Counting the cost

As BP’s devastating oil spill continues to wreak havoc in the Gulf of Mexico, Stacey Sheppard takes a look at the consequences that this crisis will have for the oil industry and what this could mean for the MENA region.

When the Deepwater Horizon drilling rig, which BP leases from Transocean Ltd, exploded on April 20, 2010 claiming the lives of 11 workers and injuring 17 before collapsing and sinking 5000 feet under the water, a shiver was sent through the oil industry.

The rig, valued at more than $560 million, has unleashed the biggest oil spill ever recorded during peace time and continues to spew oil from a blown out well under the sea destroying the Gulf's economy and ecosystem. The oil industry has watched as BP has intensified its desperate efforts to stem the flow and clean up the mess that has been created.

As fast as oil leaks from BP's rig, the oil giant is also haemorrhaging money and the cost of cleaning up the oil leak in the Gulf of Mexico now stands at $3.5bn. However, the monetary loss may not be the biggest problem that BP will have to deal with. Its reputation is in tatters and allegations of cost-savings and cutting corners when it comes to safety are not doing it any favours.

Furthermore, the heavy criticism that Tony Hayward, BP's beleaguered Chief Executive, has received for his handling of the crisis and the numerous PR gaffes he has been involved in, have only heightened the anger over the environmental disaster, particularly from the US government, which put intense pressure on BP to pay $20 billion into a fund to compensate victims of the Gulf oil disaster.

Global impact

Although BP has understandably bore the brunt of the negative fallout, the buck does not stop there. The consequences of the worst oil spill in US waters since 1989 when the Exxon Valdez spilled 11 million gallons of crude into Alaska's Prince William Sound, will undoubtedly be more far reaching and have implications for the oil industry as a whole.

In the aftermath of the Deepwater Horizon explosion, the US initiated a reform of its federal agency responsible for overseeing the oil industry, and what was formerly known as the Minerals Management Service will now become the Bureau of Ocean Energy Management, Regulation and Enforcement. The troubled government agency has often been criticised for catering to the interests of the very industry that it should be policing.

In the past, similar criticisms were also aimed at agencies in other countries that were seen to combine the critical roles of overseeing the revenue and safety aspects of the industry, which clearly leads to a conflict of interests. However, in recent years, many countries that harvest oil and gas from offshore fields have re-examined their systems to ensure that such vital safety decisions are not left in the hands of corporations that are motivated by profit.

In Britain, Norway, Australia and Canada the system is now such that governments are responsible for setting the general safety standards that must be adhered to, but it is the rig operators who are left to work out the finer details. This move away from such heavy-handed, prescriptive government regulation has gradually occurred over the last two decades or so and the reason for it is because the oil companies themselves are clearly best placed to fully understand the risk presented by offshore operations and they should also know how to minimise these risks.

This practice of letting industry select the best safety measures is now quite wide spread and is often referred to as a "performance-based" or "goal-oriented" approach. In other words, oil companies are free to select the best technology to ensure optimum safety for their operations as long as the minimum safety regulations are met.

Lack of regulation

Although it is not yet known what caused the BP disaster, congressional hearings in the US have revealed a lack of regulation covering safety aspects. Certainly, outside of the US the safety regulations tend to be stricter. In Norway, for example, regulation dictates that companies have a back up system in place and acoustic backup systems are often installed to trigger the blowout preventer remotely with sound pulses if the regular switch fails. These are also used in Brazil and off the east coast of Canada, but there is no such requirement for acoustic triggers in the US.

Britain changed its system following a fire that destroyed the Piper Alpha platform in the North Sea in 1988 killing 167 workers. This also prompted oversight of safety for the oil and gas industry to be moved from the Department of Energy to the Health and Safety Executive. Under Australia's "performance-based" system operators must submit plans of their safeguards for approval.

Canada moved to a more "goal-oriented" system last year and until recently energy companies wishing to drill in Canada needed to have plans and permits for relief wells before drilling was approved. These plans had to describe exactly how engineers would drill a relief well if required to do so. However, the National Energy Board of Canada is considering forcing oil companies to drill a secondary relief well in any deepwater Arctic exploration project, as part of a review of its regulations following the BP Gulf of Mexico blowout. There is now an open debate about whether the industry should be forced to drill the relief well at the same time as the main one.

This episode in the Gulf of Mexico, as devastating as it has been, has highlighted the fact that perhaps Big Oil has been given too much freedom to police itself. It has therefore underscored the need for much greater oversight of offshore oil and gas operations and better resources for holding companies accountable for their actions. In the US, a Senate committee recently voted to remove all limits on damage claims that oil companies could pay for offshore spills and there will surely be more reforms to follow.

