How significant an impact will BP’s Gulf of Mexico disaster have on the future landscape of the oil and gas industry?

The following set of answers to the above question regarding BP (LON:BP.) and the future of the oil and gas industry are taken from this month's 'Drilling and Dealers' Magazine published by the Oil Council which is available for download here.

“There are two components to consider, political and technical. Based on past experience, only very few politicians will let the opportunity (feeding frenzy) pass to create enormous spectacles, to arrange theatrical show cases and hearings, and to call loudly for a full range of legislative and regulatory actions from "punishment with extra taxes? all the way to totally banning any offshore drilling and production in US territorial waters. Therefore, we can expect a considerable and burdening legislative, regulatory and fiscal impact resulting from this political “Schlachtfest”.

On the technical side every catastrophic failure, especially those in technological frontiers, has always led to tremendous efforts to find the causes of such failures and to expeditiously develop new processes, procedures, superior materials and products to safeguard against repetition (e.g. Spaceships "Challenger? and "Columbia? and the "Piper Alpha? Platform events).Therefore, tremendous progress can be expected in the much better understanding of the peculiarities of the highly challenging frontier environment of deep sea drilling and production, especially in the area of temperatures, pressures, the total absence of – or highly restricted – visibility, and extraordinary difficulty in performing mechanical tasks, and the subsequent development of new technologies, materials, approaches, processes, as well as, internal and external guidelines.

Then there is the "Industry Impact?. Almost every company will undertake all reasonable and feasible efforts to review and update their processes, policies, procedures, guidelines and applied technologies to effectively reflect protection against catastrophic failures like the one that happened to BP (LON:BP.) . The experience of this spill and its enormity also could (and should!) lead to an industry-wide task force to coordinate the progress in effective technologies and applications in operations in highly volatile and hostile environments, as well as, the establishment of an industry-wide emergency response task force. „Industry? in this regards would include the Oil & Gas Industry and the Oil & Gas Service and Equipment companies, all enhanced by the inclusion of the respective Federal and State organizations.”... Franz Ehrhardt, CEO, CASCA Consulting LLC (Oil Council Committee Member)

“The Macondo blowout in the Gulf of Mexico is a tragedy for those who lost their lives and their relatives, as well as, an ongoing disaster for the offshore drilling industry. It is of course too early to tell with certainty what will be the long-term implications of the spill for BP (LON:BP.) and the wider industry. However some themes are emerging. From the industry's perspective in the US it could not have happened at a worse time, just one month after Washington had signalled an expansion of offshore drilling to balance its new legislative proposals on climate change and clean energy. The key question is whether there will be significant long-term effects, or whether business will eventually return to its previous trend and modus operandi. It is noteworthy that previous major incidents have slowed but not ultimately blocked the pace of expansion. One obvious change will be the push for stricter, and inevitably more costly regulation to reduce risk and improve safety and damage to fragile environments. In the UK, Chris Huhne, the new Energy Secretary, recently announced plans to double inspections of rigs in UK waters and may require an increase in insurance cover. Tighter regulation will clearly delay and slow down drilling programmes. This pressure will not only come from the regulators.

Directors of operating companies, particularly the juniors without the deepest pockets, will also be very concerned as to their own responsibilities and potential liability.

There will be a boost for the developers of alternative sources of energy and the clean tech industry. But in the near-term this will not provide the solution to security of energy supply in a time of increasing world demand. The current offshore model of outsourcing the work, particularly to independent contractors, will come under scrutiny, perhaps resulting in the majors taking more work in house, though abandoning the current model cannot happen quickly and almost certainly will be less efficient. This will prove to be bad news for the contractors, but to what extent? New exploration areas will be left untouched, at least for a time. In the US this includes the recently licensed blocks off Virginia, Alaska and California, and further afield potentially in the waters around Greenland and elsewhere in the Arctic.

