Oil and Gas in the Capitals

	Vol. 231 No. 10
ØYSTEIN NORENG, CONTRIBUTING EDITOR, NORTH SEA

The Macondo blowout as seen from Norway

April’s blowout and the subsequent massive spill in the Gulf of Mexico highlights the risk of offshore petroleum operations. They also raise a critical perspective on how the oil industry and governments manage risk. Therefore, it is pertinent to compare practices in different countries, not the least being Norway with the US. Risk management is essentially a political issue, involving the balance of power between government and industry, the division of costs and profits, and transparency.

Risk can be defined as probability multiplied by consequence. The probability of accident usually increases with the complexity of operations, for which water depth can be a useful yardstick, because of hazards and the greater difficulty of repair work and emergency operations. Consequences tend to be more harmful in a fragile environment, for which water temperature and fishing can be useful yardsticks. Thus, as the oil industry moves into deeper waters, hazards increase. Likewise, as the industry moves into colder Arctic waters, potential effects of accidents become more severe.

Put simplistically, accidents can be caused by technical failure, human failure, managerial and organizational failure, and policy failure. Any oil company can experience faulty equipment. Likewise, human mistakes can occur even in the best companies. Managerial and organizational failures are more company-specific, depending on standards, procedures and routines. Insufficient regulations and enforcement indicate policy failure. Consequences can be mitigated by precautionary measures as well as technical and organizational preparedness, which essentially are policy matters, the responsibility of government and politicians.

Any risk is a cost. Higher risk means higher cost, either from preventive measures to reduce hazards and enhance preparedness or, alternatively, resulting from an accident. This is why insurers, who share the industry’s risks, demand a fee as well as the right to inspect and impose safety measures. The high cost of insurance in the offshore petroleum industry is indicative of the risk level, which is one reason why many oil companies are self-insured. Regulations and safety measures have a cost, which is why they are imposed and not voluntary. The human hazard can be diminished by training and exercises, which have a cost. The technical hazard can be reduced by frequent tests and meticulous maintenance, which also have a cost. The operational hazard depends upon management priorities.

The oil industry makes money by taking geological, financial and operational risk. If oil companies can improve the bottom line by cutting corners, they are incentivized to do so, unless obliged to act otherwise. Therefore, the industry needs an effective system of checks and balances, making company management subject to countervailing forces.

Norway has been highlighted as a case where stricter offshore environmental and safety regulations are enforced. Since the early 1990s, government regulations have compelled the Norwegian offshore petroleum industry to develop additional safety measures to prevent blowouts and spills. The preferred solution is an acoustic valve or switch in the wells, so that flows of oil and gas can be shut off by remote control, even if the platform is evacuated or blows up.

Over time, appropriate safety measures reduce costs as well as risk. The combination of technology development, better equipment quality, better-trained personnel and enhanced operating procedures has consistently reduced risk levels over the past decades. One example is the “kick frequency,” meaning oil and gas flows due to falling counter-pressure from above, which is the first stage of a blowout. Already in the 1980s, the figure for the North Sea was considerably lower than in the US Gulf of Mexico, and subsequently it has been reduced to less than half that level. Likewise, Norway’s ratio of oil spill incidents to current production is a fraction of that for the US Gulf of Mexico.

It is tempting to ascribe the better Norwegian performance largely to operating procedures, meaning the routines that the offshore oil industry follows in E&P. However, those operating standards have been set by an independent government body, the Petroleum Safety Authority, whose task is to prevent accidents, spills and blowouts, and which has the right to close down operations. This has proved to be an effective counterweight to the oil companies’ inherent incentives to cut corners, as may have been the case at Macondo. Another countervailing power is the highly unionized Norwegian workforce. As in the rest of the Norwegian economy, employee representatives play an important part in the offshore petroleum industry, and elected labor representatives are responsible for operational safety and have the authority to suspend operations. Consequently, the operational routines are set by tripartite cooperation between oil companies, government and labor.

Indeed, active labor involvement may be the decisive element in ensuring safe operational routines. Norwegian safety regulations focus more on performance and incentives than on technical details, leaving more room for a decentralized choice of solutions and for workforce involvement.

Organized labor, as an internal regulator, can have a constructive role in the offshore industry. With lives at risk, labor has a more immediate interest in operational safety than any other stakeholder. Even if Norway’s cooperative and egalitarian work culture cannot be transplanted, it should be possible for the oil industry in other countries to treat organized labor as an asset, rather than a burden. The Macondo blowout occurred in US waters under the auspices of a UK oil company. Both countries strongly profess a belief in free markets and industry self-regulation. This ideological bias can be counterproductive to the search for pragmatic solutions that involve government and labor providing checks and balances to the oil companies, in the longer-term interest of all parties involved.  WO