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All Offshore Wells Are Not Created Equal

By: Steve Maley (Diary)  |  July 9th, 2010 at 10:00 AM  | 

RESIZE: AAA

Environmentalists and the Obama Administration consider all offshore wells to be equally risky, but it’s important to recognize the relative risk of grossly dissimilar types of wells.

Congress is considering a proposal to remove liability limits for all offshore well operators. That provision would effectively limit offshore operations to those companies big enough to self-insure: BP, Shell, ExxonMobil, Chevron, maybe ConocoPhillips, and the foreign national oil companies. Independents, even the large independents, will be forced out pf domestic waters due to their inability to secure affordable insurance. 

The Gulf of Mexico has produced billions of barrels of oil and trillions of cubic feet of natural gas over the last forty years, at what most people would consider an acceptable level of risk. With the exception of Chevron, all the majors have left the shallow waters of the “shelf” for deepwater. Consequently, the effect of unlimited liability will be to kill off the shelf, the safest area to operate.

To assess the relative risk of various types of offshore wells, I’ve developed a simple point system. It’s not guaranteed to be precise, accurate or even complete, but it will help illustrate a point.

  • Water Depth:  Shallow water – 1 point; Deep water – 100 points
  • Location:  Far offshore – 1 point; Nearshore – 10 points
  • Geologic control:  Development – 1 point; Exploratory – 10 points
  • Product:  Gas – 1 point; Oil – 10 points
  • Tree/BOP location:  Surface – 1 point; Subsea – 10 points
  • Pressure regime:  Normal pressure – 1 point; High pressure – 10 points

For a well’s score, just multiply the point values together.

Example #1: BP’s Macondo well was a deepwater, high pressure exploratory oil well, far offshore, with a subsea BOP. Score: 100 x 1 x 10 x 10 x 10 x 10 = 1,000,000 points

Example #2: A shallow water, low pressure gas well, close to shore but in an area where several wells have been drilled before. Score: 1 x 10 x 1 x 1 x 1 x 1 = 10 points

As this illustration shows, the risk of a Macondo-type well– measured by its relative potential of harm to workers or the environment — is several orders of magnitude higher than the garden-variety wells drilled in the shallower waters of the Gulf. (BP’s liability exposure will be another –a nd maybe the most accurate — yardstick.)

It is possible to make rational, informed decisions about offshore energy policy. The Obama Administration seems determined to play to ignorant emotion, exploit the crisis, and permanently cripple the nation’s secure domestic energy supply.

Cross-posted at VladEnBlog.

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  • alaskaescapeartist

    Why have companies gone further off shore?

    Is it because of environmental regulations? Depletion of the known reserves?

    And secondly, what technologies are available today for the discovery of new sources? Has this technology changed much over the last 40 years or so?

    Your articles are very insightful and put into context and hugely complex and important subject.

    As a former Alaskan, I would enjoy ready your perspective on ANWR (whose name “Refuge” is a misnomer left over from the Carter Administration).

    • alaskaescapeartist

      yikes….. apparently my keys like to move around!

      “…very insightful and put into context A hugely complex…..”

      and

      “I would enjoy READING your perspective…..”

      Obviously my app to the Obama Administration for Teleprompter-Writer is probably not going to get much attention.

    • http://vladenblog.tumblr.com Vladimir

      I attempted to answer that question here.

      I got out of college 32 years ago. Most of the technologies being used today were a pipe dream, if that, back then. I worked for Shell, who had just set a fixed platform (i.e., anchored to the seabed, with dry trees) in just over 1,000 ft of water, a staggering, world-record depth for the time. Every aspect of exploration, drilling, and production has made miraculous advancements in that time – it would be a whole blog by itself.

      By comparison with high pressure oil in 5,000 ft of water, ANWR would be a walk in the park.

      • izoneguy

        CLINTON CATALYZED GULF OIL DRILLING BOOM

        http://www.dickmorris.com/blog/2010/06/10/clinton-catalyzed-gulf-oil-drilling-boom/

        In 1995, President Clinton signed the Outer Continental Shelf Deepwater Royalty Relief Act which exempted oil wells drilled deep in the Gulf from the normal royalty payments they would normally have owed the government for their oil. Usually, these payments amount to between 12% and 16% of their revenues, so exemption from this requirement did a great deal to catalyze drilling in deep waters in the Gulf of Mexico. As a result of the Administration action, deepwater oil production in the Gulf increased rapidly, growing from 42 million barrels annually in 1996 to 348 million in 2004. The latter figure represents about 6% of total United States oil consumption and about 15% of domestic production. Natural gas production from deepwater Gulf drilling increased tenfold during the same period.

        The Deepwater Horizon well was one of those catalyzed by the Clinton legislation and began drilling in 2001.

      • alaskaescapeartist

        I missed that earlier posting of yours.

