingency plans and clear guidelines for contractor selection and oversight. Investors also want to make sure the compensation and incentive packages for senior management include specific links to environmental, health and safety targets.

Meanwhile the U.S. authorities are scrambling to act. The U.S. Senate is edging towards a law that could make oil companies liable for unlimited damages in the event of another big spill in the Gulf of Mexico. Industry groups are worried that if the bill is passed it will become impossible to get insurance cover for exploration and production activities in the region.

Oil companies accept some rule-tightening is inevitable and that they will have to make large investments in new technology. But, firms such as ConocoPhillips have raised concerns about 'betting the farm' on unlimited liability, and oil industry bodies warn the bill would leave companies with no alternative but to self-insure: The insurance market is unlikely to have enough capacity to cover the potential clean-up costs and other damages.

The regulatory and operational environment in the UK is different to those facing operators in the Gulf of Mexico. But a collective called the UK Oil Spill Response Advisory Group was quickly set up in May following the spill to re-assess the industry's common capabilities, including for capping and containing oil spills. It's a joint effort involving not only the operators and drilling contractors but also the relevant regulators and trade unions.

In the UK, individual companies are responsible for environmental or other material damage if there are any problems with their installations. There is no legislative cap on their liabilities for any clean-up. But if they default on their payments then, under a voluntary industry agreement, the rest of the industry guarantees to deal with the costs. In August, signatories of the Offshore Pollution Liability Association agreed to raise the liability limit from $120 million per incident set in 1974 to $250 million in the wake of the BP disaster.

"In the UK there is a legislative arrangement for oil spill response in which the government has a clear role," said a spokesperson for Department of Energy and Climate Change. "Through the Oil Spill Response Advisory Group, very close engagement between the industry and regulators is also taking place, as the urgency with which we need to review our response procedures is not lost on us."

The UK industry already has an agreement in place to respond to oil spills. This provides for surveillance aircraft, aerial dispersant application and large stocks of containment equipment, but the Oil Spill Response Advisory Group has recently recommended a further increase in the existing capabilities.

There is one key reason why the U.K. approach to offshore safety has historically been different from the U.S. and that's Piper Alpha -- a major North Sea rig disaster in which 167 workers lost their lives. The current regulatory regime with responsibility split between DECC and the Offshore Safety Division of the Health and Safety Executive emerged following the recommendations of the Cullen Report in 1988 after the disaster.

Piper Alpha caused the UK industry to evolve in a very different direction to the U.S. It adopted a principals based approach rather than more prescriptive rule setting.

Risk experts argue a more flexible, "goal-setting" strategy has proved far better suited to achieving cost-effective solutions to offshore safety. They believe there are a number of disadvantages to a prescriptive approach that will need to be addressed in the Gulf of Mexico, not least that it encourages a box-ticking mentality.

Analysts warn of a "swiss cheese" scenario, where all the holes in compliance and safety left by prescriptive regulation line up to cause a catastrophic problem.

In spite of a more sophisticated regulatory regime it appears the U.K. authorities remain extremely worried that industry safety standards in the North Sea have been slipping.

The spill prompted the Health and Safety Executive to embark on a fresh round of inspections in the North Sea, warning the industry that it must take urgent action to keep up standards. As margins in the North Sea have tightened, unions have become increasingly concerned that companies are compromising safety. Officials are concerned that more than half of the UK's platforms have exceeded their intended life span – or soon will –and that some rigs might be another disaster waiting to happen.

Must Try Harder

"This year's overall health and safety picture is simply not good enough," says Steve Walker, the head of the Health and Safety Executive's offshore division. "The industry has shown it can do better and it must do in future."

Data released in August shows the number of "major and significant" releases of gas and oil from North Sea platforms operating in British waters has increased from 61 to 85 in the past 12 months, taking the total to its highest level since 2003.

Figures recently released by the Health and Safety Executive showed there were 50 major injuries reported in the 2009 to 2010 financial year, compared with 20 in the 2008 to 2009 financial year and higher than the average of 42 for the previous five years. No workers were killed during activities regulated by the Health and Safety Executive for the third year running.

Balancing the challenge of exploration and discovery in ever-deeper waters and maintaining the focus on safety has proved far more problematical than ever imagined for the offshore energy industry. But there's no doubt vigilance over safety on offshore rigs particularly in light of the Macondo disaster will prove integral to managing operational risk in the future.

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