[Graeme]

New fossil fuel frontiers pose 'catastrophic' threat to global recovery

Soaring risks around new fossil fuel frontiers – shale gas, deepwater exploration and the Arctic – have the potential to blow the global economic recovery off course, according to a report.

Energy companies need to adopt more sophisticated risk management strategies to take account of relatively low-likelihood but potentially "catastrophic" disasters, says the paper from the global insurance broker Marsh.

The warning comes amid a heated debate around environmental and other dangers associated with shale and other unconventional reserves. The industry says they are needed to meet a near-40% increase in energy demand forecast by 2030.

The so-called shale gas revolution in the US has led to a dramatic fall in American energy prices, which has boosted the competitiveness of domestic manufacturers.

"The global energy sector is driving struggling countries out of the economic mire, while sating surging demand for power in China, the Middle East and North Africa," said Andrew George, chairman of Marsh's global energy business.

"However, myriad financial, physical and political risks are converging to create a risk landscape that is perhaps the most complex and challenging in the sector's history."

He said a single event, such as another Deepwater Horizon accident in the Gulf of Mexico, could damage the entire sector. Energy investors should make sure they were increasingly focused not only on financial returns but also on the associated risks.

He noted that shale drilling – or fracking – remained contentious with local communities and insurance underwriters were not always comfortable with the risks.

As for deepwater drilling, the broker warned of the "rising risk of black swan (unexpected but catastrophic) events" that meant companies must have even better resilience measures, crisis management and response plans.

The Marsh report, Managing Risk on the New Frontiers of Energy Exploration, concludes that reputational damage from a blowout in the Arctic would probably be irreparable and would inevitably be followed by a drilling moratorium.

guardian

[ROCKMAN]

Graeme – Not that I disagree with the general sentiment but there have been significant improvements in safety measures over the years. But it’s been focused on the safety of the individual and normal daily operations. The entire the world observed the BP fiasco. But 35 years ago I watched them carry a crushed dead body off the drill floor and continue drilling ahead. Countless missing fingers, crushed limbs and broken backs and it was accepted as part of the job. Outside the oil patch and the families few in the public knew.

But matters are much, much better today on that level. But, as described, we’re being pushed into more extreme environments and punching very fast into techniques that, at a minimum, many of the public aren’t comfortable with. In some ways it’s similar to the space race and push into nuclear power. Everything seemed fine and reasonably doable until it wasn’t. A Russian meltdown wasn’t a shock to many. But Japan? US astronauts not being killed by an errant meteorite but by an ice buildup? And BP creating the worse environmental mess in the history of the country. And despite the MSM hype it happened during a very standard and generally safe procedure except for some impatience. I’ve personally safely drilled many dozens of wells under much more difficult conditions. I doubt such an appreciation of the Macondo incident will make any one feel better knowing that it was easily and completely preventable.

As your post seems to imply the problem isn’t so much an increase in risk. Drilling, even offshore, is much safer today. The real problem is the magnitude of the potential events and our lack of technical ability to deal with the events effectively.

But there is one statement that I cannot agree with: “…a blowout in the Arctic would probably be irreparable and would inevitably be followed by a drilling moratorium.” The expectation seems to be a long term stoppage of development (if there is really anything to develop). If so that seems incredulous IMHO. Not long ago the entire country had a front row seat to the Macondo blow out. Day and night live coverage. Millions impacted along the Gulf coast. Thousands on businesses and their employees negatively affected.

Yes…a short moratorium. And since then 1 million acres of offshore GOM leases offered for sale by the feds and over 400 drilling permits issued. And if a similar incident were to happen in the Arctic with limited coverage and a comparably insignificant number of folks directly impacted we would expect a greater pull back then what we saw in the GOM? Maybe wish full thinking to the extreme or just whistling past the graveyard. I feel the same empathy for the folks who plead the case of AGW climate change. It’s a sad corollary to the old saying: The heart wants what the heart wants…no matter what. And the world wants what the world wants…energy. No matter what.

[Graeme]

Rockman, Sorry, but the insurance industry represented by Marsh sees the risk of exploring new frontiers differently. I downloaded their report (after registering). Here's an excerpt of what they said:

Within a decade, 40% of the world’s oil is expected to come from deep water, which is typically defined as water depths greater than 1,500 metres. Since 1995, the number of wells drilled in water deeper than 200 metres has
increased exponentially.

