Market News

 April 26, 2010
Gulf oil spill could affect rules for Arctic

 A major U.S. oil spill could change the shape of energy regulations in Canada's Arctic.

The explosion of an offshore drilling rig in the Gulf of Mexico comes as energy companies are pressing to eliminate a key drilling safety requirement from Canadian rules.

Current federal rules in Canada require energy companies to complete a "relief well," a drilling technique that helps to stop oil leaks, in the same season as an original well is drilled. Many Arctic nations, including the U.S., Norway and Greenland, have created such requirements as a means of ensuring that oil blowouts can be controlled before winter ice halts an emergency response.

Starting last fall, a group of companies operating in Canada began an effort to persuade the National Energy Board that technology has advanced so far that relief wells are no longer needed in the Arctic. New deep offshore wells in the Beaufort Sea will take two or three years to drill, making it impossible to drill a relief well in the same season, they say.

In 1990, a similar bid to change the rules failed, in part because it followed the Exxon Valdez spill. Now observers think the Gulf of Mexico accident could do much the same.

"Anybody who was wavering a bit, thinking -- 'Oh, maybe we can let them go ahead with it' -- is going to be really worried now," said Doug Matthews, a northern energy consultant.

The situation has become especially delicate since BP Canada Exploration Operating Company Ltd. and Transocean Ocean Offshore Deepwater Drilling Inc. are among the companies pushing for the Arctic rule change. The Macondo well that is leaking oil into the Gulf of Mexico is owned by BP, while Transocean ran the Deepwater Horizon rig that exploded and sank while drilling it.

BP and Transocean are now working to drill a relief well to stanch the flow of oil into the Gulf.

Inuit who live along the Beaufort Sea say they have keenly watched the Gulf of Mexico accident, and it has emphasized to them that any changes in regulations can't compromise safety for them or their wildlife.

"A lot of us depend on what we harvest, and that's exactly why we're so worried," said Frank Pokiak, who chairs the Inuvialuit Game Council. The council has yet to see an industry proposal that leaves it comfortable that same-season relief wells aren't needed, he said.

In a filing to the NEB, BP argues that for "both technological and operational reasons, continuance of the [same-season relief well] capability is not required and is problematical for BP and other operators, and may well impede further exploration in the Beaufort Sea."

The company "is advocating that the policy be changed by eliminating the requirement for same season relief well capability."

A similar argument was first made by Imperial Oil Resources Ventures Ltd. A number of other industry figures have also participated in the regulatory hearing, including Chevron Canada Ltd., Shell Canada Ltd., MGM Energy Corp. and ConocoPhillips Canada Resources Corp.

Transocean, which has begun designing an Arctic drillship for the Beaufort, has also argued that today's ships are capable enough in the ice that a backup vessel, which is currently required, would not be needed.

Even some in the industry say the Gulf of Mexico accident has cast doubt on that argument.

In 2007 and 2008, BP and Imperial together committed to spend $1.785-billion to explore several offshore Beaufort leases. The relief well petition has come as they work to make good on those commitments. Imperial has already spent $150-million on exploration and engineering for its lease, but says the relief well issue could hurt its ability to drill before the lease expires in 2016.

The company presented the regulator with a study that estimated the chance of an uncontrolled oil leak at one out of every 100,000 wells drilled, using today's technology.

A spokeswoman said Imperial will incorporate any lessons learned from the Macondo accident into its Arctic plans. A BP spokeswoman said it is too early to say what impact the explosion could have on Beaufort plans.