New rules for offshore drilling under consideration in Congress could create major competitive advantages for offshore contract drillers that have heavily invested in modern drilling fleets in recent years. According to The Wall Street Journal, legislation designed to prevent future oil spills set minimum standards for blowout preventers (BOP) that could render older drilling rigs obsolete or, at a minimum, require expensive retrofitting.
Although the actual cause of the Deepwater Horizon disaster will not be known until the well is permanently killed later this month, there have been many theories regarding potential flaws inherent in BP’s design decisions. Last month, one of Shell’s deepwater drilling experts gave a presentation that clarifies many of the issues in question and focuses on whether the “long string” casing of the wellbore may have allowed gas to escape and cause the explosion. A Congressional panel identified additional design problems that could have contributed to the explosion.
BOP: The Last Line of Defense
A blowout preventer is the last line of defense against a blowout, but proper well design should never allow conditions to progress to the point where the BOP’s shear rams are required to cut through the drill pipe. The proposed regulations call for two sets of blind shear rams which would provide a level of redundancy that did not exist on the Deepwater Horizon. The problem is that the larger BOPs require more space and older rigs may not be able to accommodate the beefed up versions.
Industry reaction has been varied according to The Wall Street Journal article. Noble Corporation’s CEO made the following statement regarding the proposed changes and indicated confidence in his rig fleet to adapt (Noble was profiled on The Rational Walk in June):
Companies have sought to reassure investors that costs for upgrades are affordable. “It’s not anything that should scare the hell out of you,” David Williams, chief executive at Noble Corp, told analysts last month. “It’s something that if we’re mandated to do, we can easily do.”
On the other hand, Diamond Offshore’s CEO seemed to hedge on the impact of the regulations (Diamond Offshore was profiled on The Rational Walk in July):
But others say the uncertainty is worrying. Asked by an analyst whether his company would have to modernize its Gulf of Mexico BOPs, Larry Dickerson, CEO of Diamond Offshore Drilling, said, “I wish I knew…different rigs would have different upgrade requirements depending on the final standards,” he said. “We are sure that there will be additional specifications and additional inspections on BOPs, and exactly how those play out, I don’t know.”
Potential for Retrofits
If new regulations are put in place to improve BOP standards, firms that manufacture these devices stand to benefit. National Oilwell Varco, profiled on The Rational Walk in May, manufactures BOPs as well as other components required for oil and gas exploration. The company recently announced better than expected earnings and executives commented on the BOP issue during the earnings conference call on July 29 (transcript). Based on the comments, there may be possibilities to retrofit existing BOPs in a manner that does not increase the device footprint:
Brian Uhlmer – Pritchard Capital Partners LLC: Talking on the BOP front, as we look out to what your expectations are for potentially new regulations. First off, when you’re talking about new BOPs and your new patented technology, are we replacing the entire body of the ram? Or are we just replacing kind of the guts, as well as the bonnets and the components inside of that ram? And what is kind of an estimate of the capital per rig that would be required to kind of upgrade and meet the tougher requirements in your view?
Merrill Miller, NOV Chairman and CEO: Well, I think Brian, there’s going to be a lot of things you can do. Your question is kind of a set quadratic equation. There’s a lot of variables there. But we’ll be able to upgrade existing equipment that we’ve manufactured. We’ll be able to add a bonnet to things that we’ve already manufactured. For instance, if you’ve got a four-ram stack and you have to make it a six-ram stack, we can go out and retrofit that and make it to a six-ram stack. If you’ve already got a six-ram stack, we can go out and we can retrofit and put in what I was talking about on these new low-force shear rams. So there’s a lot of different variables in there. And in some cases, people may want to buy a complete new stack, and like a complete stack just to kind of give you the run-of-the-mill number. And again, if you bought a six-ram stack today, state-of-the-art, it’s close to $50 million. However, I don’t think a lot of that’s going to have to happen. I think you’re going to be able to modify and in some cases, you can go ahead and modify for as little as probably $2 million or $3 million. It’s going to depend on the particular situation.
The current moratorium on deepwater exploration in the Gulf of Mexico is taking a major toll on the region. It makes sense to put in place regulations that require additional redundancy and safety measures. Enhanced blowout preventers make a great deal of sense, but regulators should also focus on preventing the conditions that cause blowouts to begin with since good well design should make it unnecessary for the BOP to take action. At this point, industry is likely to accept any reasonable regulatory regime in exchange for a resumption of activity in the Gulf of Mexico.
Disclosure: The author of this article owns shares of Noble Corporation.