Industry Execs See Higher Costs, Improved Safety with New Regulations

Oil and gas companies will face a tougher regulatory regime in the United States as the U.S. government introduces new rules over the next two years to improve industry safety  following the 2010 Deepwater Horizon incident, according to the findings of a recent survey by GL Noble Denton.

The independent industry technical provider's new report "Reinventing Regulation: The impact of U.S. reform on the oil and gas industry" includes data gathered from over 100 senior oil and gas professionals and in-depth interviews with 10 industry executives, analysts and academics.

Eighty-five percent of survey respondents told GL Noble Denton they expected the U.S. regulatory regime to become much tougher over the next two years. Sixty-one percent said they believed the changing regime would have a somewhat or highly negative effect on their business during the next two years.

Operators face new regulations such as being able to demonstrate they are prepared to deal with a blowout and worst-case discharge. At the same time, they are being forced to revise their approaches to issues such as well design, workplace safety and corporate accountability.

As a result, the oil and gas professionals surveyed anticipate greater administrative workloads and higher compliance costs. Seventy-eight percent expect regulatory changes will lead to greater administrative workload, while 82 percent expected compliance costs to increase. Fifty-seven percent expect the changes to impact their appetite for risk-taking.

A strong regulatory reaction is inevitable following an event such as Macondo and incidents such as Piper Alpha, a North Sea production platform that exploded in 1988, killing 167 men, said Arthur Stoddart, GL Noble Denton's executive vice president for the Americas, in an interview with Rigzone.

“No government could fail to act in the wake of such an incident. The regulations being implemented in the United States present new challenges for oil and gas operators in terms of rising costs and workloads, but these charges are absolutely necessary to improve safety and prevent a future oil spill,” Stoddart said in a statement.

Smaller oil and gas companies are the most likely to face the brunt of increasing compliance costs, burgeoning legal risks and a greater administrative workload. With the U.S. regulatory environment expected to become more stringent over the next two years, oil and gas professionals surveyed anticipate a rise in mergers and acquisitions among oil and gas operators as growing compliance costs speeds up consolidation.

The report, the third by GL Noble Denton which measures industry sentiment, didn't get into specifics on the exact increase of compliance costs, although one executive interviewed anticipated a 10 to 20 percent cost increase. The exact cost may be harder to quantify -  longer times for obtaining drilling permits are expected, which can add to cost. Higher insurance costs also are expected. An operator may experience higher costs if they have to keep a rig longer due to an inspection interrupting drilling. But in other cases, they may not incur any additional cost due to downtime that would have occurred anyway.

While 76 percent of those surveyed prefer a performance or goal-oriented approach to compliance versus the prescriptive approach taken by the U.S. government, these professionals also believe the United States will remain a major destination for oil and gas investment. However, oil and gas industry executives surveyed believe that new safety regulations will improve safety and restore confidence in the industry, the survey found.

Nearly half the executives surveyed expect the new regime to boost safety in the industry. However, only one in 10 of the survey respondents believe the U.S. government is taking the right approach to preparing the oil for new regulations.

While operators have until 2014 to adjust to the new SEMS II regulations, they must still meet inspection requirements under SEMS I by the Nov. 15 deadline. However, GL Noble Denton found the respondents felt their companies were highly or somewhat prepared to meet the new standards.

“There was a bit of a feeling that the authorities could have been clearer, but overall they felt prepared,” said Stoddart.

The impact of new post-Macondo regulations will not only be felt by the U.S.-based oil and gas industry, but regulatory regimes worldwide as countries with existing and emerging oil and gas industries look at the United States and ask them whether they are doing enough, Stoddart told Rigzone.

"It's common for countries to look to mature markets for guidance on rules," Stoddart noted, adding that the UK looked to Texas in the 1970s when North Sea oil and gas exploration began to increase.

While countries may not necessarily being adding specific new rules, the global oil and gas industry is reacting to the changes in the United States by making these new standards global, and using them as a competitive advantage, Stoddart noted.