Deepwater exploration is changing the oil and gas risk landscape in a number of ways. First, reserves are only available to nation states with offshore sovereignty. Trends are currently skewed toward the US, with 60% of deepwater drilling occurring in the Gulf of Mexico, which accounts for 80% of US oil production and holds 80% of its oil reserves. Opportunities favor E&P companies with an established presence with host nation states, which places overwhelming control in the hands of the US (see Figure 1).

Despite advances in drilling technology, the costs associated with deepwater drilling are prohibitive to all but the largest companies. Only the most financially strong can invest in these waters — just 13 companies are expected
to produce 84% of worldwide deepwater capital expenditure in the next four years1 in three dominant regions (see Figure 2). If current trends continue, the basic cost of drilling is set to rise year-on-year. Aside from standard investment, daily rig rates have significantly increased over the last decade, as the availability of the most advanced equipment decreases and local jurisdictions limit the age of rigs allowed to drill in their territories. The risk of new competitors entering the market is considered to be low, while the focus on ensuring a return on investment for established companies will continue to sharpen as requirements for capital expenditure increase.

Following the Deepwater Horizon oil spill in 2010, however, the perception of risk exposures has heightened and the contractual landscape of the industry has changed. US regulations have become more stringent and companies are now increasingly alert to the far-reaching reputational and financial damage that can be suffered in the event of a leak or spill.

For these reasons, operational controls to minimize environmental, health, and safety risk should strengthen and further standardize the industry. Furthermore, drilling contractors have organizational preservation as a main driver to ensure high standards of operational and process safety. Another incident on the scale of Deepwater Horizon would likely change the contractual regime forever, pushing some liability back onto the contractor, thereby prohibiting all but the largest contractors from operating. Improvements in technology should also lead to higher standards of reliability and insurers’ desire to see sound enterprise risk management should increase the focus on risk in its widest context.

The Deepwater Horizon incident has not aligned all deepwater wells into the same bracket in terms of insurance limits purchased. While upstream premiums may have increased dramatically since 2010, limits remain dependent upon the region in which the exploration is taking place, as does the limit to which one is able to spend on drilling and subsequently producing a well. This is best shown using benchmarking data produced by Marsh’s Energy team in the months following the Deepwater Horizon incident in the Gulf of Mexico (see Figure 3).
The risk profile of deepwater drilling is increasingly characterized by catastrophic events: low-likelihood risks with very high ramifications — in terms of cost, reputation, and environmental impact, for example — should they occur. In order to maintain profitable operations in deepwater drilling environments, risk exposures should become increasingly well managed, pushing risk exposures to the left of the traditional probability scale. However, the impact of a “blackswan” risk materializing will also continue to increase with greater depths of drilling and the use of new technology.

The rising risk of black-swan events means that resilience measures, crisis management, and response plans for companies involved in deepwater E&P need to be well developed, especially as there are typically multiple operators and organizations with various interdependencies involved in getting oil and gas to market. For example, it is not atypical to have different companies providing each of the following drilling roles: owner and contractor, operator, blowout-preventer provider, cementing well walls, mud-engineering services, well logging services, well casings provider, wellhead equipment provider, and remote-operated vehicles.

They then go on to talk about the arctic, shale gas, and middle east. Here are their summary observations.

A single event can transform the fortunes of an entire industry. An oil spill on the scale of the Deepwater Horizon disaster, for example, would likely result in the imposition of another moratorium on drilling on the Outer Continental Shelf, or worse, while local objections to fracking present significant risks
to shale gas companies. Within this context, reports of the decline of the Middle East as an energy superpower appear greatly exaggerated, but as recent history has shown, companies working in the region have a plethora of
political risks to contend with.As demand pushes energy exploration into
increasingly inhospitable geographies, the danger of a low-likelihood-but-catastrophic disaster rises and the requirement for more sophisticated risk management strategies becomes vital. The Key Risks Summary (see
page 11) shows that each frontier poses its own set of risks. One characteristic common to all of the frontiers discussed in this report is the requirement for significant capital investment.

