globeandmail.com

In deep water drilling, a delicate dance

Saturday, June 26, 2010

In the wake of BP's disaster, worries grow that Newfoundland's offshore watchdog cares more about oil's bounty than drilling's risks. By Shawn McCarthy in St. John's and Paul Waldie in Toronto

Shawn McCarthy and Paul Waldie

St. John's and Toronto -- When the Ocean Ranger drilling platform sank in a raging Valentine's Day storm off the coast of Newfoundland in 1982, it claimed 84 lives and scarred a generation of Newfoundlanders, including a young sea captain named Mark Turner who helped in the futile search for survivors.

After witnessing the tragic cost that can accompany offshore oil, Mr. Turner went on, like many of his fellow Newfoundlanders, to experience the other side of the province's drilling bonanza, becoming chief executive officer in a project to build a massive natural liquefied gas processing plant.

Now, 28 years after the Ocean Ranger disaster, he is wrestling once again with the perils and the profits that go along with Newfoundland's offshore bounty. Mr. Turner has been charged with the high-profile and high-stakes job of reviewing how Newfoundland's offshore drilling industry is regulated, and whether it is doing enough to prevent the kind of catastrophe that has befallen the Gulf of Mexico with the blowout of the BP PLC well.

Mr. Turner is confronting a question that will have a profound impact on the fortunes of Newfoundland and Labrador, and that has come into sharper focus for regulators around the world in the wake of the BP blowout: How much risk is acceptable in pursuit of oil-driven prosperity?

His findings will not only shape policy in the Atlantic but will influence federal rules in the Arctic, where international oil companies hope to begin drilling in five years.

Mr. Turner's task involves weighing the dual priorities of the Canada-Newfoundland and Labrador Offshore Petroleum Board (C-NLOPB). The federal-provincial board is mandated to monitor the safety and environmental impact of the offshore industry; it is also supposed to extract maximum economic benefits from the industry in the form of jobs and opportunities for local businesses.

The board's response to the Gulf blowout has renewed long-standing questions about its ability to balance those competing priorities. Those questions have taken on a new urgency since Newfoundland's government announced in 2006 that it was taking a stake in all new offshore ventures, a decision that gives it a vested interest in ensuring that nothing disrupts the smooth progress of offshore drilling.

After BP's horrendous accident , which killed 11 workers and has caused massive environmental damage, the U.S. government slapped a six-month moratorium on deepwater drilling. But the Newfoundland board declined to do the same, instead allowing Chevron Corp. to begin drilling just 20 days after the Gulf of Mexico blowout, at a depth far greater than BP's well. The decision made the Chevron project the only place in North America where ultra-deep drilling is taking place.

The decision raised doubts about whether the board is willing to insist that the industry adopts aggressive safety measures that would drive up industry costs and perhaps drive away investment. Critics charge that the board's economic mission is overshadowing its other responsibilities and is creating a conflict of interest. "They're there for the jobs and I think that was the one of the big reasons they allowed that [Chevron] well to go ahead," said Ian Doig, a veteran industry analyst. "If they had stopped that well until they had the ducks in better order, it would have left a lot of jobs out in left field."

On a number of other occasions, the board moved only slowly to respond to safety or environmental concerns. Following a 2009 crash of a helicopter that killed 15 offshore workers and two crewmen, a judge had to tell the board to revise its safety procedures governing such flights - a demand that came a full year after the fatal accident. More recently, biologists accused the board of not responding quickly to spills of oil field chemicals, and not properly assessing risks to marine life.

Now, the federal and provincial governments are being urged to break up the body to ensure that economic considerations don't compromise safety and environmental protection.

Norway and Britain have already separated regulatory and licensing functions for offshore oil. The U.S. has announced it will sever its much-criticized regulator into three separate bodies, including one which will have responsibility only for safety and environmental oversight.

Newfoundland and Labrador Premier Danny Williams argues the C-NLOPB does not have a conflict because unlike its U.S. counterpart, it does not collect royalties on oil production. The board does, however, handle the leasing of exploration acreage. It is also charged with maximizing production from the fields, and managing the industrial benefits that producing companies must provide to the province.