The UK utilized a prescriptive approach to oil and gas regulations until the Piper Alpha incident in 1988. Like the United States, the UK responded to the incident with significant regulatory changes, including a separation of the management of health, safety and environment issues and production revenues.

The UK also adopted a goal-oriented approach to safety, in which the operator must demonstrate they are meeting their goal of safe, responsible production, but are not told specifically how to meet this goal, said Stoddart, who sees countries with emerging oil and gas industries more likely to adopt a goal-oriented safety regime. GL Noble Denton officials also believe a goal-oriented approach can accommodate changes in technology more easily than a prescriptive approach.

The shortage of skilled technical workers in the industry topped the list of concerns among oil and gas professionals for the first time in the study's three-year history. While skills shortage ranked among the top five concerns, the shortage is now viewed as the biggest barrier to oil and gas industry growth, and the higher competency requirements will exacerbate the shortage.

Both government regulatory agencies and operators are competing to hire technical inspectors from the same limited pool of qualified candidates. GL Noble Denton officials see this trend occurring not only in the United States, but in the UK as well. With oil and gas companies able to pay more than government agencies, the top flier candidates typically get hired by operators, Stoddart noted.

Technical inspectors come from a variety of backgrounds, but are mainly engineers. The shortage of college graduates in engineering and science, technology, engineering and mathematics degrees becoming technical inspectors exacerbating the shortage of workers with this skill set.

The shortage of qualified inspectors is also made worse by the fact that only the most experienced and technically qualified candidates are sought out. Typically, people learn to operate at the edge of their experience, but the new rules prevent that, Stoddart noted. 

Inspectors now have to demonstrate they are fully qualified to perform a job before they are given responsibility. However, they can't get the experience they need unless they are given the chance to actually do the job. The trend of not handing over responsibility unless it's certain a worker can perform a job will limit learning through projects.

The increased liability associated with deepwater projects might be playing a role in why operators are seeking to expand their portfolios to U.S. onshore plays. While there are still risks associated with onshore, Stoddart said the risks are not as likely to damage a company the way that a major incident like Macondo could. Offshore projects are competing with onshore projects not only for capital but for talent as well.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com.

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Noble Energy 1Q Net Down 0.8% on Higher Costs

Noble Energy Inc.'s first-quarter earnings fell 0.8% as the oil-and-gas explorer's higher expenses counterbalanced stronger revenue from oil and condensates, as well as natural gas.

The company has been selling its noncore assets to focus its spending on higher-return areas, including horizontal drilling operations in the U.S. and offshore projects in the Gulf of Mexico, the Mediterranean, and West Africa.

Noble late last year said it would bump up capital spending by 11% in 2013 to $3.9 billion, and said its oil and gas output would grow at a compounded annual growth rate of 17%. About 60% of the capital expenditures were allocated for U.S. onshore projects, while 10% of the capital budget was targeted for its operations in the Eastern Mediterranean region.

Noble Energy reported a profit of $261 million, or $1.45 a share, down from $263 million, or $1.47 a share, a year earlier. Excluding hedging impacts and other items, earnings were down at $1.48 from $1.65.

Revenue rose 5.1% to $1.14 billion amid higher oil and natural-gas revenue.

Analysts polled by Thomson Reuters most recently projected earnings of $1.24 on revenue of $1.08 billion.

Average sales volumes from continuing operations rose to 245,000 barrels of oil equivalent a day, from 236,000 Boe/d. Average crude and condensate realized prices were down 8.2% and natural-gas realized prices rose 20%.

Copyright (c) 2013 Dow Jones & Company, Inc.

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Germany Debates Fracking as Energy Costs Rise

BERLIN - Germany is debating whether to allow hydraulic fracturing, a controversial drilling technique to extract natural gas from shale, amid growing concern that rising energy costs in the country could threaten its industrial backbone.

The German public is deeply suspicious of the drilling practice, commonly known as fracking. Many Germans worry that the process, which involves using a high-pressure mixture of water, sand and chemicals to break apart energy-rich rocks, could contaminate underground water supplies.

