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Spill ramifications spread beyond the Gulf of Mexico

The Deepwater Horizon disaster will have ramifications for deep-water drilling, not only in the Gulf of Mexico, but worldwide, as countries tighten their regulatory regimes

SOON AFTER a well being drilled by BP in the Gulf of Mexico (GOM) exploded, killing 11 people and spewing millions of barrels of oil into the sea, the US government ordered a six-month ban on deep-water drilling. Almost immediately, industry experts predicted a mass exodus of rigs from the region. Rather than letting their assets lie idle and lose around $0.5m a day per rig, owners of the 33 deep-water structures operating in the Gulf would start looking for work in less restrictive offshore basins.

The first indication that such a mass migration could occur came in early July, when Diamond Offshore Drilling announced plans to relocate two of its rigs, to Egypt and Congo (Brazzaville).

They might find, however, that the grass is not always greener on the other side of the ocean. The Deepwater Horizon catastrophe in the GOM could alter the regulatory environment in other countries as they consider its impact on their own offshore operations.

No nations have clamped down as tightly as the US, perhaps because the crisis did not happen in their own backyard, and some countries where safety and environmental regulations tend to be lax have done little more than shrug their shoulders. Most governments, however, have been taking a wait-and-see approach. Although they are keeping a closer eye on deep-water drilling, they are delaying any decisions about regulatory changes until the causes of the GOM disaster have been determined.

North America

In Canada, despite calls within the legislature for a moratorium on deep-water drilling until investigations shed light on the cause of the GOM spill, the government has authorised new exploration in some areas with water depths as great as 6,500 feet. It is also advancing plans to grant new licences to explore in the Canadian Arctic, where no drilling has taken place since 2005, and has issued a call for bids on two east coast, deep-water tracts.

But following the incident in the GOM, the Canadian government began reviewing its offshore-drilling safety and environmental regulatory system, which Christian Paradis, the minister of natural resources, has called "one of, if not the very best, in the world". In addition, the Canada-Newfoundland and Labrador Offshore Petroleum Board has increased oversight of an offshore well Chevron began drilling in May. The development is in about 8,000 feet of water – more than 3,000 feet deeper than the Macondo well wreaking havoc in the Gulf.

The spill could hamper Arctic operators' efforts to convince regulators to drop the requirement that they drill a relief well in the same season as the primary well. Hearings into the issue had been scheduled, but were cancelled after the oil spill.

Latin America

Brazil has been cited as the most likely destination for rigs abandoning the GOM. Its vast petroleum reserves, primarily in ultra-deep water and under thick layers of salt, present technological challenges similar to those in the frontier Gulf. These prospects factor heavily in plans by Petrobras, the national oil company, to double its production by 2020.

The Brazilian government has said it will move ahead with these plans and it could benefit from the US offshore drilling ban because it will free up rigs to drill in the country's deep water. But Petrobras says it is keeping a close eye on developments in the GOM and that regulators have ordered a review of safety procedures for offshore drilling. In mid-June, Petrobras's chief executive said he expects some tightening of the country's safety standards, which already are stricter than those in the US Gulf.

The firm most likely to experience the biggest backlash is BP. It had planned to buy 10 offshore blocks from Devon Energy for $7bn, but the Brazilian government has delayed approving the acquisition until the cause of the GOM oil spill has been fully assessed.

Africa

In recent years, exploration and production in west Africa has focused offshore, far from the problems, ranging from political instability to oil theft, that have plagued inland operations. In these developing nations, safety and environmental regulations typically have been either non-existent, or unenforced, as the countries count on offshore oil and gas to drive economic growth.

At a recent conference, the governor of Nigeria's Lagos State called for common international practices for addressing oil spills and pollution. Yet operators are more concerned about proposed changes to oil legislation that would increase the cost of deep-water production than they are about the country tightening environmental and safety regulations in response to the GOM incident.