Mr. Turner knows the economic considerations well. He served as president of the Newfoundland Offshore Industries Association, a group of local businesses that benefit from the province's oil boom.

He insists, though, that the Ocean Ranger will be top of mind as he conducts his review. "It was an incident we will never forget here in NL," he said in an e-mail note. "I can assure you the Ocean Ranger, Piper Alpha [disaster in the North Sea], Exxon Valdez and other offshore incidents will be considered during the study process with particular emphasis on safety, prevention and response."

ECONOMIC BOOM

From his office overlooking St. John's harbour, Geoff Cunningham has a commanding view of A. Harvey & Co. docks, where supply boats take on cargo for the offshore platforms and drill ships.

Mr. Cunningham is marine terminal manager for A. Harvey, a family-owned company that has prospered with the upsurge of oil-related activity over the past decade. Staff at the terminal has expanded from eight employees to 35 - and that's not counting the dozens of unionized stevedores who answer the call for work when loading and unloading is required. Or the welders and other tradesmen that maintain the ocean-battered vessels when they return to port.

The city's waterfront is a testament to the wealth that oil has brought to Newfoundland. It also suggests what could be lost if the federal-provincial regulatory board imposes onerous new regulations on operations in the province.

Mr. Cunningham estimates there are 100 local firms regularly involved in selling goods to the offshore oil companies. The offshore sector directly employs some 3,000 workers, with spinoffs accounting for as much as 10,000 jobs.

Then there is the treasure flowing into provincial coffers. The oil industry accounts for one-third of government revenues - or some $1.4-billon. The rising supply of petro-dollars allowed the province to escape "have-not" status in 2008, the first year in which it did not receive equalization payments.

But Newfoundland's production, and the accompanying oil revenues, will decline precipitously after 2020 without additional discoveries.

ULTRA-DEEP WATERS

To keep the oil flowing, companies like Chevron, Norway's Statoil ASA, and U.S.-based ConocoPhillips Co. are drilling more risky exploration wells in ultra-deep waters, at a cost of up to $200-million each.

Chevron's project is in the Orphan Basin, 430 kilometres off the coast, in 2,600 metres of water. To put that depth into perspective, BP was drilling in 1,500 metres, and has compared its two-month-long struggle to cap the blowout to working on the moon.

Max Ruelokke, chairman of the C-NLOPB, says the Chevron project - while not without some risk - can be done safely. In the aftermath of the BP blowout, the board stepped up its supervision of Chevron's project. It now requires daily progress reports on the drilling; visits the drilling platform every three weeks for inspections, and requires Chevron to pause its drilling operations before it enters oil and gas zones in order for the board and company to re-assess safety procedures.

Mr. Ruelokke insists safety is the board's top priority, and notes it has a chief safety officer and a chief environmental officer who operate independently, and have final say over decisions affecting drilling operations.

He says BP was not following best industry practices when its well blew, and vows Chevron will be closely monitored to ensure it operates by the book. "We are quite comfortable that our procedures, when they are adhered to, and they will be adhered to, would not allow that to happen," he said in reference to BP's alleged operating lapses. "Having said that, I can never provide assurance that we will not have a blowout. I absolutely cannot."

The key is reducing the danger to the smallest level that is practical, says Kathy Dunderdale, Newfoundland's Minister of Natural Resources. "We realize this is a risky business and we have had painful reminders of that," she said. "We need to understand what the risk is and what we can do to mitigate that risk." She sees no conflict between encouraging development and protecting workers and the environment.

CUTTING CORNERS?

The problem is that the confident assumptions of regulators are only truly tested in the aftermath of a catastrophic blowout or a deadly accident at sea.

Board spokesman Sean Kelly says the regulator can get tough with oil companies. He noted the regulator forced the Terra Nova field to shut down five years ago for 15 days because of safety problems. "We have shut them down before and we will shut them down again if we have to," Mr. Kelly said.