Over the past 10 years, worldwide costs of developing production capacity have doubled, largely due to increases in the cost of materials, personnel, equipment, and services. With costs amplified further in the pursuit of challenging reserves, attention will be increasingly focused on ensuring the required return on investment is achieved while managing risk appropriately. The consequences of the wide breadth of risk exposures in the new frontiers of energy exploration should: improve operational standards across the industry (and create a degree of consistency between operators and contractors); lead to the management of risk exposures from an enterprise-wide perspective; and help develop measures, such as continuity plans and contingency measures, to improve the resilience of a company. Firmly embedding strategic decision-making in the boardroom is a benefit for all organizations, but for those operating on the new frontiers of energy exploration, it is vital.

You can read without registering the US Marsh Insurance Market Report 2013 here. You can see that premiums for liability insurance have increased 5-20% especially in the energy, marine and environmental sectors.

[ROCKMAN]

Graeme Actually it looks like the bean counters and I are in full agreement. Maybe I just didn't express it clearly enough. As they say: "The risk profile of deep water drilling is increasingly characterized by catastrophic events: low-likelihood risks with very high ramifications — in terms of cost, reputation, and environmental impact, for example — should they occur." Exactly the point thought I made: 'low-likelihood risks": IOW we are much safer now than ever before. But " increasingly characterized by catastrophic events". As I thought I expressed: when it does go bad it goes very bad. A Macondo blow out in the Arctic may be very unlikely given how closely the world will be watching the effort. But imagine how nearly impossible it might be to deal with if it happens. The Macondo blow out happened within a hundred miles of the oil infrastructure capital of the world and look how difficult it was for us to deal with.

[Graeme]

Except for the part where the insurers say that there could be a drilling moratorium. Although they say there is a "low" risk of a catastrophic event, it is not zero. The chances of one occurring are just about inevitable (in spite of new regulations and stringent safety measures) given that the number of wells drilled has increased exponentially. In which case, the industry could be facing an uninsurable risk.

[rockdoc123]

not sure I would trust an insurance company that says black swan events will become more frequent.
By the nature of their definition they are unpredictable and rare events, often difficult to analyze after the fact. In a probability distribution they sit at the very tippy tail of the log normal occurrences. Doing more activity doesn't mean you will have more black swan events, you could get more black swan events with less activity.....they are unpredictable.
I am of the opinion that pretty much all of the potential problems are avoidable if the right checks and balances are put in place. Macondo was an example of what I like to refer to as the "BP-think syndrome". If you have ever dealt with any of them they are with few exceptions arrogant "we know better than anyone in the industry" folks (many of whom are English, but I won't go there) who were trained into that way of thinking by their bosses....it isn't clear how far back you have to go to find anyone who knew better than anyone in the industry about pretty much anything. Remember they were responsible for Texas City refinery and the Alaska pipeline leak. But the rest of industry isn't like that. The best companies engender a safety "culture" on their operations where everyone feels he is part of the process and free to report incidents and demand stand downs. I grew up in the industry in a company that expected if you were on a wellsite and found say a spanner sitting on the deck that you would first pick it up and return it to it's home but more importantly report it and it would be part of the next mornings safety meeting. The amount of drilling in the US has increased exponentially but it has not been followed by an exponential increase in reportable incidents nor fatalities nor environmental disasters. There are, however, irresponsible operators. As I said on the Macondo thread of years gone by what is required is appropriate gov't regulations, appropriate enforcement, significant fines (and as the Superfund legislation does, provide for jail time for executive) and companies coaching employees in the right way to build a safety culture. This is all doable and a statistical analysis of risk of rare events versus additional drilling is irrelevant in the face of it.

[ROCKMAN]

Graeme – And I neither said nor implied the risk was zero. In fact, I made the point that at a minimum thanks to human nature the risk can never be zero. As far as some draconian moratorium ever developing let me make the point more bluntly: a worse environmental catastrophe then anyone, even the far left environmentalists, ever offered and just one year after the Macondo blow out the govt began granting drill permits in the same area. And again: over 400 offshore drill permits since that event. And at least 14 major offshore oil developed projects being constructed since then. And 1 million acres offered for lease since then. Just how bad would another accident have to be, say in the Arctic, to impact the industry any worse? Every company that I know working the DW GOM is plowing money into it as fast as possible. The insurers can spin the story as they wish but the folks putting their corporate asses on the line aren’t holding back at all. And neither is the “greenest White House ever” holding back. I made the point long ago on The Oil Drum: there’s only one way to be sure to not have another Macondo scale disaster: ban all offshore drilling. Whether the companies, the public or the govt has the guts to admit it out loud that risk was accepted just a year after the accident.

