Deepwater Horizon ripples help sink US Arctic drilling: Regulation and Environment

In this week's Oilgram News(opens in a new tab), Regulation and Environment, Gary Gentile looks at the after-effects of Deepwater Horizon on offshore production elsewhere and has a bonus segment about the future of the Renewable Fuels Standard in the US, which could impact both the oil industry and biofuels producers.

Investigators into the 2010 Deepwater Horizon disaster in the US Gulf of Mexico often lament the failure of Congress to pass any meaningful safety-related measures informed by the lessons learned from the tragedy.

But make no mistake — the ripples of Deepwater Horizon have been felt by the industry and can be clearly seen in the decision of Shell to abandon its offshore Alaska exploration as well as the canceling of Arctic lease sales for the remainder of the current US five-year leasing plan.

The Macondo Effect, if you will, can also be seen in more subtle ways, as a close reading of the recent 300-plus page final consent decree between BP and federal and state governments reveals.

Shell’s decision to indefinitely suspend exploration offshore Alaska may have been sparked mainly by the disappointing results from the one well spud in the Chukchi Sea. But the company made it clear that regulatory uncertainty as well as the safety requirements that forced it to spend millions of dollars and launch a flotilla of ships to drill only one well were also to blame.

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Those requirements were a direct result of the ordeal that BP and US responders had bringing the gushing blown-out Macondo well under control in 2010. From April to July, BP experimented with untried technologies, inventing on the spot (with the enormous assistance of government scientists) containment domes, capping stacks and other equipment before finally halting the flow.

That experience informed the decision by US regulators to require Shell to have a containment dome on site and to have a backup rig available to drill a relief well in the case of a blowout in the harsh Arctic seas.

Shell, to its credit, complied with all that was asked. But as a result, it became economically impossible to carry out a robust exploration program offshore Alaska. That reality led the Interior Department to cancel the remaining lease sales(opens in a new tab).

Whether future lease sales in the Chukchi and Beaufort Seas remain in the 2017-2022 leasing plan remains to be seen. But if they are removed, it will be easy to connect the dots between the April 20, 2010 Macondo blowout and the reluctance to risk a similar fate in Arctic waters.

There are some interesting bits in the consent decree worth noting.

BP will pay $82.6 million to the US, which consists mainly of the 75% share of royalties owed by BP and its partner MOEX on the 3.19 million barrels of crude that leaked from Macondo into the Gulf. The US is still litigating its claim that the third partner, Anadarko, owes royalties on the remaining 25%.

The decree mentions the previous criminal plea agreement from 2013 that requires BP to initiate, in conjunction with industry and government, at least four pilot projects “to evaluate technology enhancements intended to improve operational safety with respect to deep water drilling.” The results are to be shared with others “on commercially reasonable terms.” No word yet from BP on whether these projects have been launched.

Is it RIP for the RFS in the United States?

The never-ending debate over the US Renewable Fuels Standard flared up again recently, with the announcement that the Environmental Protection Agency’s own auditor will examine the issue. One of the main questions that the EPA’s inspector general will examine is the lifecycle impacts of the biofuels mandate. The details of the current probe were well laid out in a story written by Platts reporter Herman Wang in the October 20 Oilgram News.

The narrow issue is whether the EPA has full considered research(opens in a new tab) on the carbon intensity of biofuel sources, including corn ethanol. The larger issue is whether the RFS has acted to boost the interests of the corn lobby at the expense of advanced biofuels.

The debate goes back to the earliest efforts by the EPA to implement the Congressional biofuels blending mandate.

Early on, the EPA proposed using the concept of “Indirect Land Use Change,” which considers the impact of growing demand for corn ethanol on old growth forests in the Amazon and other places. This approach actually assigns to corn ethanol the consequences of land use decisions abroad. In 2009, the EPA threatened to classify ethanol as having a worse greenhouse gas profile than gasoline because of the ILUC calculations.

The EPA backed off that position and now the agency’s inspector general is going to examine it fresh. Stay tuned.

Changes coming to The Column

Starting next week, we will introduce a new version of the weekly column titled “Fuel for Thought.” The new format will allow us to feature original Platts analysis and thinking on a wider variety of global topics. Let us know what you think at pon@platts.com(opens in a new tab). — Gary Gentile