Macondo: the disaster that changed the rules - SCOR.COM

Page created by Clara Gibbs
 
CONTINUE READING
Technical newsletter                                                                                               April 2014

Macondo: the disaster that changed the rules
On 20 April 2010, while completing work on an exploratory well in the Macondo Prospect, approximately
50 miles off the coast of Louisiana, the semi-submersible oil rig Deepwater Horizon experienced a
catastrophic blowout, leading to several crippling explosions and an uncontainable fire that resulted
in the deaths of 11 rig workers. Two days later, the rig sank in approximately 5,000 feet of water.
The accident severed the rig's connection to the seafloor, while the blowout preventer experienced
a complete failure, allowing oil from the reservoir to plume into the Gulf of Mexico. The federal
government estimates that the Deepwater Horizon incident released 4.9 million barrels of crude oil
into the Gulf of Mexico before the damaged well was stabilized on 15 July, making it the single worst
offshore incident in US history.
In the three years following the oil spill, the government and the oil and gas industry (the Industry) have
worked hard to create and implement new rules governing offshore drilling.
The Deepwater Horizon accident has led to a re-evaluation of deepwater drilling procedures. New
regulations have been implemented with a view to preventing future oil spill incidents and improving
the health and safety of both the environment and offshore workers.
This seems particularly relevant in a technological environment where an increasing number of oil and
gas projects involving ultra-deep drilling are being presented by various players.
Most people in the oil production business believe that the era of easy oil discovery is over, and many
of today’s oil and gas reservoirs are indeed to be found in increasingly difficult locations with complex
geologies. These locations include large, ultra-deep oil and gas reservoirs.
The (re)insurance sector still views these projects as extremely risky. SCOR’s objective is to incorporate
these new prospects into our existing portfolios as carefully as possible.
SCOR Global P&C’s Business Solutions division currently deals with a large number of ultra-deep drilling
projects. It is important for the underwriters, lawyers, regulators, financiers and engineers involved to
understand the risk exposure linked to these projects and to verify that the insureds are closely following
the new post-Macondo regulations.

   US government focus – four areas
Only three years have passed since the           Task Forces (JITFs) and the Bureau of Safety
disaster in the Gulf, but it is already          and Environmental Enforcement (BSEE).                            Center for Offshore
                                                                                                                     Safety (COS)
clear that the incident has led to some          The order specified that:
significant changes in terms of the              • The Center for Offshore Safety (COS)
regulation of offshore oil and gas               would be created by the Industry to serve as
                                                                                                     Minerals      Bureau of Safety
production in the United States.                 the focal point for operators to work together   Management      and Environmental
                                                 on the enhancement of offshore operations.       Service (MMS)   Enforcement (BSEE)
Changes in the regulation                        • The Bureau of Safety and Environmental
of offshore oil and gas                          Enforcement (BSEE) would have the
                                                                                                                     Joint Industry
production                                       authority to inspect and investigate Outer                           Task Force
The first notable change was to the identity     Continental Shelf (OCS) activities, including                           (JITFs)
and makeup of the regulator itself.              calling witnesses, levying penalties, and
On 9 May 2010, the Secretary of the Interior     cancelling or suspending activities.
issued Secretarial Order No. 3299, eliminating   • The Joint Industry Task Forces (JITFs)
the Minerals Management Service (MMS) and        would be assembled by the Industry in
replacing it with three new bodies: the Center   order to focus on critical areas of the Gulf
for Offshore Safety (COS), the Joint Industry    of Mexico’s offshore activity.
The changes reflect the Department’s             Procedures Task Force (Procedures JITF),            enhancing safety and environmental
response to criticism of its functioning         the Joint Industry Offshore Equipment Task          protection.
in the past. M MS was supposed to                Force (Equipment JITF), the Joint Industry          The ultimate goal for these JITFs is to
be responsible for guaranteeing safe             Subsea Well Control and Containment Task            improve Industry drilling standards in
and secure operations on the Outer               Force (Subsea JITF), and the Joint Industry         order to form comprehensive and safe
Continental Shelf. In theory, this meant         Oil Spill Preparedness and Response Task            drilling operations, well containment
that MMS would carefully evaluate the            Force (OSPR JITF).                                  and intervention capability, and oil spill
environmental and socioeconomic impact           Sessions began in early spring of 2010              response capability, not just through
of lease sales and other OCS activities,         to provide recommendations to the US                the evaluation and revision of Industry
balancing the cost s and benefit s of            Department of the Interior in the areas             guidelines and procedures, but also
further development. However, there              of oil spill prevention, intervention and           through active engagement with regulatory
was a perception among many critics that         response, with the definitive aim of                processes.
the revenue management functions of
MMS gave it a direct incentive to increase
and expedite OCS development, thereby
hampering its regulatory neutrality.