And as far as “the industry facing uninsurable risk”: that ship has sailed long ago thanks to hurricanes. In addition to caps on individual company coverage there are area caps: enough damage occurs in your area of the GOM you don't get a single.penny of coverage. And even incident caps: once the insurance industry pays out $X for any damage caused by any one incident no one’s losses are covered. If the incident causes 10X $X damage the companies have to eat 90% of the loss themselves. Those rules were in place long before the Macondo accident. Just another dirty little fact neither the oil companies nor govt really want the public to be aware of: if you add it all up there are already $trillions in uninsured liability in the GOM and the rest of the world. So that expressed concern is just a tad late. That uninsured risk was accepted by the industry long ago. And we’re still drilling out there…aren’t we? See if that revelation keeps you staring at the ceiling tonight after you turn out the lights. LOL.

And just a little background on what a one year moratorium means to offshore operations. Most of the major offshore projects I’ve been evolved with have time lines of 5 to 7 years. I once waited 2 years to get a rig on to my location just to drill my first exploratory well. A one year+ moratorium would not have delayed my drilling for a single day. I once waited almost 3 years for a platform to be completed and installed before I could begin my development drilling and then another year to install the production equipment. Again, a moratorium 3X as long as the one caused by the Macondo incident would not have delayed my production start-up by a single day. I would offer that around 3/4 of the time that an offshore field, especially a DW field, is being developed there is actually no physical activity going on out in the water. The vast majority of the physical effort happens in the ship yards. And there has never been even a single day ever lost to that phase as a result of any moratorium. Most of the offshore facilities installed in the last couple of years did not lose a single day from their time line due to the Macondo moratorium. Ship yard construction continued while the oil was still flowing into the GOM. I know it first hand: I was working on one of those projects at the time. There may be more but I know of only one company that suffered a significant financial set back by the moratorium. They had drilled all their wells and finished fabricating the production facilities. The moratorium delayed setting the facilities up in the field. The delay in cash flow forced them to liquidate some of their onshore production just to keep the doors open. I snapped up one of their wells at a great discount. Yep…the moratorium made my company a nice little chunk of pocket change. Another one of those unintended consequences. And we didn’t even buy them lunch. LOL.

[Graeme]

It's in insurance industry's best interest to say that there is an increasing risk of 'black swan' events because they will be paying claims for legitimate 'accidents'. They have made the assessment that the new frontiers have an increased risk.

In addition, ROCKMAN pointed out that now hurricanes make the industry 'uninsurable'. Then he goes on to say that the only way to ensure that there will be no accidents is to ban all offshore (and onshore?) drilling activity!! Well, that's what might have to be done in certain areas by using regulation. Perhaps that day is fast approaching! On top of potential storm damage, there is the looming prospect of having to leave reserves in the ground anyway.

A recent report by the Carbon Tracker Initiative shows that companies invested 674 billion dollars last year in developing nonrenewable energy assets globally. Add that to the fact that fossil fuel reserves already exceed the carbon budget and you get an unsupportable surplus – aka a “bubble.”

Many of the world’s countries have voluntarily agreed to reduce carbon emissions in an effort to limit global warming to a 2° C temperature increase. If we stick to the 2 degree limit, 60 to 80 percent of the world’s oil and coal reserves owned by publicly listed companies would be unburnable — that’s about a third of the world’s fossil fuel reserves. This would drop the value of those companies by 40 – 60 percent. The world’s fossil fuel reserves far exceed the world’s carbon limit, so if we cut down on carbon we also hurt the global economy.

The problem isn’t without some sort of solution, however. According to the report, if we act now, phasing in the carbon limit could help ease the impact on these corporations. It’s clear that finding the balance between economic collapse and limiting carbon emissions is key to both our short term and long term survival.

