Offshore Operators Committee

June 13, 2001 – Houston, TX

• Update on Appointments to DOI

• As you probably have noticed in the President’s National Energy Plan, oil and gas development on the OCS will be a strong link in the energy supply chain for the Nation. MMS played an important role in the development of the plan.

• The President’s plan addresses the nation’s principal energy challenges, which are:

• Promoting conservation,
• Repairing, modernizing, and expanding our energy infrastructure, and
• Increasing and diversifying our energy supply while protecting the environment.

• By 2020, we expect energy demand to increase by 32 percent, with oil consumption rising 33 percent and natural gas use increasing an even larger 50 percent. If we are to have the capability to respond to these projected increases, we have to start the process now.

• Of the 105 recommendations in the report, only 20 will require congressional action. Executive action or directives to federal agencies can implement the remainder.

• One of the first steps that we will take is the development and implementation of the next 5-year oil and gas leasing program for 2002 – 2007, while we continue holding sales under the current one.

• Our most recent lease sale, Sale 178, in the Central Gulf, was held on March 28 and attracted more than $500 million in high bids from 90 companies. While the sale reflects a continued interest in deepwater, high interest was also shown in shallow water where deep gas deposits and subsalt prospects may be present.

• About 60 percent more bids were received on shallow water tracts in Sale 178 than in the central Gulf sale held last year. We believe this is in large measure, because of three new incentives we developed in concert with industry to help stimulate oil and natural gas production for this sale.

1. Royalty relief incentives for ultra deepwater leases. On a lease in water 800-1600 meters deep, royalty will be suspended for the first 9 million barrels of oil equivalent (MMBOE) produced. On a lease in 1600 meters of water or deeper, royalty will be suspended for the first 12 MMBOE.
2. A natural gas incentive that encourages industry to drill for deep gas deposits located in less than 200 meters of water. We will suspend royalty payments for the first 20 billion cubic feet of production from a well drilled below 15,000 feet subsurface; and
3. A second natural gas incentive is technically aimed at subsalt hydrocarbon development. We are providing up to a two-year extension of the five-year lease term when an operator has drilled a first well and needs additional time to determine the appropriate next drilling target, as long as the second well will be drilled to tap a subsalt hydrocarbon objective. This objective will avoid premature expiration of the lease. This extension was also offered to existing leases with subsalt potential through a Notice to Lessees last December.

• In our view, these provisions were a major factor in making the March sale a success—although, of course, the robust natural gas prices of the previous 6 to 8 months also played an important role. These three provisions will also be in place for Lease Sale 180 in the Western Gulf and part II of Sale 178, both to be held in August.

• These upcoming sales will also offer, for the first time, leases in the area commonly known as the Western Gap. This is an area in international waters sandwiched between U.S. and Mexican waters. Since we last met, the U.S. Senate has ratified the treaty delineating the respective jurisdictions within the gap, and our governments have officially exchanged the articles of ratification.

• FPSOs and Sale 181

• We are currently waiting for guidance from the Department about how to proceed with the issue of FPSOs, so there is very little we can tell you other than we continue with our evaluation process.

• Lease Sale 181 is currently scheduled for this December and we expect to have a decision by the Secretary in October.

• I would now like to turn my attention to safety issues. As you know, our focus is on ensuring safe and environmentally friendly operations on the OCS. We know these are not only OUR issues but are of concern to OOC as well.

• We are pleased with our past collaborative efforts on OCS performance measures and offshore safety and I would like to take a moment to alert you to some current issues of concern to MMS.

• Crane incidents on OCS fixed facilities have been an ongoing concern. Between 1995 and 1999, 47 crane incidents were reported to the MMS. These accidents resulted in 10 fatalities, a significant number of personnel injures, and millions of dollars in damages. Human error and equipment failures continue to play a major role in these accidents.

• To combat this problem, MMS has implemented a variety of initiatives. New rigger training requirements were instituted in April, and over the past few years we have organized numerous public workshops and panels. At these meetings, discussion topics included: MMS inspection requirements, crane safety, movement of rental cranes, and incidents associated with material handling and lifting activities occurring on OCS facilities.

