Exxon Says `$25 Billion Rule' Will Sink Deepwater Oil Drilling

  • Obama plan sets tougher pressure-control measures offshore
  • Regulations come as well accidents continue after Macondo leak

The world’s biggest oil explorers have bitterly contested a U.S. plan to toughen offshore drilling rules that Exxon Mobil Corp. said will cost as much as $25 billion over 10 years and render many offshore discoveries worthless.

The Obama administration issued sweeping new regulations Thursday as part of an effort to reduce the number of well blowouts after the explosion aboard the Deepwater Horizon rig in 2010. The government has pegged the rules’ costs at less than $1 billion.

The changes arrived amid the worst oil slump in a generation. ConocoPhillips and Chevron Corp. have already abandoned some Gulf prospects because they wouldn’t be profitable at current prices. Before the final regulations were announced, consulting firm Wood Mackenzie Ltd. predicted they would cause exploration outlays in the Gulf to tumble by 70 percent over the next two decades, wiping out as many as 190,000 jobs.

“The Gulf of Mexico is already in a deep downturn as a result of lower oil prices,” said Robin Shoemaker, an industry analyst at Keybanc Capital Markets Inc. “Oil companies and the service providers are trying to come up with ways to reduce costs so the idea that they can absorb any additional expenses -- they’re not in that ballpark at all.”

After the government announcement Thursday, Exxon spokesman Bill Holbrook didn’t respond to a voice mail or e-mail seeking comment.

The regulations, first proposed last year, strictly control the types of fluids pumped into wells, require redundant safety devices and stipulate continuous monitoring from shore. The changes were needed because well blowouts have continued at about the same rate as before the explosion at BP Plc’s Macondo well in 2010 that killed 11 and spewed millions of gallons of crude, the government says. 

Environmental groups say the proposed new rules didn’t go far enough to safeguard marine life and the people who depend on it for their livelihoods. Friends of the Earth has called on the government to halt all auctions of offshore drilling leases.

“There’s no such thing as safe offshore drilling,” said Marissa Knodel, a climate campaigner for the Washington-based group. “Tougher rules aren’t going to mitigate the human and environmental costs of allowing more drilling to occur.”

Government Shortcomings

In a closed-door meeting last month, Exxon, the largest driller in the U.S., said the government underestimated the time and complexity needed to implement the rules, ignored the reduced production and stranded reserves that would result, and added unneeded operations that could boost risks rather than decrease them. The comments came in slides Exxon presented at the meeting and were posted on a government website.

The Deepwater Horizon disaster looms large over federal attempts to tighten requirements. The blowout at the $153 million well sank a $365 million drillship, paralyzed the Gulf region for months and cost BP more than $40 billion in penalties, compensation and restoration costs.

Exxon, in the meeting with White House and Interior Department officials on March 7, outlined its assertion that the rules will cost $25 billion and argued they would increase the danger of a blowout by wresting decision-making from on-site engineers with decades of experience. 

Increasing Risk

Some rock formations can’t handle the heft of drilling fluids that would be required, while the proposal for pouring cement around the steel pipe lining a well would boost the risk of dangerous air pockets and cracks, according to slides Exxon presented at the meeting.

“It is abundantly clear that despite post-Macondo improvements in safety and technological advancements, there are still issues that must be addressed,” Brian Salerno, director of the Bureau of Safety and Environmental Enforcement, said in December testimony before the Senate Energy and Natural Resources Committee.

In 2013 and 2014, drillers in the Gulf lost control of eight and seven wells, respectively, according to Salerno. One incident resulted in a blowout “that caused a massive explosion and fire on the rig,” he told the senators.

More Dire

Exxon’s $25 billion warning wasn’t even the most dire forecast out there. An analysis conducted by consulting firms Quest Offshore and Blade Energy Partners on behalf of the industry-funded American Petroleum Institute estimated extra costs over 10 years at $31.8 billion and result in the the loss of the equivalent of 500,000 barrels of crude a day by 2030.

After Thursday’s announcement, the Washington-based API said it was reviewing the specifics of the regulations.

Crude output from the U.S sector of the Gulf will reach a record 1.91 million barrels a day by the end of next year as discoveries dating as far back as 2005 come online after years of design, drilling and construction work, the Energy Information Administration said last month.

In the March 7 meeting, Exxon cited an industry review of 175 Gulf wells drilled since 2010 that concluded 63 percent couldn’t be drilled as designed if the new rules had been in place.

Other explorers, rig operators and equipment makers who sought and conducted private discussions with bureau personnel included Chevron, Royal Dutch Shell Plc, Halliburton Co., Murphy Oil Corp., GE Oil & Gas, National Oilwell Varco Inc. and Transocean Ltd., according to attendance logs published on the government website.

Environmental organizations including The Wilderness Society, the Sierra Club and the Southern Environmental Law Center also were granted closed-door meetings with White House and Interior Department officials to press their concerns, according to the attendance logs.

“These rules green-wash offshore oil and gas operations and do little to prevent another Deepwater Horizon disaster or protect our climate,” said Kristen Monsell, an attorney with the Center for Biological Diversity. “Offshore drilling is inherently dangerous and the only way to truly minimize the risks is to stop allowing this dangerous practice altogether.”

Before it's here, it's on the Bloomberg Terminal.