Finally, under pressure from environmentalists, the offshore drillers' fiscal regime may well become less attractive, with the recent tax breaks implemented in the US already under considerable threat. Overall though, the outlook for the industry generally remains positive and one suspects that the Deepwater Horizon disaster, serious as it is, will not alter its long-term trend."... Neil Vickers, Partner, Corporate, Denton Wilde Sapte LLP (Oil Council Member)

“Whilst the disaster will impact on many aspects of the industry the impact on the structuring of JOAs will be interesting to see. Can we continue with the concept of „no gain/no loss? for the Operator, with the Operator and Non-Operators sharing any loss in proportion to their respective participating interest, other than where the Operator?s gross negligence or wilful misconduct is the cause of the loss – and then the gross negligence or wilful misconduct of a senior manager of the Operator at that? Will the Non-Operators accept such a submissive role in the future when it comes to how the Operator conducts petroleum operations? Will they want to be more intrusive? Will the role of the Operating Committee change from supervisory and advisory to include monitoring and enforcement? Will the mechanisms for dealing with default need to change? How can we be sure the Operator and Non-Operators will have the financial capability to meet a call to cover such loss? What about sole risk? Will the rules of sole risk be changed? Will the non-sole risk parties rely on a contractual indemnity by the sole risk parties? So many questions – time will give us some answers.”... Dr Kenneth Mildwaters, Senior Partner, Mildwaters Consulting LLP (Oil Council Member)

“I am actually quite worried about the BP (LON:BP.) GOM situation. It is bad enough that such a catastrophe has occurred (with the devastating impact on people?s lives and the environment) but I am equally dismayed and disappointed with the immediate politicisation of the disaster by the White House. Wild accusations, xenophobic threats and over-aggressive pontification have done no credit to the Obama Administration. Obviously, there had to be a degree of table thumping and corporate bashing in order to appease a nervous electorate but, on a wider context, fresh lines may have been drawn between the US government on one side and “Big Business” on the other. I see a much more difficult operating environment (and not just in the US) for the whole industry.

The US domestic offshore petroleum industry could be about to get a whole lot more expensive and tougher. If we also add in the rising environmental objections in North America to onshore shale gas and oilsands operations, there are serious supply concerns ahead for the US. The Obama Administration?s reaction to this event could also be a worrying presage of a more interventionist attitude in general, perhaps with wildly unpredictable consequences. Over-reaction to such stresses tells us a lot about the capability of this Administration and gives serious cause for concern when even larger issues of an economic, political or military nature present themselves in the future.”... Robert Lambert, CEO, GB Petroleum Ltd (Oil Council Member)

“Longer term this could have a severe impact and may be viewed in the future as the watershed moment when a significant move towards a post-oil economy gathered pace. A shift of focus in the near-term towards identifying fail safe solutions over identifying reserves may become the priority for CEOs worldwide. From a layman?s point of view it has also highlighted the unedifying behaviour endemic following any disaster where avoiding responsibility is the priority.

The sector doesn?t help itself when the multinational big boys outsource everything (BP (LON:BP.) contract, Transocean operated rig and Halliburton (NYSE:HAL)  as a service provider for other critical tasks) to service companies and everyone looks to everyone else to take the blame. Perhaps Big Oil will no longer be seen to be untouchable. Lastly, is it really state of the art technology in the industry to deploy a hastily prepared „funnel? in response to the disaster? In this day and age it all seems a bit inadequate to the general public.”... Alan Ross, Senior Manager, Oil & Gas, Lloyds Banking Group (Oil Council Member)

“It?s important to remember that the number one issue that drives this industry is the global demand for oil. The unfortunate accident in the Gulf will not have an impact on demand for mergers and acquisitions. In fact, it might give another boost to the already robust pipeline of deals we can expect this year because of companies needing to adjust their practices and operations to any potential technical changes that we expect will be mandated to improve overall environmental safety.

PwC works with energy companies to help them better understand new opportunities in the market, especially when there are unforeseen events like this. Based on our experience, there will be more companies looking for additional insights and perspectives into how potential changes will impact their current businesses and strategies. And, since today?s energy deals are not just focused on acquiring reserves, but technology, talent, and inherent 'know-how',” there will be an appetite for a new wave of transactions that can add proven capabilities to a portfolio of services. We are actively helping energy companies navigate the complicated road of M&A, and with any unique event that takes the spotlight, there is a heightened sense of being prepared for a variety of scenarios and making sure they uncover every potential risk and opportunity for reward.”... Michael Collier, Partner, PwC (Oil Council Member)