• We are preparing a rule that proposes incorporating API Specification 2C, which addresses crane design, construction, and testing, into our regulations.

• Another issue of concern is cementing problems. As much as a third of total losses of well control reported to MMS since 1992 are attributable to cementing problems that resulted in annular flow of gas or water. Although the majority of those resulted in only minor damage and minimal pollution, correcting this problem as soon as possible can help prevent a major incident in the future.

• We are working with an API task group of experts from across the industry to develop a best cementing practices standard for incorporation into MMS regulations to help alleviate this problem.

• Coil tubing operations is another consideration for us at MMS. Recent advances in drilling technology have spurred a dramatic increase in the use of coil tubing for OCS drilling, workover and completion operations. This increased use, plus a fire and loss of well control in September 1999 while conducting coil tubing operations, has prompted MMS to reevaluate its current regulations in this area.

• We are currently evaluating the possible incorporation of API Recommended Practice 5C7 on coil tubing operations into MMS operating regulations. We are also funding a research study on coil tubing operations and participating with industry representatives on a well control/well intervention task group working to standardize coil tubing equipment and operations throughout the offshore industry.

• We are also focusing on fires, the most common type of incident occurring on OCS facilities. We are working to standardize fire fighting requirements across the OCS. We are also working with industry and the Coast Guard to identify needed changes.

• API has recently hired a contractor to revise Recommended Practice 14G, which addresses fire prevention and control on open offshore production platforms. The revised edition will include additional guidance on the use of chemical extinguishing systems on offshore facilities. Both MMS and the Coast Guard are active participants in this project, as well as the National Fire Protection Association.

• On the environmental protection front, I want to thank OOC for its support and leadership in the DeepSpill Joint Industry Project, and for this organization’s recent help in planning and reviewing our Physical Oceanography of the Slope and Rise study (POSAR). Your assistance has been an immeasurable help in making these efforts successful.

• It is through these types of projects that we will bring good science to the forefront of our planning efforts, not only for lease sales but also for daily operations on the OCS. Success in these areas can only help to build public confidence in offshore operations.

• We encourage and support continuing this mutually beneficial interaction with you as we expand our deepwater environmental science programs and proceed with our ongoing evaluation of safety regulations over the upcoming years.

• Of course, new issues will continue to emerge that need to be addressed in both the environmental and technological arenas. Decisions will need to be made, for example, on where or how we use FPSOs in the GOM, as well as delineating responsibility between MMS and the U.S. Coast Guard.

• As we move to deeper water, a transportation infrastructure will need to be put in place, an infrastructure which uses the technological capability of industry and recognizes the need to conserve resources.

• To date, deep water has been principally an oil province, with associated natural gas, but our domestic need for natural gas as an environmentally preferable fuel cannot be overlooked in regulatory decisions.

• Options to promote increased natural gas recovery, such as on-site compression and gas-to-liquids technology will need to be pursued as well as incentives such as MMS provided to tap the promise of deep gas resources on the shelf.

• Additionally, as a result of the movement into deeper waters, non-routine issues continue to arise. For example, we have had discussions with various companies on efforts to develop offshore support facilities for equipment and consumables, temporary housing of personnel, emergency landing facilities for aircraft, field hospitals, offloading terminals, central gathering facilities, shuttle tanker transport of produced hydrocarbons, waste management, and mariculture initiatives. Recently, there have also been proposals for floating LNG facilities and conversion of existing platforms for LNG use.

• With each new proposal, environmental and technological challenges emerge. The role MMS will play in responding to routine development and new initiatives will continue to evolve.

• As always, to have government and industry work well together, we need to continue having open and early dialogue as issues arise. This will be our major tool as we both work together to supply the offshore energy resources to the Nation in a responsible, safe, and environmentally sound manner.

• I look forward to working with the Offshore Operators Committee in the future and although he or she may not know it yet, the new director of MMS also looks forward to working with OOC as we have worked so well together in the past as these challenges present themselves. Thank you.