The saying in oil and gas these days is “lower for longer,” meaning we are going to have to get used to lower prices and learn how to be profitable. Recently the Bureau of Safety and Environmental Enforcement weighed in with a very pointed warning to industry to not let lower prices result in lower safety levels.
BSEE’s Gulf of Mexico region director, Lars Herbst, spoke at the Offshore Technology Conference this month and laid out some worrying statistics:
Deferred Maintenance – Herbst pointed to the General Potential incidents of Noncompliance (G-PINC list) which BSEE inspectors use to identify regulatory violations. In particular, Herbst says violations of the section related to maintaining “equipment in a safe condition” (G-111) are up 100% compared to the previous five years. Herbst’s conclusion – companies are deferring maintenance because of low margins and it shows. Salt water is unforgiving and routine maintenance is critical on offshore facilities.
Funding Levels – Offshore projects have high capital costs. Offshore exploration is expensive and requires long lead times before production starts. the further offshore, the higher the cost exposure for an operator. Existing facilities require constant upkeep. The costs of an incident are exceptionally high. Herbst says his agency is watching smaller companies closely to make sure they are capitalized to maintain their operations. The Society of Petroleum Engineers online safety website quotes him as saying:
“Some of the operators are not as well-funded as the larger companies in the Gulf of Mexico, and their bottom lines are impacted much quicker than those larger operators,” he said. “This is exaggerated even further in the deepwater environment and the deepwater facility fields that carry higher operating costs. It is imperative that we continue to monitor these companies’ capacity to respond and mitigate consequences of incidents offshore.”
Bankruptcy Threat is High – Perhaps the greatest concern is the spike in bankruptcies offshore. Herbst says that about 450 of the more than 2,000 offshore facilities are owned by companies that are financially at risk. “It is quite shocking that bankruptcies seem to be more widespread, in my view, this downturn cycle than in previous downturn cycles,” Herbst said, “Currently, nearly 25% of the facilities operated offshore were operated by financially at-risk companies.”
It is important to note that the number of incidents offshore does not show a big increase in either spills or injuries. However, the warning signs are there and the message from Herbst is BSEE is watching.