Changes in the safety &                                                               Well Containment &
environmental management                                                            Intervention Capability
system
A lot of good work has gone into remaking
the old MMS. The Bureau of Safety and
Environmental Enforcement (BSEE), now
includes an Investigations and Review Unit,                                                 Sale
the mission of which is “to promptly and                                                   Drilling
credibly respond to allegations or evidence                                               Operations
of misconduct and unethical behaviour                                   Spill
by Bureau employees; pursue allegations                                                                     Prevention &
                                                                      Response
of misconduct by oil and gas companies                                                                    Industrie Drilling
                                                                      Capability
involved in offshore energy projects; and                                                                    Standards
assure the Bureau's ability to respond
swiftly to emerging issues and crises,
including significant incidents such as spills
and accidents”. BSEE must be adequately
                                                 Figure 1: Restoring confidence in deepwater drilling operations through comprehensive improvements
staffed, clear about its mission and able to     to well containment and intervention capability, spill response capability and drilling standards.
keep up with the constant innovations of
private industry - a challenging task given
the need to compete for talent with the          Drilling safety rules:                              and operational performance.
Industry and with other entities.                Joint Industry Offshore                             These recommendations resulted in the
A transparent way must be found for the          Operating Procedures Task Force                     revision of the American Petroleum Institute
Industry to be involved in exposing the new      Permit applications must now meet                   (API) guidelines, which are considered
investigators and regulators to emerging         new standards for well design, casing               Industry best practices for US oil and gas
technologies and techniques.                     and cementing, and be independently                 operations.
BSEE and the Industry must develop a             certified by a professional engineer. Plans         The API guidelines provide well design and
collaborative approach to training these         must include a compliance statement and             operational considerations for the safe design
new investigators.                               a review of subsea blowout containment              and construction of deepwater wells, with
                                                 resources for deepwater drilling.                   maximum reliability:
Joint Industry Task Forces (JITFs):                                                                  • the casing and cement programme must
four areas                                       ➥ Well integrity                                      now be certified by a Professional Engineer;
Amid the initial uncertainty regarding the       The Procedures JITF reviewed critical               • two independent barriers must be set
causes of the blowout, the difficulty of a       processes associated with the drilling and            up during completion (certified by a
major reorganization, and heavy public           completion of deepwater wells, in order to            professional engineer);
criticism, the oil & gas industry assembled      identify gaps between existing practices and        • any change-out of lighter fluids must be
four JITFs to focus on critical areas of         regulations and Industry best practices. Their        approved (negative test procedures);
Gulf of Mexico (GOM) offshore activity:          recommendations were intended to move               • installation, sealing, and locking of casing
the Joint Industry Offshore Operating            Industry standards to a higher level of safety        hangers is a new requirement.