[Keith_McClary]

A Year After Gulf Tragedy, Offshore Oil Companies Still Shielded by Liability Limits
April 19, 2011

The Oil Pollution Act capped the amount BP owed in damages for the spill at $75 million—a legal limit that, under public pressure, BP ultimately volunteered not to invoke.

BP and its contractors also were shielded by maritime laws that limited how much victims’ families could win by filing lawsuits. Because the deaths took place offshore, the companies could only be sued for future wages, minus taxes and expected living costs, and not for pain and suffering or other punitive damages commonly recoverable in fatal onshore accidents.

Transocean, the owner of the sunken rig, also has invoked a 160-year-old maritime law to limit its liability to about $27 million—the value of the rig—in personal injury and wrongful death cases.

[Pops]

I was going to post a link about the "haliburton Loophole" that exempted fraccers from the Clean Water Act, interestingly 4 of 6 links I googled had been scrubbed, 2 remaining are NYT and this list of exemptions

[ROCKMAN]

Keith/Pops – All valid points to bring up. But just to be sure folks aren’t confused about that huge chunk of uninsured liability I mentioned. Nothing to do with costs associated with fines or civil suites. It refers to the actual loss of corporate assets. The only silver lining to the Macondo blow out was that it happened to BP. They have ponied up many $billions so far with more on the way. But had it happened to a smaller company they would have just liquidated what assets they had and closed the doors. No fines paid. No civil suites collected. The rest of the financial damage would have fallen entirely on the govt and thus the public. And it’s good to remember that the shareholders would probably lose everything. And also remember that much of the shareholder base of the public oils is everyday folks thru their retirement funds.

I wasn’t kidding about that dirty secret neither the companies nor politicians want the public to appreciate.

[Graeme]

The number of civil suits and prosecution for criminal acts by petrochemical corporates can only increase.

Freedom Isn’t Free, Terrorism Is Pervasive

Enduring occasional acts of random terror is the cost of living in a free society. Giving up civil liberties does not provide security, but rather enslaves you in a state of pervasive terror. The human family is threatened by systematized eco-terrorism and other assaults by the elite upon the poor far more than by infrequent criminal acts which the courts can and should handle.


America is not special. In fact, many acts of terror occur around the ecologically and socially collapsing Earth for which America is responsible. The far greater threat issues from systematic targeting of the poor and of nature by America’s and other nations’ privileged elite. The rich and their corporations, police, and military routinely practice systematic terrorism that is much grander in scale, with devastating impact.


Earth's ecosystems are collapsing and dying as all life and the biosphere are murdered for industrial economic growth. Just like a cancer cell, exhibiting profound personal and societal sickness, humanity is systematically destroying billions of years of naturally evolved ecosystems for a few generations of excessive consumption for some, to be followed by biosphere collapse and unimaginable terror for all.

A time of great suffering and dying is upon us as global ecosystems – water, land, oceans, air, and food – are routinely destroyed by the industrial growth machine. Everywhere on Earth species, ecosystems, economies, communities, climate, and our one shared biosphere are being liquidated.

Drone perma-war, tar sands and coal, old-growth logging, inequity, ecocide, lack of justice, poverty, and human rights abuses are all terrorism and need to end.


Eco-terrorism is the oil oligarchy and corporate elite ravaging ecosystems and climate, destroying our one shared biosphere and all life’s well-being, for a bit more growth in stuff for a while; what will follow are apocalyptic collapse and the end of being. Where are the outrage and government resources to stop this preventable corporate terrorism? Oh wait, that’s right, they aren’t affluent Americans so they don’t matter.

ecoearth

Dr. Glen Barry is an internationally recognized environmental advocate, scientist, writer and technology expert. He is well-known within the environmental community as a leading global ecological visionary, public intellectual, and environmental policy critic.

Dr. Barry is the President and Founder of Ecological Internet (EI). His work there - as the creator and manager of Earth's largest biocentric ecological advocacy web portals - was recently recognized as one of " 25 Visionaries Who Are Changing Your World" by the Utne Reader. They described him as an "Eco-Rabble Rouser" and stated that as "an early political blogger, Barry has built a massive network for ecological change. His 'global grassroots advocacy' adds muscle to local environmental fights all over the planet, and when mainstream green groups fall short, he speaks up."