        It just seems to me that the logical push-back (and the sensible position) against the current efforts to halt offshore oil operations would be to used the Left’s own arguments in favor of the more safe and logical locations to extract the resources.

        Again, ANWR is an excellent vehicle to illustrate this. It has become synonymous with so many issues in energy policy…. from it’s nonsensical name, to lack of education by the public and lawmakers, and as a fund raising tool for environmentalists.

        “What is ANWR, how and why we should be there” is my suggestion if you’re taking requests for future writings.

        When you consider that the Alaska Pipeline is also the longest horizontal caribou scratching post on earth, it’s time to dispel the misconceptions of ANWR specifically, and the oil exploration industry in general.

        The BP accident offers an opportunity for some jui-jitsu against those whom wish to throttle back our energy exploration and use.

        • http://vladenblog.tumblr.com Vladimir

          Environmental extremists are pulling out all the stops to block all activity on Alaska’s North Slope & offshore.

          They want the Trans-Alaska pipeline gone.

          It takes 200,000 barrels of throughput a day to pay the expenses to operate the thing. As Prudhoe Bay and the other old fields decline, new production is needed to stay above the economic threshhold.

          Once that point is reached, the enviros will push to have it removed, not mothballed.

          This would be very bad news.

          • Achance

            and the ROW “restored” if it stops operating. It has become a real issue here as only the relatively high prices are keeping the State afloat. Production is in the 600K/bbl/dy realm, down from over 2M/bbl./dy. at the peak in the ’80s. There is oil under State land as well as offshore in State waters, but there will be intense environmentalist opposition and feeder lines to TAPS in some cases need federal ROW, something they will not get from Comrade Obama’s regime.

            The Industry has dramatically retrenched since Palin’s ACES revenue scheme came about. The easy to get to oil in Alaska has been gotten to, so any new fields will be remote and expensive to explore, develop, and transport to TAPS. Such development requires high prices. The ACES scheme imposes almost confiscatory taxes at high prices, so it acts as a disincentive to developing new fields. Palin and her band of geniuses were only thinking in terms of the already developed fields when they came up with ACES and gave short shrift to future development. At the time, no legislator would dare be seen talking to anyone from the Industry or to vote for anything that the Industry supported for fear of a visit from the FBI, so she got her way. Well, it did give her the opportunity to give away $1000 a head to boost her popularity numbers that she and her sycophants so love to brag about.

            There was a push in last Session to revisit it, but the Governor and the Administration wouldn’t go there. Parnell has an Industry background but is between a rock and a hard place in that he is stuck with her appointees and her policies and if he tries to change anything, she’s on Facebook in the middle of the election. I’m pretty confident she extracted a pledge from him to look after her buddies. It appears that Parnell will win re-election handily, so maybe he can have an independent administration after he wins on his own. His principal opposition, Ralph Samuels, was a vocal opponent of ACES but his campaign just hasn’t gained any traction. Even if Parnell stays the Palin course and keeps the geniuses she relied on, the Legislature will drive the move to modifiy ACES so as to provide greater incentive for new development.

          • izoneguy

            First rig sails away over “potential” drilling ban
            Lawmakers and experts fear loss is only the start of offshore exodus

            http://www.chron.com/disp/story.mpl/business/7101738.html

            I added “potential”. Even though judges keep slapping Obama down it is still not enough to inspire confidence in the oil producers.
            This will be the first of many rigs leaving. Probably for good.
            More job loss, less oil revenues and we will end up buying the foreign oil anyway. A real lose, lose, lose….the one we need to lose is Obama. I really wish he would go off-shore and never return.

          • cactusjack

            there is a national security dimension most Americans are not aware of, and evidently not O-Bomber either. We have the world’s greatest military, but praytell what does it run on? Kerosene for the jets, diesel or gasoline for the tanks and hummers, and for the cargo ships carrying the heavy stuff everywhere. The fastest way to defeat the US military strtageically is not to meet it face to face, it is to embargo its petroleum. Oh well I guess it’s OK, we won’t buy it from American or American friendly companies anymore, we’ll get it from Chavez. And Putin. And the Chinese who will swoop in to drill in the Gulf, from whence we have been evicted. The Fifth Circuit Court of Appeals are showing unexpected bravery in the face of tyranny for which we can be grateful, but the signs of weakness O-Bomber is sending out to the world, are being read loud and clear.

  • romeg

    and his behavior since taking office. His claim to allow more offshore exploration and development was an aberration from that rhetoric and was cynical on its face.

    He is not simply the most anti-business president in the history of the Republic. He is the ONLY anti-business president in its history. Other liberal presidents merely took a parasitic approach to business, viewing it as a source of revenue to fund various vote-buying schemes. Obama aims to supplant private enterprise with “Public-Private Partnerships”.

    This is the National Socialist model.