                                                                                                           SCOR Global P&C - Technical Newsletter - 2
➥ BOP (blowout preventer) & control              Adequate spill responses                          ➥ Marine Well Containment
system: Joint Industry Offshore                  & well containment resources                      Company
Equipment Taskforce                              ➥ Joint Industry Subsea Well Control              In the days immediately following the
The Equipment JITF reviewed current BOP          and Containment Task Force                        incident, it became clear that neither the
equipment designs, testing protocols and         The Subsea JITF reviewed technologies             companies involved nor the Industry as
documentation. Their recommendations, as         and practices for controlling the release         a whole had realistic plans in place for
listed below, were designed to close any gaps    of oil from the source of a subsea well           containing a disaster of the scale presented
and to create improvements in these areas:       where there has been a loss of control.           by the Macondo blowout.
• blind-shear ram function-testing & 3rd        These include equipment design, protocol          Though the operators were ultimately
   Party verification;                           testing, research and development (R&D),          able to cap the wellhead and then seal
• requirement & function testing for auto       regulations and documentation to determine        the well itself, the initial series of trial-and-
   shear;                                        if enhancements are needed.                       error attempts at stopping the initial leak
• m in im u m re q u ire m e nt s fo r R OV     The JITF identified five key areas of focus for   damaged both the environment and the
   intervention plus testing;                    GOM deepwater operations:                         public’s confidence in the Industry.
• BOP inspection & maintenance to API           • Well containment on the seafloor;               Early shortfalls in necessary oil cleanup
   RP 53;                                        • Intervention and containment within the        equipment led critics to accuse the Industry’s
• minimum requirements for personnel               subsea well;                                   response process of having evolved very
   operating BOP equipment.                      • Subsea collection and surface processing       little since the Exxon Valdez disaster decades
                                                    and storage;                                   earlier.
Based on the Equipment task force’s              • Continuing R&D;                                 Anticipating that the Industry would now
recommendations, an API work team                • Relief wells.                                   have to demonstrate enhanced capabilities,
began development on the fourth edition                                                            several large integrated companies formed
of API RP 53 Recommended Practices               The Subsea JITF focused primarily on              the Marine Well Containment Company
for Blowout Prevention Equipment Systems         potential operational scenarios after a well      (MWCC) in July 2010.
for Drilling Wells. This edition was updated     blowout has occurred. It also considered the      Shell, ExxonMobil, ConocoPhillips and
and published in early 2012.                     containment of hydrocarbons that may leak         Chevron announced that the consortium
                                                 from subsea production system equipment           would be funded by $1 billion in member
Worst case blowout                               (e.g. subsea production wells) and casing         contributions. The purpose of MWCC
discharge & blowout response:                    stubs on the seafloor.                            was to design and make available a
joint Industry oil spill                                                                           technology system that would be “flexible,
F o ll ow ing the M a co nd o a ccid ent ,                                                         adaptable…. able to begin mobilization
stronger offshore drilling regulations were                                                        within 24 hours and that can be used on a
implemented. For instance, operators must                                                          wide range of well designs and equipment,
now demonstrate that they are prepared to                                                          oil and natural gas flow rates and weather
deal with the potential for a blowout.                                                             conditions.”
The Joint Industry Oil Spill Preparedness                                                          The pre-engineered system was designed
and Response Task Force (OSPR JITF) spent                                                          to be able to contain a blowout in
several months developing and prioritizing                                                         10,000 feet of water at a peak discharge
project plans to address each preliminary                                                          rate of 100,000 b/d. Since its introduction,
recommendation, and subsequently received                                                          six new companies have joined MWCC
approval and Industry funding commitment                                                           (BP, Apache Corp, Statoil ASA, BHP Billiton,
for a multi-year work programme.                                                                   Anadarko Petroleum, and Hess Oil). Member
The OSPRS divided the recommendations                                                              companies claim to represent 70 percent
into seven categories, or work streams, as                                                         of the deepwater wells drilled in the Gulf.
outlined in the original report, specifically:                                                     Non-members can lease the MWCC system
• Planning                                                                                         for a fee.
• Dispersants
• Shoreline Protection and Cleanup                                                                 ➥ Helix Well Containment Group
• Oil sensing and Tracking                                                                         At the same time, a larger group of more than
• In-Situ Burning                                                                                  15 independent oil and gas companies active
• Mechanical Recovery                                                                              in deepwater exploration and production
• Alternative Technologies                                                                         formed the Helix Well Containment Group
                                                                                                   (HWCG). The group works in partnership
                                                                                                   with Helix Energy Solutions Group (HESG),
                                                                                                   a field services company active in the Gulf
                                                 Well containment system                           of Mexico.