This week the government unveiled a proposal that it hopes can bridge the gap between pro-fracking advocates in industry and environmentally conscious voters. Through a change to existing laws, the government is proposing banning fracking near any water supply and in all national parks and conservation areas. Drilling anywhere else would be subject to approval based on an environmental-impact study.

The fracking debate comes as Germany is pursuing a radical restructuring of its energy sector. In the wake of the Fukushima nuclear disaster in Japan in 2011, Chancellor Angela Merkel abruptly declared that Germany would abandon nuclear power and transition to renewable energy sources such as wind and solar. As the use of nuclear power declines, Germany is filling the gap with a combination of renewable energy and coal-fired plants.

Yet Ms. Merkel's "energy revolution," as the shift away from nuclear has been dubbed, is having unexpected side effects.

Subsidies for renewable-energy producers that are financed in part through household electricity bills are causing electricity prices for ordinary consumers and industry to rise. Germany's biggest industrial power consumers have seen electricity prices per kilowatt hour rise nearly 40% in the past five years, according to the Cologne Institute for Economic Research, also known as IW. Electricity prices for industry are nearly 15% higher than the average in the 27-nation European Union, IW said.

"We have reached the pain threshold," said Michael Huther, IW's director. He added that data show that energy-intensive industries are already beginning to curtail investment in Germany because of higher electricity charges.

"We are beginning to observe a creeping disinvestment," he said.

As the country turns its back on nuclear power, it is also seeing its carbon emissions rise. Long a leader in cutting CO2 emissions, Germany's emissions rose 1.6% last year, according to the Environment Ministry, the first rise in years.

It is unclear what immediate impact increased natural-gas supplies would have on German electricity bills. Still, the availability of cheaper natural gas could help avert a large-scale return to coal in 2020. That is the year that Germany will shut down about six nuclear power stations and many of the country's coal-fired power plants will also shut down due to age. A plentiful supply of domestic natural gas could provide a better bridge fuel to replace nuclear power as Germany continues to build its alternative energy supply, say analysts.

If fracking is ultimately banned in Germany, analysts warn that Germany could miss out on a broader European energy boom. Eastern European countries like Poland and Ukraine have large shale deposits and are keen to exploit them.

Experts don't believe Germany has the kind of massive shale-gas deposits that are transforming the U.S. energy market. But there could be enough natural gas trapped underground to meet Germany's gas needs for about 50 years, based on the current rate of gas consumption, at costs below what Germany now pays for imported gas, analysts say.

So far, Ms. Merkel has sided with her wary public, expressing doubts about the viability of fracking in Germany and pledging to allow it only if it can be proven entirely safe. Ms. Merkel is trying to please the broader public, which surveys show is frightened by fracking, while not alienating industry, which is lobbying the government to do something about Germany's soaring energy costs.

"The compromise here is to allow for pilot projects to do testing," said Miranda Schreurs, director of the Berlin-based Environmental Policy Research Center and an adviser to the German government on the issue. "The government is trying to keep the door open for fracking to be able to say that if they do it, it will be safe."

Germany's energy industry welcomed the fact that the government has shied away from an outright ban on any fracking. The government's proposals are a compromise between the environment minister, who initially wanted to ban fracking, and the economy minister, who wants to allow it. Industry sees the compromise as a step that would allow for some testing and which could help determine whether fracking is harmful to the environment.

"Only at the end [of testing] will we be able to judge using all relevant criteria whether this makes sense-economically, environmentally, and regarding its acceptance by society," a spokesman for chemical and energy group BASF AG said. "To do that, we need the framework which is now being established."

Germany's powerful environmental lobby says the government's proposals don't go far enough and demand an outright ban. The opposition Green Party called the government's move a smoke screen. "It's like banning skiing in the Sahara," said Oliver Krischer, a Green Party member of parliament. "An environmental-impact study, which is also embraced by the gas industry, will do little."

Copyright (c) 2012 Dow Jones & Company, Inc.

