Uncertainty in the Gulf: the lengthening shadow of Macondo

Conference hears sobering assessment of the fiscal and regulatory challenges facing the Gulf of Mexico decommissioning market.

The decommissioning market in the Gulf of Mexico is facing serious regulatory and fiscal challenges, and the longer-term outlook is uncertain, an expert has warned.
A raft of new rules without the manpower to enforce them, the transfer of decommissioning liabilities down to inadequately financed companies, and the lack of tax incentives to save cash to pay for those liabilities all hamper the smooth functioning of the market, said Professor Eric Smith, associate director of Tulane University Energy Institute in New Orleans.

Speaking at DecomWorld’s Gulf of Mexico Decommissioning & Abandonment Summit in Houston last month, Prof Smith said the government had put “the horse before the cart” after Macondo by introducing new rules while the Bureau of Safety & Environmental Enforcement (BSEE) suffered severe staff shortages.

As an example, he gave BSEE’s decision to start issuing Incidents of Noncompliance – INCs – to contractors: “You should be prepared to start seeing them show up on your doorstep,” he told conference attendees.

Markets can handle new rules when there is certainty about the process, but, he said, “what’s deadly is when you return a piece of paper and then it doesn’t come back – and nobody talks to you.”

He noted the recruitment drive underway at BSEE, but said the regulator would need even more people than they were forecasting.

“When everything goes to hell in a handbasket with a deep-water production platform, there’s just no people to process the paper,” he said.

He added: “That is, to me, one of those sins of commission – that the government went out and put these rules in place without any thought to how they were going to enforce it.”

Stampede for the door

More uncertainty has been caused by the post-Macondo financial requirements for a worst-case spill scenario, he said.

“When you start talking about posting a bond for $100 million, that’s a pretty serious bond to go find. Then somebody says we mean a $1-billion bond. Well there is no $1-billion bond. The industry doesn’t have that sort of liquidity to do those sorts of bonds.”

“It’s one of the reasons you see sort of a stampede for the door by a lot of the independents,” he said. “They’re trying to get rid of their properties without [plugging and] abandoning them, and selling them at a steep discount to somebody who wants to try and continue to participate.”

Another example of regulatory confusion was what he called “an inherent conflict” between the Idle Iron directive and post-storm repair and inspection requirements.

“We’ve got a finite number of four-point boats, we’ve got a finite number of crane barges, and BSEE... will come in after a big storm and say stop doing abandonment. Go out and fix this platform before it falls over, or go and inspect 50 miles either side of the storm track,” he said.

“Every time they do that, your commitments to do the abandonment work are being pushed back... And that is an issue. There’s simply not enough equipment to do everything all the time.”

In the background, he said, is the lengthening shadow of Macondo.

“A lot of these rules are not just due to a change of administration,” he said. “What’s involved here is a wake-up call, that we, the voting public, have lost confidence in the ability of the oil and gas industry to do things on their own without these kinds of problems.”

The last guy in line

As well as regulatory uncertainty, Prof Smith said the GoM decommissioning market is compromised by an unfit financial structure, which promotes the transfer of decommissioning liabilities down the line to companies who cannot deal with them.

He suggested changing the tax rules to copy other industries so that money set aside for decommissioning later is tax deductible now.

“We need to fix the funding and accounting mechanism and stop kicking the can down the road,” he said, adding that “the last guy in line is probably going to be the least capable of funding that removal among all of people in that chain of title.”

“That’s one of the things I would suggest maybe a committee of folks could work on,” he said.

Looking ahead, Prof Smith said that while there will be a rise in decommissioning activity in the short term, the longer term looked uncertain.

“You’re dealing with a finite base,” he said. “As long as we’re not installing new platforms and you’re taking out 200-plus per year … you have trouble predicting past a decade or so that those kind of levels can be maintained.”

He noted how three of the major P&A service suppliers, Superior Energy Services, Tetratech and Caldive, all seem to be shifting their focus away from the GoM, and suggested that California could be promising for offshore decommissioning in the longer term.