How US regulators can help the industry

Changes to the current oil and gas regulations in the US are required in order to give the industry clearer and more favourable guidelines.

Eric Smith, Associate Director, Tulane University Energy Institute

Professor Eric Smith, Associate Director of the New Orleans-based Tulane Energy Institute and a long-time observer of the US oil and gas industry puts forward the specific regulatory changes that need to be made, from bringing current practices under the regulatory regime, to the creation of a financial support system and the institutionalization of activity.
According to Smith, these requirements would ensure that the US government provides greater assistance to the decommissioning industry at large.

Regulatory instability
The regulatory regime has a tendency to reactively change the current rules that are in place. Smith identifies that this creates instability for operators and argues that there is requirement for greater stability with regards to the regulations that are in place.
Smith gives the example of how an apparently stable situation can be overturned with little warning.
“Say you have a decommissioning industry that is chugging along, removing 200 platforms a year, and everything’s been scheduled, and everything’s been paid for,” he said. “Then a hurricane will come through and the government says: stop all P&A and go out and inspect all your affected platforms so that you can get them back on line and we can earn our royalties.”
These kinds of rule changes come with an extra sting in the tail, Smith observes, because their legality is contested and a future Democrat or Republican administration could declare them null. It means that executives can never be completely sure whether the rules they’ve adapted to are going to be in force after a couple of electoral cycles.

Application of new rules
As well as applying rules that have not been subjected to the usual checks and balances, Smith argues that a number of rules that would greatly improve the way the decommissioning process works have not been applied.
One obvious example is to make plugging and abandonment of non-producing wells independent of the removal of the platform: a lesson the industry learned in the 2010 Taylor mudslide, but which has not been made compulsory.

Financial burden
Another problem Smith cites is that fields that were developed by the majors are sold on down the food chain to smaller and more financially stressed companies. This means that as equipment ages, and as the task of producing oil with them becomes more difficult, they are handed to companies that are less and less able to cope with the problems. And when the end of life stage is reached, it is the companies with the greatest debt that typically have to handle the decommissioning.
One result of this is that the operator is left holding the bag when the oil runs out will often do all it can to postpone its plugging and abandonment (P&A) obligations.
Smith says: “The regulators can force anyone’s hand at any time, but what typically happens is that the smaller operators can say: give me another two years because I’m going to drill another exploratory well but I just can’t do it this year, or I’m going to use that platform for a pipeline manifold connection, and they’ll have a thousand of those excuses, and the government accepts them because they want to see every drop of oil come out of the ground when the platform’s removed.”
Smith’s suggestion is that, rather than noting the accruing P&A cost in the owner’s accounts, the money should be put into a fund, so that when the time comes to decommission, the work has already been paid for. “It hasn’t happened because it’s been fought tooth and nail by the independent oil and gas operators – that’s cash they can spend on drilling.”

Institutionalization of activity
Smith also suggests that the regulators could create an orderly decommissioning market by setting up a quota for how much needs to be decommissioned. He believes that it would be useful if the P&A business could be institutionalised so that a mandated number of platforms would be neutralised every year. This will allow operators to plan around that and they could have the dedicated equipment to do it, avoiding a start and stop system.
“I would probably do it based on age and I would have some kind of default mechanism that, barring an expensive structural survey like we do with ships they’re the ones that have to come out. If you had a 40-year-old platform and you had taken loving care of it and you were spending money on it every year and it was still in production that would be great. If not it would have to come out,” Smith explains.