Alarm bells are certainly ringing for governments who already host or who have been considering the opportunities to host oil companies who are looking to move into deep-water offshore exploration. The BP accident has marred the entire industry and even if it was a one-in-a-million type accident, governments will need to seriously consider the balance between risk and riches.

Spill in the Middle East

The spill in the US has certainly served as an example to other countries but there is nothing like having to deal with a disaster on your own territory to really put things in perspective, as Egypt has recently been unfortunate enough to learn. With eyes around the globe firmly focused on the BP oil catastrophe, a spill off the coast of Egypt's Red Sea has gone seemingly unnoticed, bur nonetheless highlights the potential damage that an environmental crisis of this magnitude could cause in the MENA region.

It was mid-june when oil started to appear off the coast of Hurghada, prompting the Hurghada Environmental Protection and Conservation Agency (HEPCA) to demand tighter regulation of offshore oil platforms. However, the possibility of the oil spill originating from any of the 188 oil platforms operating in the Gulf of Suez area was originally denied by Egypt's Oil Minister, Sameh Fahmi, who said that a technical report indicated that the spill may have come from a passing oil tanker, may have seeped from the ground due to a heat wave, or may have been the result of attempted sabotage of a rig.

The oil spill, which has polluted a 20 km stretch of the popular tourist hub of the Red Sea coast from El-Gouna in the north to Sahi Hashish in the south, has outraged environmentalists who have been very disappointed with the Egyptian government's apparent inability to identify the source of the leak. However, the Prime Minister's spokesman, Magdy Rady, later said that a spillage from an oil rig was the "probable cause" and that an investigation would be launched.

The Ministry of Environment will therefore form a committee to assess the damage caused by the Hurghada oil spill. The committee will be composed of members from the regional branch of the Egyptian Environment Affairs Agency (EEAA), the Centre for the Combat of Petroleum Pollution, and the Red Sea Protectorates Authority.

According to the oil ministry, no more than 30 to 40 barrels of oil were leaked, but environmentalists are disputing this estimate and HEPCA Managing Director Amr Ali has said that he would like to see more stringent standards for offshore platforms to ensure that natural areas are better protected. Egypt's Oil Minister, Sameh Fahmy, is also considering drastic measures to help protect the region from future environmental crises, including the reduction of oil platforms in the Suez Gulf in the hope that this may help the authorities monitor the rigs more effectively. Sameh Fahmy has also called for the creation of a fund to help prevent any further pollution of this nature.

The Egyptian authorities are naturally very protective of their eastern coastline, which has undergone a programme of development to encourage tourism in the area. The lucrative tourism industry earned the country $15.4 billion last year and, according to the Tourism Ministry, it is Egypt's biggest source of foreign exchange revenue and contributes 11 percent of the country's GDP.

Spill containment exercise

The spill in Hurghada has raised fears that a more major incident could wipe the town off the tourist map and has highlighted the fact that better handling of a marine environment crisis is needed. Egyptian officials have already announced plans for an oil spill containment exercise in the port of Sidi Kerir, approximately 30 kilometres west of Alexandria. Egypt's Petro Environmental Services Company (PESCO) and Saudi state oil giant Aramco will be launching the spill containment exercise in November.

Mahmoud Ismail, the head of the environmental disasters and crisis management at the Egyptian Environmental Affairs Agency (EEAA), told Reuters that the exercise will test response to a big shipping spill in the Mediterranean. "We want to make sure that we have all the right equipment and people in place in the case of a disastrous spill, like the one BP had in the US," said Ismail.

The $1 million dollar exercise has already garnered interest from Egypt's Navy and Ministry of Defence, as well as a number of state environmental agencies. Other sponsors include BP, Royal Dutch Shell, Aramco's shipping subsidiary Vela and Egypt's Arab Petroleum Pipeline Company (SUMED).

This fear of an environmental crisis and response capabilities, however, is not limited to Egypt. The whole MENA region has sat up and started to reassess its ability to prevent, contain and respond to such a large-scale oil spill, similar to that in the Gulf of Mexico. Even countries that do not have any oil rigs on their territory are looking at implementing contingency plans. Dr Adel Al Zayani, Director General of Bahrain's Public Commission for the Protection of Marine Resources, Environment and Wildlife, said that an updated plan will be tested out during a comprehensive drill immediately after Ramadan in September. "Bahrain does not have any offshore rigs, but there are plenty round the corner," said Al Zayani. "A disaster could be just a few miles away, so we cannot be complacent."