                                                                                                        SCOR Global P&C - Technical Newsletter - 3
Members
                                                            Q4000
 ATP Oil & Gas Corporation                                                                        Non-DP. Storage Tanker
 Cobalt International Energy, LP
                                                                                            12" Flex Export Line
 Deep Gulf Energy, LP                                                                       Floating Offloading Hose
                                                                                            (Hawser not shown)
 ENI U.S. Operating Company
 Energy Resource Technology GOM Inc.
 Freeport-McMoRan Oil & Gas
 LLOG Exploration Company, LLC                                                                                         Helix producer I
 Marathon Oil Company
 Marubeni Oil & Gas (USA), Inc
 Murphy Oil Corporation
 Noble Energy, Inc.                                   6-5/8" HD-563
                                                                                       5" 10,000 PSI
 Repsol E&P USA Inc.                                  Q-125 32 lbs/ft
                                                      Casing (5-5/8" ID)               Flexible Riser

 Stone Energy Corporation                             (All threaded,
                                                      Q4000 installed)
 Walter Oil & Gas Corporation
 W & T Offshore Inc.
                                                                           Flow

                                                                                                 Intervention
                                                                                             5" 10,000  PSI
                                                   Stack Can      Riser                      Flexible
                                                                                                 RiserRiser
                                                                                                        System
                                                   connect
                                                   to BOP,
In fact, HESG was hired as part of the effort      Wellhead       IRS
                                                   or Tree
to stem the flow of oil from the ruptured                         SSOD
Macondo well, and at one point was                               BOP                               Subsea shut
                                                                 Stack
successfully collecting up to three quarters                                                       off device /
                                                                                                   Well Cap
of the oil flowing from the well before it
was capped.

There is considerable debate over whether
the existence of two separate Industry-
sponsored containment entities, HWCG            Helix containment system
and MWCC, is either useful or necessary.
HWCG, populated by smaller, independent
companies, is positioned to respond to             Center for Offshore Safety (COS) governance
a blowout at a mid-sized well. MWCC,
as a partnership between much larger,           The Center’s primary objective is the improvement of the Industry’s safety and
integrated international oil companies, is      environmental performance. It will provide a platform for Industry collaboration
clearly designed for a much larger incident.    with third party stakeholders, including Federal agencies.
This dichotomy would seem to imply that
the two systems are equally important.          The Center is located in Houston and has a governing board representing a diverse cross-
Indeed, there has been some discussion of       section of the Industry.
the groups working together in the future.
                                                Member Companies
It is important to note that both HWCG          • Anadarko Petroleum              • ConocoPhillips                     • NOIA
and MWCC are generally geared towards             Corporation                     • Diamond Offshore                   • Oceaneering
responding to incidents in the US Gulf of       • Apache                            Drilling, Inc.                       International, Inc
Mexico. An early criticism of this approach     • Baker Hughes Inc.               • Ensco Offshore                     • Pacific Drilling
was that the Industry was ill-prepared for      • BHP Billiton Petroleum            International                      • Schlumberger
subsea blowouts in other areas of the OCS,      • BP Exploration and              • Exxon Mobil Corporation            • Seadrill Americas
or indeed globally.                               Production Inc.                 • Halliburton                        • Shell International E&P Inc.
To respond to this issue, nine of the world’s   • Cameron International           • HESS                               • Statoil North America Inc.
largest oil companies announced the               Corp.                           • IADC                               • Stone Energy
formation of the Subsea Well Response           • Center of Offshore Safety       • Marathon Oil                       • Tidewater Inc.
Project (SWRP) in May of 2011. SWRP             • Chevron Energy                  • Marine Spill Response              • TOTAL E&P USA INC.
members include BG Group, BP, Chevron,            Technology Company                Corporation                        • Transocean
ConocoPhillips, ExxonMobil, Petrobras,          • Cobalt International            • Murphy Oil
Shell, Statoil and Total.                         Energy                          • Noble Corporation

                                                                                                           SCOR Global P&C - Technical Newsletter - 4
What about the other countries?
The human tragedies, together with the environmental, social and economic costs of Macondo, inevitably led the
US to conduct an extensive review of its regulatory regime. The UK and the European commission followed suit.