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Raisama Slashes Salaries of Two Executive Directors to Reduce Costs

Raisama Energy disclosed Wednesday that it has reduced the salaries of two of its executive directors, Jeff Steketee and Jim Durrant, to save on overhead costs.

In a statement released, the company noted that both of the directors will draw $231,030 (AUD 225,000) per annum; their salaries will be increased to $256,700 (AUD 250,000) per annum upon settlement of a dispute with Blade Petroleum. Steketee was earning $325,000 (AUD 333,710) per annum, while Durrant was drawing a yearly salary of $308,040 (AUD 300,000).

Blade started court proceedings against Raisama last year, the former was seeking to terminate a farm-in agreement pertaining to the Cadlao oil project located in the Philippines inked in 2010, according to a statement from Raisama.

The statement also revealed that both of the directors will be required to give six months' notice period for their rolling employment term of one year. Under their previous contracts, the directors had to present 18 months' notice.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

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Raisama Slashes Salaries of Two Executive Directors to Reduce Costs

Raisama Energy disclosed Wednesday that it has reduced the salaries of two of its executive directors, Jeff Steketee and Jim Durrant, to save on overhead costs.

In a statement released, the company noted that both of the directors will draw $231,030 (AUD 225,000) per annum; their salaries will be increased to $256,700 (AUD 250,000) per annum upon settlement of a dispute with Blade Petroleum. Steketee was earning $325,000 (AUD 333,710) per annum, while Durrant was drawing a yearly salary of $308,040 (AUD 300,000).

Blade started court proceedings against Raisama last year, the former was seeking to terminate a farm-in agreement pertaining to the Cadlao oil project located in the Philippines inked in 2010, according to a statement from Raisama.

The statement also revealed that both of the directors will be required to give six months' notice period for their rolling employment term of one year. Under their previous contracts, the directors had to present 18 months' notice.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here

Raisama Slashes Salaries of Two Executive Directors to Reduce Costs

Raisama Energy disclosed Wednesday that it has reduced the salaries of two of its executive directors, Jeff Steketee and Jim Durrant, to save on overhead costs.

In a statement released, the company noted that both of the directors will draw $231,030 (AUD 225,000) per annum; their salaries will be increased to $256,700 (AUD 250,000) per annum upon settlement of a dispute with Blade Petroleum. Steketee was earning $325,000 (AUD 333,710) per annum, while Durrant was drawing a yearly salary of $308,040 (AUD 300,000).

Blade started court proceedings against Raisama last year, the former was seeking to terminate a farm-in agreement pertaining to the Cadlao oil project located in the Philippines inked in 2010, according to a statement from Raisama.

The statement also revealed that both of the directors will be required to give six months' notice period for their rolling employment term of one year. Under their previous contracts, the directors had to present 18 months' notice.

Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

View the original article here

The President’s Energy Tax Hikes: Expensing of Intangible Drilling Costs

Yesterday, we discussed the president’s 2013 budget proposal to repeal the Section 199 manufacturer’s deduction for oil and natural gas companies – showing the disconnect between his call for more domestic oil and natural gas production and boosting U.S. manufacturing. Today, let’s look at another proposed energy tax increase in the president’s spending plan: repealing the expensing of intangible drilling costs (IDC).

Repealing IDC would generate $13.9 billion for the U.S. Treasury over 10 years. But it would eliminate a 99-year-old section of the tax code that has fostered innovation and exploration in the oil and natural gas business – playing a major role in the development of our energy resources for nearly a century.

Here’s what the president said in his State of the Union address:

“We have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

And:

“We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.”

More manufacturing, jobs and energy. We’re for all three. Unfortunately, the president’s energy tax increases, including the IDC repeal, would make all three harder.

Here’s why: When energy companies drill they incur costs that can’t be recovered, such as site preparation and labor, representing 60 to 80 percent of the cost of the well. These costs accrue whether the well produces oil or natural gas or is a dry hole. Take away IDC and you increase the cost of production. Increase production costs and you discourage new energy development, which affects manufacturing and energy supply.