  • northernrockiesguy

    I have a picture in my office of the “Mr. Gus11″ offshore rig that was capable of drilling in 150 feet of water, considered the “deep water” at that time. It was built in 1958 after the Mr. Gus went down in hurricane Audry in 1957. I think both rigs were built by Bethlehem Steel in Beaumont, Tx.

  • ralatredstate

    You say, “Independents, even the large independents, will be forced out of domestic waters due to their inability to secure affordable insurance.”

    I trust that you are right, but I don’t understand how an activity that’s too risky to be insured can be profitable for a self-insurer, if the insurers are correctly evaluating the risk and charging only a reasonable amount based on that evaluation.

    Or to look at it another way, a self-insurer is in the insurance business whether or not it organizes a division, say the “Risk Management Division”, that internally mirrors the functions of an external insurance provider. In the absence of extraneous factors [eg. people may be more or less careful depending on whether they have insurance coverage] the risk is the same and the cost of the risk is the same whether it is insured internally or externally, except only for the profit of the external insurance company.

    So why can’t the others get affordable insurance?

    -

    Another thought. The liability caps amount to a government subsidy, and I am not sure why anyone or anything should be subsidized.

    • http://vladenblog.tumblr.com Vladimir

      One issue is whether there will be enough folks willing to underwrite the liability.

      Another issue is what level of bonding will the Feds require? If it’s set too high, it may just force small companies out who can no longer play the game.

      It used to be that labor and transportation were our two biggest cost items. Before BP, it was labor, transportation & insurance. In the future, insurance will probably be our #1 cost of doing business.

      • ralatredstate

        ought to be able to deal appropriately with risk, I think, if not hamstrung by government. I’m not knowledgeable enough to comment further.

        Thanks.

    • Achance

      in which the plaintiffs’ attornies and Alaska juries went on a feeding frenzy that led to a 20 year court fight.

      • ralatredstate

        A huge problem in lots of areas. Thanks for reminding me.

        • Achance

          is on the Gulf right now hustling up his class action against everybody and his dog associated with that oild well, including every poltical jurisdiction that might have regulatory authority.

    • JSobieski

      and you will see why—-government actions can make insuring certain risks undesirable–too much of a hassle for too little reward.

      Why do a lot of smart people go to Wall Street instead of to work making things? Sometimes its just easier to play the predefined game than it is to deal with certain hassles and uncertainties.

  • Richard Mullins

    That being one of Diamond Offshore’s rigs. It was at the same time that they having a suit in Federal court here in Houston at the same time of Hornbeck. I wonder how many other Independents will rigs will move away.

    • cactusjack

      They are very expensive to operate and crew. The daily rate on some of these is huge, There is plenty of oil to be drilled offshore Africa, etc., so they are all going in time. its just business.

  • StandardCandle

    and ought to be instructive to both the oil industry, as well as the underwriters for insurance on these wells.

    However I just don’t think Obama’s Administration is responding emotionally… I believe they are responding rationally, quite rationally.

    The rationale however isn’t about environmental protection, its about spreading the loss of production to other Oil companies, to allow BP to catch up, clean up, and capture what they can from a well that should have been simply shut off… I don’t believe that BP’s engineers have been honest with us… I also believe that EVERYTHING this administration has said about BP was planned in the background. They are using this crisis to put every independent company out of business, while doing business in the back room with the Major producers.

    They WANT to control oil production, so they can control distribution and pricing as well. What easier way to force the people into a nanny state than to take away their personal transportation ability.

    I honestly do NOT believe the end goal is to move to a Green Economy as suggested, they know realistically it’s not possible…

    This is a calculated move to destroy the American Economy so the people will hand over their fiscal sovereignty to international powers.

    If you want the world to be a fair playground, you have to eliminate the largest “bully” as they see it.

  • eastbaylarry

    Great post and very informative, as usual.
    I suspect your ‘insider’ position exposes you to info the rest of us are being blocked from by the BP/Obama news blackout. Can you give us any hints as to what it is they don’t want us to see?

    • izoneguy

      or how inept the clean-up is going.

      BP produces the santized TV spots that show an ethnic diversity of folks cleaning up little tar balls so the “people” can go frolic in the clean water of the Gulf…..

      I don’t think I would go near a beach in the Gulf.

      • eastbaylarry

        Don’t want us to see how inept the clean-up is going? That fact does not seem hidden to me. That doesn’t fit the ‘unConstitutional’ actions of both BP and the Coast Guard.
        $40,000 fines and felony charges? For taking a picture of a tar ball?

        They’re hiding more than ineptitude, but what?

        • izoneguy

          Evidence….

          They don’t want a bunch of photos & video showing up in court.

          There all already plenty of photos & video but I think the union thugs probably maning many of the skimmers don’t want to be implicated in anyway….

          This is probably more of a union directive – so Obummer is covering for his buddies.