UK offshore regulatory regime                     One of the areas scrutinised was the financial     DECC is aware through the auspices of
In considering the consequences of the            capabilities of licensees following a blowout      Oil&Gas UK (OGUK), an Indemnities and
Macondo accident for the UK regulatory            from drilling operations on the UKCS.              Insurance Review Group was established
regime, it is important to consider the                                                              under a forum to provide assistance to a
significant differences between the United        In respect to drilling activity, OPEPs (Oil        review of what and how to demonstrate
Kingdom Continental Shelf (UKCS) and              Pollution Emergency Plans) contain worst           financial responsibility with regard to both
the Gulf of Mexico – in terms of both the         case scenario information and details are          first and third party costs, including the
physical environment concerning weather,          provided of the incident response actions          OPOL limit.
climate and normal sea state, and the nature      to be implemented should such a scenario           The outcome of this working group was
of the regulatory regime, where a goal-           occur, including loss of well containment/         the production of OGUK Guidelines.
setting approach plays a major role in the        well blow out. These actions can include           These guidelines contain five appendices
UK compared to a largely prescriptive US          deployment of a capping/containment                setting out certificates that, depending on
approach.                                         device or the drilling of a relief well with the   particular circumstances, OGUK recommend
In December 2012, the UK government               related logistical and time frame factors.         should be submitted to DECC.
published its final report on the adequacy of     All the response mechanisms to be used by          This guidance has effect on and from
the present regulatory regime for offshore oil    the operators during any such incidents will       1 January 2013.
and gas operations on the UK Continental          be expensive (first party costs), as may the
Shelf (“UKCS”) in the post-Macondo era.           compensation costs for pollution damage            Norwegian regulation
Responsibility for offshore oil and gas           (third party costs).                               Following the Macondo incident in April
regulation in the UK is split between                                                                2010, the Norwegian Ministry of Petroleum
three authorities: (1) the Health & Safety        For an OPEP to be credible and for DECC            and Energy announced that the incident
Executive (“HSE”), which is responsible for       to have sufficient assurance that the OPEP         could result in changes to laws and
the safety integrity of E&P operations: (2) the   will be implemented when required, DECC            regulations concerning activities on the
Department of Energy and Climate Change           requires operators to provide sufficient           Norwegian Continental Shelf.
(“DECC”), which is responsible for licensing      evidence that the risks of the operation have      The Petroleum Safety Authority, PSA
and drilling consents as well as environmental    been appropriately estimated and that the          Norway, has the regulatory responsibility
protection and response; and (3) the Maritime     financial mechanisms are in place to meet          for safety, emergency preparedness and
and Coastguard Agency (“MCA”), which is           those risks.                                       the working environment for all offshore
responsible for responding to oil spills.                                                            and onshore petroleum-related activities
In 1988, the UK suffered its own “Macondo”        The level of financial responsibility that         in Norway.
when the Occidental-operated Piper Alpha          companies need to demonstrate for any              According to PSA Norway, the Macondo
production platform exploded, resulting in        particular well should be calculated by            accident has demonstrated the need
167 deaths.                                       establishing the combined:                         to assess a number of measures that
The subsequent regulatory review led to           • cost of well control                            can improve the management of major
a raft of safety legislation, with the effect     • cost of financial remediation and               accident risk, with an eye to more robust
that the UK’s offshore regulatory regime             compensation from pollution                     solutions than those generally employed
is now regarded as one of the most robust         And this should accompany the relevant             today. Permission from the PSA to start
in the world and acknowledged as a “gold          OPEP at the time it is submitted to DECC           drilling a new well will now depend on
standard”. Nevertheless, Macondo provided         for approval, unless otherwise agreed with         the applicant’s ability to handle a potential
a poignant reminder of the importance of          DECC.                                              blowout.
maintaining and developing a regulatory                                                              The PSA repor t of assessment s and
regime of the highest standard, capable of        Financial responsibility can be verified by        recommendations after the Macondo
managing incidents in increasingly complex        means of:                                          incident was finally issued on 16 June 2011.
and remote drilling scenarios.                    • reliance on credit/financial strength           Part one of the report focuses on lessons
In 2011, DECC has been reviewing the                 rating of the operator or co-venturer           for safety and emergency preparedness in
systems and processes in place with the aim       • insurance                                       connection with drilling and well operations
of improving and strengthening procedures,        • parent company guarantee/affiliate              on the Norwegian Continental Shelf,
including those demonstrating financial              undertaking;                                    and part two contains guidance on the
responsibility, with regard to exploration and    • any combination of the above.                   prevention of major accidents in general for
production activity.                                                                                 the whole Norwegian petroleum industry.