Whilst some countries in the MENA region are looking to reexamine their national plans, there are some people in the industry who are calling for a much more coordinated approach between the countries in the area. In an interview with arabianOilandGas.com Khamis Juma Bu-Amim, CEO of the Regional Clean Sea Association (RECSO) - an organisation founded in 1972 that plays a leading role in the process of oil spill and incident response under the mutual aid concept - called for a unified national emergency response plan.

"Both oil and increasingly chemical spills are a huge concern in this region," said Bu-Amim. "When you think about the ports, urban developments, power plants and desalination infrastructure which are all reliant on access to clean sea water - a chemical spill would be disastrous."

He stressed the urgent need for a unified plan saying: "The UAE urgently requires a national plan. There has to be a federal agreement, which brings all the stakeholders together as one. We don't want a scenario like the Exxon Valdez or Hebei Spirit in our national waters."

According to his proposal, any federal plan would need to be administered independently of any commercial interest, which would mean that oil companies should not be given sole responsibility of implementing such a plan, despite the fact that they have the technical capability and resources to do so. Bu-Amim also says that the plan must take into consideration the best practices used worldwide and must be set out in clear, transparent language that everybody can understand.

"Meeting that need and implementing a plan like this will go a very long way to protecting the Gulf," said Bu-Amim. "At the moment each Emirate has the responsibility for its own coastline. This isn't practical because an oil spill won't obey zonal waters. One central commander has to be in charge and that authority cannot be questionable."

Other countries, however, do not seem to have been quite so perturbed by the Gulf of Mexico crisis. Libya, for example, will continue with its plans to allow BP to begin drilling in its offshore deepwater region. According to Shokri Ghanem, Libya's de facto Oil Minister, the April explosion of the Deepwater Horizon rig and the oil spill that followed were "tragic" but he said "an accident will not stop us from digging in this new frontier. Life must go on, but we will learn a lot of lessons." He likened the oil spill to air accidents saying: "Accidents happen all the time. If an air crash takes place, we don't stop air traffic."

Whilst this is true, the majority of countries and oil companies, having witnessed the fallout that BP is having to deal with and the devastation that is being caused in the Gulf of Mexico, are willing to do everything possible to avoid making the same mistakes.

However, achieving the difficult balance between technology, complexity and regulation will not be easy, but as the Gulf of Mexico spill has highlighted, this is something we can ill afford to ignore, particularly given the increasingly global nature of the companies in this industry. The BP oil spill echoes back to some of the problems that we saw cause the global financial crisis ­- inherent complexity, lack of sufficient regulation and excessive risk taking - all of which created new vulnerabilities and ultimately brought the industry to its knees. If offshore drilling is to avoid the same fate, radical changes will need to be implemented.

UK

The UK Department of Energy and Climate Change (DECC) announced that it is recruiting more inspectors so that it can double the rate of its offshore drilling rig inspections.

UK Secretary of State Chris Huhne announced that once details are available regarding the cause of the BP blowout, the UK will review new and existing procedures.

At the end of May, the industry representative organisation Oil & Gas UK set up a new Oil Spill Prevention and Response Advisory Group (OSPRAG) to review offshore drilling practices in the UK Continental Shelf and to assess the industry's readiness to respond to a major event in the UK.

China
China National Offshore Oil Corp (CNOOC) has placed an increased focus on safety issues in light of the Deepwater Horizon oil spill. Zhou Shouwei, Vice President of CNOOC, China's largest offshore oil and gas producer, told China Daily the company "ordered checks on every offshore oil and gas project to ensure safety."  Zhou said the company has invested close to $73 million since developing the company's oil leak prevention systems seven years ago.

Chinese oil companies will however continue to increase deep water oil and gas exploration activities because of the huge potential it represents.

Norway
Following the crisis in the Gulf, Norway, the world's fifth largest oil exporter announced that it was "not appropriate" to open new deep-water areas for drilling until an investigation sheds light on BP's leak. The Norwegian freeze signals a push to slow expansion of exploration to new offshore areas, especially in the Norwegian Sea and the Barents Sea.

The Norwegian Oil Industry Association (OLF) also commissioned Det Norske Veritas to gather and compare information on differences similarities between factors such as regulations and procedures related to the petroleum activities in Norway and the US.

Denmark
Shortly after the BP crisis, Danish Climate and Energy Minister Lykke Friis announced that Denmark may tighten North Sea oil drilling regulations. The Danish Energy Agency is reviewing all energy safety rules at her request.

Brazil

Following the Deepwater Horizon incident, Brazil's National Petroleum Agency requested that all companies operating in Brazilian waters supply information on the control systems that are being employed in their wells and the to re-evaluate their emergency plans.