Deepwater Horizon litigation

Federal government stepping up criminal enforcement actions against oil and gas drilling companies

In the last few months, the federal government has ramped up criminal enforcement actions against oil and gas drilling companies for violations of the Clean Water Act, and other environmental statutes. Alleged violations occurred in Ohio, Louisiana, North Dakota, Oklahoma, Texas and West Virginia.

The most recent case was filed about two weeks ago in Ohio, where the U.S. Department of Justice (DOJ) charged Ben Lupo with criminal violations of the Clean Water Act for allegedly illegal disposal of hydraulic fracturing waste. Lupo is charged with one count of violating the Clean Water Act, and according to the court affidavit the violation took place on January 31, 2013. The Ohio Department of Natural Resources arrived at Hardrock Excavating LLC, which is owned by Lupo, located in Youngstown, OH. Ohio DNR inspected and found a hose, connected to a storage tank, discharging wastewater into a stormwater drain at the facility. The case has been filed in the U.S. District Court for the Northern District of Ohio.

In Louisiana, Cedyco Corporation was sentenced in the U.S. District Court for the Eastern District of Louisiana for illegally and negligently discharging oil into the bayous of Jefferson Parish, Louisiana. The company was fined $557,000 for the misdemeanor Clean Water Act violation. Cedyco also agreed to stop operations of all hydrocarbon business in the state.

Kent Phillips, owner and operator of Kepco Operating Inc., plead guilty in the U.S. District Court for the Western District of Louisiana in June of last year. Phillips negligently discharged oil without a permit into Devil’s Creek, which was a violation of the Clean Water Act. Phillips was placed on probation for one year and fined $2500.

Two separate cases involving Clean Water Act violations settled in early January in North Dakota. The cases involved Hurley Enterprises and Mon-Dak Water & Septic Service, LLC. Hurley Enterprises admitted dumping domestic sewage onto farm land on three separate occasions, one of which occurred after receiving a notice of violation from the North Dakota Department of Health. It is estimated that the company dumped over 400 thousand gallons of sewage waste in an 18 month period. Hurley Enterprises agreed to a $50,000 fine and future compliance with the Clean Water Act’s land application regulations.

Mon-Dak Water & Septic Service, LLC admitted to dumping domestic sewage onto properties on two different occasions, and admitted in a plea agreement that the disposal was not in compliance with Clean Water Act regulations. Like Hurley Enterprises, Mon-Dak also agreed to a $50,000 fine and future compliance with the Clean Water Act’s land application regulations. The federal district court judge Daniel L. Hovland– U.S. District Court for the District of North Dakota has yet to issue a final judgment in these cases.

Last April in Oklahoma, Integrated Production Services, Inc. (IPS) was sentenced in the U.S. District Court for the Eastern District Oklahoma and ordered to pay a fine of $140,000. The fine was assessed for violations of the Clean Water Act at IPS’ operations in Atoka County, Oklahoma. The violation occurred when Gabriel Henson, a crew supervisor for IPS, drove a pickup truck through an earthen bern, causing rain water which had become contaminated with hydrochloric acid from a tank leak to flow into Dry Creek, a tributary of Boggy Creek. Henson was placed on probation and fined $2500.

Late last year, Chesapeake Appalachia, LLC was sentenced in the U.S. District Court for the Northern District of West Virginia for three violations of the Clean Water Act. Chesapeake Appalachia was ordered to pay a fine of $600,000 and was placed on a supervised release for a two year period. The company admitted to discharging 60 tons of crushed stone and gravel into Blake Fork, a waterway, on three different occasions. It did this in an effort to create a roadway to improve access to a site for Marcellus Shale drilling activity. EPA conducted a series of site inspections at sites operated by Chesapeake Appalachia and issued 11 administrative compliance orders. The company has either complied or is in the process of complying with all the orders.

In Texas, PEMCO Services, Inc. applied more than 1.3 million barrels of used drilling muds onto its land farming site, which was a violation of its permit. This occurred in Jefferson County, Texas and PEMCO was ordered to pay fines totaling $1,350,000. PEMCO then spent over $1 million to clean up the facility, which has since been closed.

For more information on the above cases and others visit the EPA Environmental Crimes Case Bulletin for January 2013.

lexology

Civil Cases and Settlements