A year after Macondo, oil industry returns to normal

An oil rig in the Gulf of MexicoWhat a difference a year makes. Or does it?

Activity in the Gulf of Mexico remains slow following the Macondo disaster – but it is moving again. And despite all the talk about how the US risked driving away the industry by tightening up processes and procedures, just about everyone is still here.

Seahawk Drilling was forced into bankruptcy and Plains Exploration & Production is moving to exit the deepwater, but, for the most part, it is the same people, working for the same companies (BP was even among the first companies to get permission to resume drilling in the deepwater), using the same technology. Even the much maligned blowout preventer that got jammed and failed in the Macondo disaster is still here as the last line of defence.

And the gulf coast economy has remained pretty resilient. Michael Hecht, chief executive of the Greater New Orleans economic development agency, said the local economy received a boost from BP’s spill response effort that gave work to fishermen and tour boat workers who had lost jobs with the spill. That false economy is only now ending in some places, leaving the real economic cost still to be seen.

It might, for example, take two or three years to know if the offspring of sea creatures who laid their eggs in the path of the oil and dispersants will be impacted – the adult fish were able to swim away, but the babies had to stay put. So, he says, the fishermen must get through the next few seasons to know for sure whether their livelihoods will be impacted.

New rules

In the oil industry, regulators have imposed new rules and tightened up approvals. Companies themselves have increased oversight. Everybody is focused on process safety and the provisions in contracts for force majeure, indemnification and insurance coverage, according to Stephen Gates, special counsel at law firm Mayer Brown:

They have revisited and are retooling contracts as new arrangements are entered into.

Jorge Leis, a partner in Bain’s Houston office and co-head of the North American oil and gas practice, said as companies go through their risk-management practices, they are not only working through their own processes but how they evaluate partners, service providers and contractors.

You’re going to see much more scrutiny, not only who can do the project for the right cost but who can do it with a focus on safety and compliance.

Back to work

Charles Swanson, Houston managing partner at  Ernst & Young, the professional services firm, said:

Those kind of incremental, evolutionary changes are what we’re going to see, and they can be effective. There is always someone who wants the third coat of paint to be applied before they operate a machine. But that is not realistic given the demands on the oil and gas industry. The country needs to get back to drilling.

That is the prevailing attitude among oil and gas companies and explains why almost everyone has seen out the moratorium on new deepwater drilling. In the words of Gary Adams, US oil and gas leader at Deloitte, the consultancy:

There is still a great prize in the Gulf of Mexico.

That said, he expects it might not be until 2014 that the industry sees 2009 production levels again.

Status quo prevailed

Bruce Vincent, chairman of the Independent Petroleum Association of America (IPAA) and president of Swift Energy, said 10 permits had been issued this year, signaling the industry is getting back on track. He noted, however:

It’s been an extremely difficult and tortuous path to get to that point.

That is certainly what the industry believes. But in the end it appears the status quo has, for the most part, prevailed.

Robert A. Kessler, head of global integrated oil research at Tudor, Pickering, Holt, said Gulf of Mexico production already was peaking before Macondo, and is now down 14 per cent from the peak in September, 2009.

While there is a resurgence in the lower tertiary of the gulf, the growth in production there will be a long time coming given the deeper and more challenging reservoir conditions. He notes:

The incremental production benefit was already going to be spread out over a number of years.

In January, production from the gulf was down 10 per cent year-on-year. He attributed much of the drop to the moratorium but said some of the big projects, such as Thunder Horse, Tahiti, Shenzi, Blind Faith and Atlantis, had hit their stride and already were beginning to fall off their highs. To compare, gulf production in March 2010, just before Macondo, he said, already had declined 9 per cent from the September 2009 high.

The more things change, the more they stay the same.

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