Bulgaria

Bulgaria's Deputy Prime Minister recently announced that a final decision on building an oil pipeline that bypasses Turkey's Bosporus strait will be made after an environmental impact assessment is completed in February. Turkey is using the environmental damage caused by BP Plc's Gulf of Mexico spill to press its case that oil traffic through the straits is unsafe and potentially dangerous.

Canada

The response of Canada's offshore regulator has been to tightening the oversight of its deepest-ever exploration well, which is being drilled by Chevron off the coast of Newfoundland. Chevron is required to meet with Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB) every two weeks to discuss matters of interest. The frequency of audits and inspections onboard the Stena Carron will be approximately every three to four weeks.  Normally, audits and inspections are conducted on offshore operators every three to four months.

Prior to penetrating any of the targets, Chevron must hold an operations time-out to review and verify that all appropriate equipment, systems and procedures are in place to allow operations to proceed safely and without polluting the environment.  

Takeover talk

With BP's share price tumbling down to a figure less than half of the 650p that it achieved in April this year, before the spill occurred, the oil giant is understandably starting to prepare a defence strategy to ward off any unwelcome takeover strategies. The Obama Administration has already forced BP to agree to place $20 billion into an escrow account to fund the clean-up operation and any compensation claims and the company announced some time ago its need to sell off $10 billion worth of assets.

BP now finds itself at the centre of takeover speculation as reports suggest that President Obama has told ExxonMobil that it would not stand in the way of a takeover bid. If the two companies were to merge it would create a group with a stock market value of $400 billion.

This threat of a hostile takeover has led BP's CEO, Tony Hayward, to look for potential strategic investors who could help the oil company fend off any potential bidders. A Senior UAE source told Reuters that Hayward has already met with the Kuwait Investment Authority - the Kuwait Investment Authority already has a stake of 2.8 percent, but BP would reportedly like it to increase that to as much as 10 percent - officials from Abu Dhabi Investment Authority (ADIA) and the sovereign wealth funds of Qatar and Singapore. Reports also suggest that Saudi investors are looking to buy 10 to 15 percent of BP. Shokri Ghanem, Chairman of Libya's national oil company has expressed interest in BP now that the share price is so low and has reportedly told Dow Jones that he will be recommending that the Libyan Investment Authority invest.

Reevaluating regulation

Julian Lee is a senior energy analyst at the London-based Center For Global Energy Studies in London. Here, he gives his views on the direction that the oil and gas industry may take in light of the BP oil spill in the Gulf of Mexico.

The main ramifications will be much stiffer regulations for offshore drilling, virtually everywhere in the world. At the moment we don't really know what caused the Gulf of Mexico well to blow out and BP itself still doesn't know so with regards to what the industry can learn, that very much depends on what they find out about the causes of this leak.

What it does teach everybody though is that oil drilling is a risky business. It has become such a routine and thankfully there are so few incidences of this nature that people both within the industry and outside tend to forget that they can happen. This incident will force both the industry and the regulators to wake up to the fact that oil and gas drilling is inherently risky.

In terms of actual changes in regulations and working practices, this is very difficult to determine at the moment as we don't know what caused the accident. What we can say is that there will generally be much tighter regulation of the blowout preventer, it will need to be tested much more frequently, and there will probably need to be additional redundancy built into the control mechanisms that will allow external control in the event that something goes wrong.

There will certainly be new regulations on record keeping with the requirement that electronic records be kept offsite as well as on the rig. There will also be more stringent requirements for the clean up equipment to be on hand for use. I suspect that there will be requirements for the spill response capabilities to be built up. One of the things that I think that should happen is rather than expecting every company to draw up its own spill response programme for every well there should perhaps be a province wide spill response requirement that is drawn up by the US coast guard for the Gulf of Mexico and other similar bodies in other bodies of water, which companies have to buy into. This would provide a much more coordinated way of trying to deal with an eventuality like this.

The problem that everybody is facing is that very few places have actually had to deal with a blowout of this nature. The industry will look at what comes out of the BP investigation but they will make up their own minds about how they should proceed with legislation.

One of the problems that will come out of this, and something that the US authorities are going to have to think about very carefully, is the manner in which they have gone after BP and the sort of regulations that they are proposing to bring in, not in terms of controlling the drilling, but in terms of removing any liability limits. If these regulations are adopted there will be very few companies who can afford and who will be willing to drill in the Gulf of Mexico. Whilst the risk of something like this happening is relatively low, if it does happen the cost is going to be simply too big for any but two or three of the very biggest companies to be able to risk.