“The BP (LON:BP.) disaster is likely to be a game changer for the GOM and many other deep offshore locations. It has focussed media attention on the technical challenges as never before and it is likely that there will be a significant increase in regulation and supervision that will add time and complexity for players wishing to explore such regions. In the longer term the need to recover reserves from these locations will be paramount and so a way will be found to continue to have economic exploration in the most challenging locations. In terms of players there will be no change – it remains the preserve of super majors and it is very unlikely that national governments would want to be more than regulators one step away from ultimate responsibility.”... Keith O’Donnell, Head, Natural Resources (EMEA), KBC (Oil Council Member)

“The traditional hydrocarbon model is really a dying one. Even with the oil reserves in Iraq, Iran and the Kingdom of Saudi Arabia, easy oil will be running out in less than 12 years. Difficult oil, strictly seen from the economics, would require an oil price of at least US$75 to make it break even. The market will not accept a US$150+ price and alternative energy will mushroom again because their break-even prices will be graciously surpassed.

Companies and experts claim that technology will improve to a level that will make difficult oil cheaper to access. Indeed technology has improved – back in the early days 1,000 feet of water was astonishingly cutting edge, now they?re drilling at 12,000+ feet of water – but the costs have not decreased. The opposite is true. The environmental impact was big anyway, but with accidents such as the BP (LON:BP.) one in the Gulf, the stopwatch will be put on hold for at least another two years. Companies should really re-think their models in that perspective. The gas sector will get more attention as a consequence and already we?re seeing a number of new sites coming on-stream with gas substituting oil as chemical feedstock increasingly more so.”... Ennio Senese di Sisto, Executive Partner, Energy, Accenture (Oil Council Member)

“If BP (LON:BP.) are able to cap the well (Wednesday 26 May is first top kill attempt) then this will enable any „worst case? scenario to be avoided, and BP's efforts to correct the situation and clean up the impact of the spill can become (even) more focused. Their visibility and proactive response has been exemplary in my view, and the industry should take note of such commitment for future incidents - which is a read across in itself. There is of course a significant environmental impact already.

However the US Gulf and other sensitive offshore environments have recovered from spills and other disasters before and while there will be lessons learnt in response and application of clean up techniques –this may not be the main ramification for the industry. Indeed, the key change for the industry has to be in avoiding such catastrophe again. This implies a need to focus on the failure of a number of processes, systems and equipment with multiple control-mechanisms, procedures and tools that obviously did not work in either a) preventing the accident or b) reducing the impact of the accident.

In years to come, BP may be measured on its clean up commitment and the rectification of the spill. However, it will also be measured on the very steep learning curve it has had to climb to kill the well at such depths and improvise in such a frontier territory. The industry will likely be measured on its ability to improve safety procedures and avoid such damaging disasters in the first place, and this will involve inclusion of the lessons learnt from this whole episode. Any repeat catastrophes of such magnitude cannot be allowed to happen – and BP's experience will be core to ensuring this going forward."... Jason Kenney, Head, Oil & Gas Research, ING Bank; and President, Scottish Oil Club

“What lessons have we learned already? In summary...

• A woeful lack of preparation on the part of BP to cope with these types of oil spill disasters. It?s an eye opener for the industry as a whole to add additional redundant safety measures. 
• The multi-level, devastating damage that such an oil spill disaster can cause worldwide. 
• Government agencies in charge of regulating the industry are staffed with personnel having neither the technical knowledge associated with offshore drilling, nor the sufficient power to enforce regulations.

What does the future now hold for the industry? In summary...

• Deep water drilling is a necessity, and it will continue. At the present, there are not enough viable oil substitutes to produce energy at the massive scale needed globally. 
• New rigorous safety / maintenance regulations applied on a global basis.
• Sky rocketing insurance coverage, which adds to the cost of drilling, particularly subsea.
• Additional taxes levied on the industry. 
• Revitalized efforts to develop energy renewables.”

... Philippe Mitterrand, Chair, International Study Group, SPE-Gulf Coast Section (Oil Council Member)

“The impact of the Gulf disaster will be significant on the future regulatory climate for offshore and in particular deepwater drilling. At the very least, it will add regulations in an effort to prevent future blowouts. These expected regulations will add to the cost of exploring for and developing deepwater oil and gas resources. If liability for major spills rises from US$75 million to billions of dollars, it could mean that only the IOCs can continue to explore and develop deepwater projects. One would also expect that the review process prior to approval of future offshore projects will take more time and that leasing of offshore acreage on Federal lands will be slowed.