Since 1913 companies have been able to expense drilling costs – much like the Research & Development deduction enjoyed by other industries. Repealing IDC would discourage the very things the president wants: innovation, risk-taking, investment and new drilling activity – which helps the manufacturing sector as well as overall economic growth. We’re seeing that right now in states like North Dakota, Pennsylvania and Texas.

The president is right: There’s huge opportunity to help spur U.S. manufacturing and to capitalize on America’s vast energy riches – including the second-largest natural gas reserves in the world that are being unlocked through hydraulic fracturing.

With the right policies in place, America’s oil and natural gas companies can be a catalyst for both. Greater access to our resources could generate 1 million new U.S. jobs by 2016 while making our energy future more secure. Raising taxes on America’s oil and natural gas companies, which already are paying $86 million a day to the U.S. Treasury, will squander the opportunities the president mentioned. It’s the wrong policy for the jobs, energy and economic growth everyone wants.

View the original article here

Study: EPA’s Tier III Proposal Would Increase Fuel-Making Costs

At a time when just everyone is understandably concerned about fuel prices, EPA apparently didn’t get the memo. Its latest thinking on a Tier III refinery rulemaking would add significant costs to the making of gasoline, according to a new analysis by Baker & O’Brien, Inc.

During a recent conference call with reporters, API’s Bob Greco, group director for downstream and industry operations, talked about the impacts on refiners of the proposed rule to further reduce sulfur levels in gasoline:

Nearly $10 billion in new capital costs to industry.Increase of between 6 cents and 9 cents per gallon to the cost of manufacturing gasoline, according to Baker & O’Brien.Increase of as much as 25 cents per gallon if a vapor pressure reduction requirement, which EPA considered, is included.

Greco:

“With the pump price of gasoline already above $4 a gallon in some parts of the country, this added burden clearly makes Tier III the wrong regulation at the wrong time. More importantly, EPA has yet to demonstrate any air quality benefits from reducing sulfur in the amount proposed. And, as the Baker & O’Brien analysis also shows, implementing the new requirements would increase refinery greenhouse gas emissions because of the use of energy-intensive hydrotreating equipment to remove sulfur from the gasoline.”

EPA claims the new rule wouldn’t be a hardship. But Greco said the agency cites a “low-ball cost estimate” that uses flawed modeling about what U.S. refineries would have to do to be in compliance. Although EPA has dropped the gasoline vapor pressure requirement, industry doesn’t believe the provision is off the table.

The Baker & O’Brien analysis found that while the sulfur requirement alone probably wouldn’t lead to refinery closures, Tier III in tandem with other potential EPA requirements could cause some refineries to close, resulting in diminished fuel manufacturing capacity and increased reliance on imported fuels – all for what Baker & O’Brien said would be modest environmental benefits. Greco:

“Refinery regulations clearly contribute to a cleaner environment and safer workplace, but, unnecessary, inefficient, and excessively costly requirements hamper our ability to provide and distribute fuels to America, while also employing hundreds of thousands of people and enhancing our national security. We have already seen some refineries close, at least in part due to the cumulative impact of environmental controls. We urge the administration to take a step back on Tier III and its other proposed rules. We must be sure that new regulatory proposals are necessary, properly crafted, practical, and fair to allow US refiners to remain competitive, preserve good paying refinery jobs, and ensure our energy security.”

View the original article here

Study: EPA’s Tier III Proposal Would Increase Fuel-Making Costs

At a time when just everyone is understandably concerned about fuel prices, EPA apparently didn’t get the memo. Its latest thinking on a Tier III refinery rulemaking would add significant costs to the making of gasoline, according to a new analysis by Baker & O’Brien, Inc.

During a recent conference call with reporters, API’s Bob Greco, group director for downstream and industry operations, talked about the impacts on refiners of the proposed rule to further reduce sulfur levels in gasoline:

Nearly $10 billion in new capital costs to industry.Increase of between 6 cents and 9 cents per gallon to the cost of manufacturing gasoline, according to Baker & O’Brien.Increase of as much as 25 cents per gallon if a vapor pressure reduction requirement, which EPA considered, is included.