But companies are actually getting more flexibility in how they meet rules. Last December, the Newfoundland board - along with the federal National Energy Board and the Canada-Nova Scotia Offshore Petroleum Board - adopted new "performance-based" regulations, which set standards rather than prescribing compliance measures in detail.

The companies and C-NLOPB say the new approach yields the same environmental and safety protections, but with more flexibility. Critics argue it allows companies to cut corners.

The concerns echo problems raised at the inquiry into the 2009 helicopter crash. The probe heard testimony that the C-NLOPB worked closely with companies in designing safety procedures but did not get the same level of input from workers or the unions that represent them. Serious holes were revealed in the regulatory oversight, despite the chairman's insistence that safety was his top priority.

Earlier this year, Mr. Justice Robert Wells fired off a letter to Mr. Ruelokke, urging the board to suspend night flights to the oil rigs until better search-and-rescue aircraft and equipment could be put in place. A year after the crash first raised questions about the board's safety regime, the C-NLOPB finally responded to Judge Wells' letter by ordering oil companies to suspend night flights to their rigs.

Lana Payne, president of the Newfoundland and Labrador Federation of Labour, told the helicopter inquiry that the board suffers from a "confusing and conflicting mandate," which resulted in safety issues being given too low a priority.

"Our confidence in this regulator to protect worker safety has been severely shaken," Ms. Payne said in an interview.

ASSESSING RISK

Marine scientists have expressed their own concerns. After BP's blowout turned the spotlight on Chevron's ultra-deepwater project in the North Atlantic, Mr. Ruelokke assured the public that - in the highly unlikely chance that Chevron suffered a similar blowout - the gushing oil would never touch the shores of Newfoundland. Premier Williams echoed his blunt assertion, suggesting the risks from Chevron's operation would be less than from BP's well, which lay a mere 65 kilometres from Louisiana.

Mr. Ruelokke based his reassuring forecast on an "oil spill trajectory model" produced by a consultant for Chevron as part of its environmental assessment report.

Memorial University oceanographer Brad DeYoung complained the model was flawed. Ocean currents are poorly understood, he said, making assurances of a spill trajectory merely educated guesswork.

"It's just nuttiness," Mr. DeYoung said. "Things don't stay in one place in the ocean - it just doesn't happen. And if you are basing your risk assessment on that, it's going to be badly flawed."

The scientist agreed there is a low probability that a blowout in the Orphan Basin would foul the Newfoundland coast. It would be far more likely, however, to pollute Grand Banks fishing grounds and nesting areas for millions of seabirds.

Chevron has already demonstrated the risks of drilling in the storm-tossed North Atlantic. The company drilled its initial deepwater well in the Orphan Basin three years ago. During a violent storm, its drill ship broke free of the well tubing. No oil was spilled and Chevron says the incident illustrates it can disengage from a well and seal it.

But 74,000 litres of synthetic drill mud was released to the ocean floor.

It took the C-NLOPB three months to assess the spill, noted York University biologist Gail Fraser. "An assessment of a spill three months after its occurrence of a spill does not constitute valid assessment of the environmental impact," she told a Commons committee.

Chevron vice-president Mark MacLeod concedes that impact of the blowout would be disastrous for marine life, but he also insist the probability of that happening is extremely low.

Mr. Turner's toughest task: weighing the risk of a potential disaster against the potential rewards that the offshore industry can bring to his province. He, better than most people, knows that lives will depend upon his conclusions.

******

Why Newfoundland needs new discoveries

Without new discoveries, Newfoundland's oil produciton will decline rapidly after 2020, along with provincial revenues.

Million of barrels per year

(Years approximate)

Actual

2002: 53

2006: 111

2007: 135

Expected

2012: 98

2016: 69

2021: 94

2026: 47

2030: 21

2036: 11

CARRIE COCKBURN / THE GLOBE AND MAIL

SOURCES: WADE LOCKE, MEMORIAL UNIVERSITY, CANADA-NEWFOUNDLAND AND LABRADOR OFFSHORE PETROLEUM BOARD