                                                                                                          SCOR Global P&C - Technical Newsletter - 5
Brazilian regulation                                production level of 2.5 million barrels per            necessarily translate into strengthening
Looking to the oil and gas landscape                day could actually double by 2020, when                Brazilian legislation in an effort to lessen
beyond the Gulf of Mexico, the Macondo              taking into account the “pre-salt” project             the damage caused by an oil spill.
oil spill and environmental clean-up                off the coast of São Paulo.                            The Brazilian authorities discussed these
response has been studied by another                                                                       issues at a meeting held in Rio de Janeiro,
oil producing country in the Americas               The offshore discoveries have resulted in              which concentrates 80% of the country’s
- Brazil. The largest country in South              new shipbuilding, ship owning, shipyards,              oil exploration. Five workgroups were
America is already a major player in the            crewing and overall maritime sector                    created to gather information on accident
oil industry and its production is about            opportunities. This boom brings to mind                prevention and strategies designed to
to increase exponentially. State-owned              the Spiderman comics statement: “With                  contain and minimize the impacts of
energy superpower Petroleo Brasileiro S.A.          great power there must also come great                 possible leaks.
(Petrobras) has projected that the current          responsibility”. Said responsibility will

   Post-Macondo projects: preparing for the underwriting challenges
Companies have no doubt learned a lot               with new guidance post-Macondo has                     dealing with “deep offshore drilling”
from the Macondo oil spill, but mistakes            been challenging due to the frequent                   projects. In all honesty, however, it is
can of course still happen. Operators have          amendments to current requirements, the                still difficult to know if there have been
learnt how to respond to these in a faster,         differences between countries and the lack             effective advances in offshore safety since
more efficient way.                                 of communication between the various                   the Macondo accident of April 2010.
The lessons of Macondo are all about                safety centres and organizations.
engineering, permits, plans, communication                                                                 N ever theless, the incident has not
and sociology. The idea is that anyone,             From an insurance point of view, the                   discouraged global deepwater exploration.
employee or contractor, can order work              purpose of this document has been to                   In the near future, there will be even more
to be suspended if he or she feels that             give an overview of the new regulations                deepwater drilling rigs and deepwater
anything unsafe is going on. However, many          post-Macondo and to set out the challenges             projects in existence than before the spill.
operators have been finding that complying          encountered by insurers/reinsurers when

Caroline Haquet
Underwriter Offshore & Shipbuilding
SCOR Global P&C
chaquet@scor.com

SCOR Global P&C
5, avenue Kléber - 75795 Paris Cedex 16 - France
Editor: Dominique Dionnet
Tel.: +33 (0)1 58 44 72 62 - Fax: +33 (0)1 58 44 85 22 - ddionnet@scor.com

ISSN : 1967-2136

No part of this publication may be reproduced in any form without the prior permission of the publisher.
Design and conception: SCOR Global P&C, Strategy & Development/                             – (04/2014).
You can also read