While the Obama Administration had already excluded the Pacific OCS from future oil and gas development, this potentially oil and gas rich region will not be opened for development for a very long time. Outside of the US, it may become more difficult for Brazil to raise the funds necessary to develop the pre-salt blocs where major oil and gas files have been discovered. Delays in developing the pre-salt can be expected. It is possible that the technology to find, develop and produce oil and gas from ultra deepwater oil and gas accumulations, is way ahead of the technology to deal with serious potential problems. Perhaps some time is needed for those technologies to be developed.”... Dr Herman Franssen, President, International Energy Associates (Oil Council Member)

“The BP Gulf of Mexico disaster has raised public awareness of the risks associated with offshore drilling for oil. Given the size of the industry and the fact that virtually all recent significant discoveries are offshore, it is unlikely that a regulatory response will have a lasting impact on operations. It is possible that there will be delays in projects as companies and government officials try to introduce new controls and practices, but given the demand for hydrocarbons as the world?s main energy source, the adaptation period should be relatively short. After all, it is becoming clear that the BP disaster comes down to human error rather that poor practice and regardless of what any manual says, human error is very difficult to control. BP might have failed in instilling its policies and (high) standards, as stated in its manuals, to its employees, but such management quality is very hard to regulate. Drilling offshore should continue especially given the decline in reserves in onshore fields around the world.”... Angelos Damaskos, CEO, Sector Investment Managers Ltd (Oil Council Committee Member)

“Gulf of Mexico produces ca. 1.6 mln bpd of oil ca. 24% of all US oil production and ca. 25% of global deepwater oil production. Gulf of Mexico and other deepwater areas remain crucial for the global oil supply. Following a review of the accident, new safety, operational and environmental regulation are likely for offshore drilling in Gulf of Mexico and other regions are likely to follow suit and to include them in their operating guidelines. The regulation, liabilities and insurance cost for deepwater operations are likely to increase cost and also delay to future deepwater production (Deepwater is likely to remain the marginal barrel for conventional oil production). Governments and consumers should remain pragmatic and realise that production from deepwater areas is essential in order to meet global demand. Currently only a few select operators have the expertise and financial muscle to manage full cycle deepwater operations. Lessons learnt from BP?s Macondo will be shared by industry players to build better awareness and standards on deepwater operations.

Collaboration between service companies and upstream players has built a vibrant deepwater industry in a safe way over the past two decades. A tragic accident like Macondo should encourage the industry, policy makers and consumers to strive even harder to achieve new levels in safety and environmental standards while addressing the global energy challenge.”... Unnamed Industry Advisory Perspective

 

“It depends in part on BP's success in executing remediation strategies, but will in time be reduced by the mere tendency to forget. Litigations will drag on and influence public perception, which is the objective of such efforts, aimed at invoking legislative reforms to further restrict and regulate oil and gas companies and command environmental accountability and stewardship. All things considered, the impact could be damaging for those companies that cannot adapt, or at least appear to.”... Chris Valenti, Energy Investment Banker, Starlight Investments, LLC (Oil Council Member)

“BP's newly released Statistical Review of World Energy shows the US making major progress in oil and gas production in 2009. It overtook Russia last year as the largest natural gas producer in the world after US output increased 5.3% in 2008 and another 3.5% in 2009 on the back of rising unconventional gas production. Last year the US showed the best growth rate in oil output (+7%) for over forty years – largely due to a 34% increase in GOM oil output, which was in turn to a large extent driven by a 58% jump in BP?s oil production in deepwater GOM. Both unconventional gas and deepwater oil carry environmental and technological risks as indeed any new technologies would do.

Without America?s ability to encourage technological innovation and take investment r isks last year?s breakthrough would not be possible. Would Obama?s administration now want to reverse this? I don?t think so. However, the industry will likely face more stringent regulation in GOM with a commensurate rise in production costs and insurance premiums. Taxes and royalties may also rise but probably not to the level where new investments would be discouraged.

The EU may follow with a review of their offshore regulations but other major new deepwater areas such as Brazil or Angola are unlikely to respond with any material changes.” ... Evgeny Solovyov, Director, Oil and Gas, Global Equity Research, Societe Generale Corporate & Investment Banking (Oil Council Member)