The last barrel

With all the mischief emanating from U.S. bureaucrats of late, one could be forgiven for thinking that Halloween has come early. Within a matter of days, the feds ruled out Atlantic exploration; proposed new methane rules and waxed lyrical about safe commercial development in the Arctic; and released updated rules to regulate offshore air quality emissions. Unfortunately for the industry, the trick-or-treaters are still a half-year away.

Leasing. The U.S. Department of the Interior announced its proposal for the nation’s 2017-2022 OCS Oil and Gas Leasing Program on March 15. The proposed program envisages 13 lease sales during the period—10 of which will be in the Gulf of Mexico and three of which will be offshore Alaska. More significantly, the plan also ruled out exploration in the Atlantic.

While welcoming the inclusion of the three Alaskan lease sales, Sen. Lisa Murkowski (R–Alaska), chairman of the Senate Energy & Natural Resources Committee, criticized the Atlantic decision, warning that the administration’s vacillation should make Alaskans vigilant.

“The administration’s decision to cancel a sale in the Atlantic offshore—the second time it has made such a reversal—undermines the energy security of our country and is an ominous warning to Alaskans. As easily as the Atlantic was taken off the table, the proposed sales in the Cook Inlet, Beaufort Sea, and the Chukchi Sea could suffer the same fate in further reviews.”

According to a statement by Interior, its decision on Atlantic exploration was in response to “many factors,” including potential conflicts with other ocean uses, current market dynamics; limited infrastructure; and opposition from coastal communities. However, given the administration’s unremitting hostility to fossil fuels, it’s rather hard to take what it says at face value.

One of the more salient points was the concern about current market dynamics. The downturn has caused many operators and service companies to switch, wittingly or not, to short-term thinking, prompting the IEA to warn that the scale of the upstream cutbacks could lead to an oil price shock in the “not-too-distant” future.

Offshore exploration, by its very nature, is a long-term business. By closing the door on Atlantic exploration, the administration is exacerbating this risk by placing potential reserves, which may be needed in a few short years, out of reach.

Methane. News of the proposed lease sales came days after President Obama and Canadian Prime Minister Justin Trudeau (Liberal Party) issued a joint statement in support of their environmental agenda on March 10. Amongst other things, both leaders committed to “reduce methane emissions by 40-45% below 2012 levels, by 2025, from the oil and gas sector.”

As part of the agreement, the U.S. EPA was to “begin developing regulations for methane emissions from existing oil and gas sources immediately,” with the agency moving as “expeditiously as possible” to complete the process. In addition, in April, the “EPA will start a formal process to require companies operating existing methane emissions sources to provide information to assist in development of comprehensive standards to decrease methane emissions.”

However, given that methane from E&P activity only accounts for about 1% of total U.S. greenhouse gas emissions, the plan seems destined to be disproportionately bad for the upstream—especially given IPAA’s warning that the proposed regulations could jeopardize a significant proportion (20% of oil and 13% of gas) of domestic production.

Obama and Trudeau also committed to setting a “word-class” standard for commercial activities, including oil and gas, in the Arctic.

However, it seems, to me at least, that such apparent grandstanding reflects a certain ignorance about daily upstream operations. The upstream is—by and large—staffed by conscientious workers who want to drill successful (and uneventful) wells. No one wants to be associated with a Macondo-style incident. And I would argue that any operator brave enough (and rich enough) to venture into Arctic realms after Shell’s recent departure already has more-than-enough incentive to avoid mishaps.

Emissions. Meanwhile, on March 17, BOEM announced a proposed update to regulations on monitoring offshore air quality. According to BOEM, the 349-page proposed rule (it’s a page-turner!) would “modernize and strengthen requirements for identifying, modeling, measuring and tracking the emissions of air pollutants.”

BOEM regulates air quality emissions from oil and gas activity on areas of the OCS in the Western and Central Gulf of Mexico, and the Arctic. According to the bureau, the new regulations aim to ensure that offshore activity does not “significantly harm the air quality of any state.” However, as API pointed out, the bureau is only required to regulate offshore emissions, if they significantly impact onshore air quality. Meanwhile, the bureau’s air modeling studies, which were commissioned to inform the rule, won’t even be finished until next year.

In the meantime, a 2,057-page, 2012 report from the bureau addresses Gulf of Mexico air quality, stating, “In general, ambient air quality on coastal counties along the GOM is relatively good.” And in the section on Alaska’s Cook Inlet, the report says, “Except for a few population centers, such as Anchorage, Fairbanks, and Juneau, the existing air quality in Alaska is relatively pristine.”

So, what’s really going on? I can’t put it any better than API’s Erik Milito, group director of upstream and industry operations, who said: “This is regulation for regulation’s sake.”

So there you have it. While the industry is reeling from a severe downturn, the regulatory screws—with all of their associated costs—are being tightened. No matter the consequences to industry, this administration appears determined to implement as many regulations as possible before November. We’d better not be caught sleeping.