Greco:

“With the pump price of gasoline already above $4 a gallon in some parts of the country, this added burden clearly makes Tier III the wrong regulation at the wrong time. More importantly, EPA has yet to demonstrate any air quality benefits from reducing sulfur in the amount proposed. And, as the Baker & O’Brien analysis also shows, implementing the new requirements would increase refinery greenhouse gas emissions because of the use of energy-intensive hydrotreating equipment to remove sulfur from the gasoline.”

EPA claims the new rule wouldn’t be a hardship. But Greco said the agency cites a “low-ball cost estimate” that uses flawed modeling about what U.S. refineries would have to do to be in compliance. Although EPA has dropped the gasoline vapor pressure requirement, industry doesn’t believe the provision is off the table.

The Baker & O’Brien analysis found that while the sulfur requirement alone probably wouldn’t lead to refinery closures, Tier III in tandem with other potential EPA requirements could cause some refineries to close, resulting in diminished fuel manufacturing capacity and increased reliance on imported fuels – all for what Baker & O’Brien said would be modest environmental benefits. Greco:

“Refinery regulations clearly contribute to a cleaner environment and safer workplace, but, unnecessary, inefficient, and excessively costly requirements hamper our ability to provide and distribute fuels to America, while also employing hundreds of thousands of people and enhancing our national security. We have already seen some refineries close, at least in part due to the cumulative impact of environmental controls. We urge the administration to take a step back on Tier III and its other proposed rules. We must be sure that new regulatory proposals are necessary, properly crafted, practical, and fair to allow US refiners to remain competitive, preserve good paying refinery jobs, and ensure our energy security.”

View the original article here

The President’s Energy Tax Hikes: Expensing of Intangible Drilling Costs

Yesterday, we discussed the president’s 2013 budget proposal to repeal the Section 199 manufacturer’s deduction for oil and natural gas companies – showing the disconnect between his call for more domestic oil and natural gas production and boosting U.S. manufacturing. Today, let’s look at another proposed energy tax increase in the president’s spending plan: repealing the expensing of intangible drilling costs (IDC).

Repealing IDC would generate $13.9 billion for the U.S. Treasury over 10 years. But it would eliminate a 99-year-old section of the tax code that has fostered innovation and exploration in the oil and natural gas business – playing a major role in the development of our energy resources for nearly a century.

Here’s what the president said in his State of the Union address:

“We have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.”

And:

“We have a supply of natural gas that can last America nearly 100 years. And my administration will take every possible action to safely develop this energy.”

More manufacturing, jobs and energy. We’re for all three. Unfortunately, the president’s energy tax increases, including the IDC repeal, would make all three harder.

Here’s why: When energy companies drill they incur costs that can’t be recovered, such as site preparation and labor, representing 60 to 80 percent of the cost of the well. These costs accrue whether the well produces oil or natural gas or is a dry hole. Take away IDC and you increase the cost of production. Increase production costs and you discourage new energy development, which affects manufacturing and energy supply.

Since 1913 companies have been able to expense drilling costs – much like the Research & Development deduction enjoyed by other industries. Repealing IDC would discourage the very things the president wants: innovation, risk-taking, investment and new drilling activity – which helps the manufacturing sector as well as overall economic growth. We’re seeing that right now in states like North Dakota, Pennsylvania and Texas.

The president is right: There’s huge opportunity to help spur U.S. manufacturing and to capitalize on America’s vast energy riches – including the second-largest natural gas reserves in the world that are being unlocked through hydraulic fracturing.

With the right policies in place, America’s oil and natural gas companies can be a catalyst for both. Greater access to our resources could generate 1 million new U.S. jobs by 2016 while making our energy future more secure. Raising taxes on America’s oil and natural gas companies, which already are paying $86 million a day to the U.S. Treasury, will squander the opportunities the president mentioned. It’s the wrong policy for the jobs, energy and economic growth everyone wants.

View the original article here