Gulf of Mexico: Oil Spill

Lord Grantchester Excerpts

Thursday 16th December 2010 Lords Chamber

[Lord Grantchester]

While the rhetoric has subsided to a large extent on the oil spill disaster, nevertheless the reality of the event has to be recognised and recent events taken into account. For BP, the event was a near-death experience. It appeared that BP did not know what was happening as it seriously underestimated the flow-rate discharge. It appeared not to know how to stop the flow, as three attempts to stem the well failed. It appeared unappreciative of the depth of the concern regarding the effect of the spill on the environment and the impact on other businesses in the gulf.

The Macondo spill resulted at one stage in a 50 per cent fall in BP’s share price, while the stock market had concerns about whether the asset base of the company was deep enough to meet its ultimate liabilities. BP’s stock briefly rallied following the initial disaster but this morning it fell again as the US Government announced their plan to take legal action against BP for the disaster in the Gulf of Mexico. They are planning to sue BP, in addition to Anadarko of the US and Mitsui of Japan, its partners in the disastrous Macondo well; Transocean, the owner of the Deepwater Horizon drilling rig; and the QBE syndicate 1036 at Lloyd’s of London, which insured the rig. The claim is for $21 billion.

Following extensive political debate and government discussion undertaken in the full glare of publicity, BP has responded to stabilise the situation. Among the measures taken, it has set aside $20 billion in an escrow account under third-party control with no cap on its liabilities and excluding potential penalties. BP is perhaps grateful for the political pressure to withhold two quarters’ dividend payments, with the challenge to resume but not restore dividend payments in 2011. It must be borne in mind that this affected the pension funds of many people on both sides of the Atlantic. In addition, BP has cut its capital expenditure and, since the disaster, has now disposed of $43 billion value of assets to increase liquidity. The spill over the 87 days before the capping stack attempt succeeded in stemming the leak is estimated at 4.9 million barrels and resulted in a record $17 billion second-quarter loss to the company.

The company has made its internal inquiry extensively available. The internal inquiry did not identify any single action or inaction that caused the accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational procedures and contractor interfaces allowed an escalation of errors. The report presented eight key findings related to the causal chain of events and recommendations that have been examined throughout the industry and between national regulatory regimes.

The UK already has a robust regulatory regime introduced following the Piper Alpha disaster of 1988. For deep-water drilling, operators are being required to demonstrate that the factors identified in the BP report have been satisfactorily addressed—that there is effective co-ordination between all the companies involved and between companies and relevant government agencies. In this light, it is correct that the UK Government do not see a case for any ban on deep-water drilling. The strength of the UK regulatory regime was recognised in the initial report from the US Department of the Interior, which identified that elements of our regime should be implemented there, in particular a case-by-case safety appraisal, independent verification of the design of wells and, most important, the separation of the health and safety function from the licensing function within government.

The Macondo incident has shown that co-ordination between all the companies involved and between companies and relevant agencies is an essential part of safe operations and will be a requirement to be demonstrated. The industry needs an environment where best practice is shared and lessons are learnt. The UK regulations also contain a range of additional safeguards, statutory requirements, checks and verifications. While it is impossible to say that such a blow-out as occurred in the Gulf of Mexico could never happen in UK waters, our regulations provide a reduced probability of such an event.

The US has separated health and safety from licensing in two different agencies and has implemented two new rules to improve safety. First, there is the drilling safety rule to make mandatory several requirements for the drilling process and, secondly, there is the workplace safety rule to make programmes to identify potential hazards and to introduce risk reduction protocols.

Since the capping of the well on 15 July, BP has had to revise its business to ensure that safety is placed at the heart of its operations. Finance and reputation have been further strengthened through structural and personnel changes. Under the guidance of a new chief executive, Bob Dudley, the exploration division has now been split between exploration, production and development, each with separate leaders reporting to the chief executive. In addition, BP has re-examined the low-probability, high-impact quartile of its risk register and introduced a new executive role with powers to intervene, also reporting to the chief executive. These changes help to ensure that a greater emphasis is placed on risk management.

Furthermore, BP has examined its relationships with contractors to review the balance between, on the one hand, its incentives and reward structures, with the corporate emphasis on operational objectives such as timely fulfilment, and, on the other hand, the emphasis on safe operations. It needs to introduce further measures to incentivise safety. BP has identified improvements to its response capability in operations made complex by the very nature of deep-water drilling.

I am informed that BP, with the rest of the industry, is examining best practice in communication and sharing of experiences. In hindsight, it is examining the disincentive to share near-miss experiences, such as the one that happened in the Shell Sedco 711 platform in the North Sea in December 2009, when a blow-out preventer worked and shut down operations, in contrast to what happened in the Gulf of Mexico.

I am grateful to the Minister for making his contacts in BP available to outline their changes to business practice. Not only is it necessary to focus on preventing major oil disasters and disastrous events, but examination of all leaks, spills and seepages in operations must also take place, with the necessary reporting structures to build up a culture of continuous improvement within the industry and with the emphasis on safety and the minimisation of environmental degradation.

In response to the gulf inquiry, an industry-led initiative has set up the Oil Spill Prevention and Response Advisory Group—OSPRAG—to liaise with industry and government. I would like to ask the Minister what discussions have taken place with this group. What areas of concern are being addressed? Will it continue to meet to a regular timetable?

In light of the huge amounts of dispersant that have been used in the gulf, can the Minister tell us what monitoring and research is happening and being shared with Her Majesty’s Government concerning dispersant effects on the environment? I understand that no advances in dispersant technology have occurred since the 1989 Exxon “Valdez” spill.

I am grateful to the department for making available the shareholder map of responsibilities in respect of the regulatory framework. Action 9 of the department’s annual energy statement makes a commitment,

“to undertake a full review of the oil and gas environmental regime following the outcome of the investigation into the causes in the Gulf of Mexico incident”.

Can the Minister advise the House when that review will be finalised and whether it will include a best-practice review by the Better Regulation Task Force or the Risk and Regulation Advisory Council?

Finally, I ask the Minister whether the Government are setting up any formal structures to improve dialogue internationally between Governments, especially with the United States, to monitor exploration as it takes place in ever more remote and potentially hazardous environments as the search for oil reserves continues.

The North Sea remains an extremely important resource to the UK: the UK’s oil and gas resource is estimated to be up to 24 billion barrels equivalent. The sector at present provides about 60 per cent of the country’s energy and benefits the balance of trade to the tune of some £30 billion a year. This disaster highlights the challenge to move decisively towards a low-carbon economy. Recently a report from a group of business leaders drew attention to what it called the peak oil debate and urged an added emphasis behind renewable energy that green campaigners have been longing for. Meanwhile, BP announced yesterday a significant discovery in the deep-water west Nile delta in Egypt. It cannot be a return to status quo practices. We must press on and continue in the transition to safer, more sustainable energy. I look forward not only to the Minister’s reply but to his Statement later today.