Egypt's coastal waters have been the site of some impressive natural gas finds. But it is dealing with its own oil spill-related environmental catastrophe in the Red Sea, albeit significantly smaller than the one in the Gulf, which has at least been contained. In response to this disaster, the Egyptian oil ministry is considering reducing the number of rigs operating in the nearby Gulf of Suez to enable more effective monitoring of those that remain. More than 180 rigs are working in the Gulf of Suez and the Red Sea.

In Libya, which holds Africa's largest oil reserves, an energy official said he did not expect the GOM spill to affect deep-water drilling there. Angola, meanwhile, is moving ahead with deep- and ultra-deep-water developments as well.

Europe

The world's second-largest gas exporter and sixth-largest oil exporter, Norway already has strict safety and operational requirements. Although the country has temporarily suspended new drilling licences until the cause of the GOM oil spill has been determined, and could enforce more stringent restrictions if warranted by the study results, it plans to go ahead with its 21st licensing round – a total of 12 deep-water leases will be offered; as a precaution, however, four blocks from the Nordland V area of the Norwegian Sea that are closest to the coast have been pulled from the sale. Bids are not due until November; leases will not be awarded until the spring of 2011.

The GOM spill could have an impact on the government's decision whether to open an area near Norway's Lofoten and Vesteraalen islands for development. Even before the Gulf oil spill, exploitation of this area faced significant opposition because of its environmental vulnerability.

Although most oil and gas development off the UK coast has been in relatively shallow waters, activity recently has begun in Atlantic margin deep waters, west of Shetland. The government has no plans to ban drilling there, with officials expressing confidence in the region's offshore regulatory structure. The UK has rejected calls from EU energy commissioner Guenther Oettinger to ban drilling as a "wholly unjustifiable knee-jerk reaction" to the GOM situation.

However, the UK says it will double annual inspections of offshore drilling rigs to ensure regulations are being met; and that the Oil Spill Prevention and Response Advisory Group is reviewing the country's offshore practices and readiness to respond to a significant event.

Partly in response to the Gulf spill, the Italian cabinet has banned drilling within five miles of the coast and 12 miles of any protected marine area. It will also now require drilling proposals to be reviewed by an independent agency to assess their environmental impact.

Asia

The South China Sea began emerging as a high-potential, deep-water play in 2006 with the discovery of a field containing trillions of cubic feet of natural gas. State-owned China National Offshore Oil Corporation (CNOOC) has ordered safety checks on its offshore rigs and upgrades on blowout preventers operating in deep water. CNOOC officials say the oil spill in the GOM would have no impact on plans to develop the country's deep waters.

Although Indian regulators have made no official statement about the GOM oil spill, the chairman of state-owned ONGC called it a "game changer" that would have a "huge negative impact on industry's offshore activities". He also said ONGC has been reviewing safety procedures as a result of the spill. Meanwhile, Reliance Industries, the country's largest privately owned upstream operator, has reportedly been scrutinising its services contracts with the Gulf catastrophe in mind.

The GOM oil spill has fuelled opposition in Australia to deep-water drilling that had been growing since a blowout last year in the Timor Sea. But the country faces a trade deficit in crude and oil products that has reached $14m and is expected to double within the next five years. With that in mind, resources minister Martin Ferguson decided to continue with the annual offshore licensing round, putting 31 tracts up for bid. Some of the acreage is in frontier areas in waters up to 12,300 feet deep – more than 7,000 feet deeper than the blown-out Macondo well.

The governments of Azerbaijan and Russia are likely to tighten offshore drilling regulations in the wake of the GOM spill, sources suggest. Meanwhile, Indonesian officials are convening with offshore operators to assess their safety measures, but they do not expect the GOM spill to affect activities.

Back in the US

Although the US courts struck down the original drilling moratorium, in July, the federal government issued a new moratorium that applies not only to deep-water rigs, but to all floating rigs that rely on blowout preventers. Even if this ban is thrown out by the courts and deep-water drilling is allowed to resume, tougher regulations will likely make the deep-water Gulf much less attractive for oil and gas development.

But as other countries respond to the human and environmental disaster in the GOM, oil companies might find the regulatory environment less appealing in other deep water basins as well.

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