Gulf of Mexico: Oil Spill

Lord Moynihan Excerpts

Thursday 16th December 2010 Lords Chamber

Moved By

[Lord Moynihan]

To call attention to the implications of the Deepwater Horizon oil spill in the Gulf of Mexico; and to move for papers.

[Lord Moynihan]

My Lords, I declare an interest as one of many long-term investors in BP shares as part of a pension fund and, more important for today’s debate, as a director of Rowan Companies. I have had the privilege to sit on Rowan’s board for 12 years and have chaired its health, safety and environment committee since its inception. We are a high-spec jack-up rig company with a manufacturing and land drilling business headquartered in Houston, Texas. I should add, in the context of today’s debate, that Rowan has no involvement in deep-water drilling activity.

The explosion that we are considering, and its consequences, occurred on the Transocean Deepwater Horizon at 10 pm on 20 April this year. It is known that the crew had been fighting circulation issues on the rig, where the weight of the muds and pressure of oil were not matched. The explosion was a horrific human disaster that rapidly turned into one of the worst environmental catastrophes in the history of the energy business.

In 1990, when I was appointed Minister for Energy with responsibility for implementing the Cullen report, a different approach was followed by the British Government from that energetically pursued by the Obama Administration before the mid-term elections. Back then, on 6 July 1988, the Piper Alpha rig, a North Sea oil production platform, was the subject of a tragic explosion and the resulting fire destroyed the rig and killed 167 men, with only 59 survivors. The Government of the day, with the support of the Opposition, responded calmly and worked with the industry on both sides of the Atlantic—indeed, with the US company Conoco leading—to implement a new safety regime, which currently leads the world.

Deep-water drilling is the future of the industry. Such drilling characteristically takes place in hostile conditions and is at the leading edge of drilling technology. Deep water is where the world’s hydrocarbon growth market exists and is the main area for offshore production growth, with deep-water discoveries accounting for 50 per cent of world discoveries over the past three years. The deep-water discoveries are significantly larger in size than the new onshore discoveries, with 150 million barrels of oil equivalent being the average size of a deep-water discovery compared with 25 million barrels onshore. Deep-water production has doubled over the past five years and is expected to double again over the next five years. The reality is that, given the annual discoveries required to meet world demand, in 20 years’ time we will need to discover and produce as much from deep-water drilling as we do in total world wide today. However, as we have seen, deep-water exploration and production are still in their infancy, and the focus has been on exploratory wells. A backlog of needed development drilling may indeed be building.

Against that background, we need to consider not only what is happening in the offshore oil and gas drilling business but the relevance of this morning’s announcement that the US intends to take legal action, as was expected. It would be inappropriate to comment on the legal implications of that, but equally the announcement was part of due process and those who follow the industry recognised it as such. What is relevant is that the decision has formally spread the net much wider; many counterparties have been added, and I anticipate that more will be added. The announcement underlines the fact that Deepwater Horizon was a major industrial accident, but I have to say that the approach being taken is in stark contrast to the total focus on BP by the Obama Administration before the mid-term elections.

That point about BP brings me to my remarks on governance. The British, much more than the Americans, favour the separation of powers between the chairman and the CEO. This is not just for good governance, as the role of the chair is to provide air cover for the CEO. In the case of BP, the chair should have been available to cover while his CEO focused on the operational issues, for the only person who can provide such cover is the chairman. Regrettably, Tony Hayward had no port of call, as he had no effective chairman. As a result, he had become too close to the action. When the chairman finally appeared, to the embarrassment of many his reference to “the little people” on the lawn of the White House achieved the unthinkable by yet further damaging the reputation of the company. As a result, BP presented a soft public-relations target.

Interestingly, BP is in the interesting position that there may be a silver lining for the company in this tragedy. The real problem facing the major oil companies is growth. Many are simply too big. BP has been forced to shrink substantially, to a level from where it can begin to grow again. I believe that the very size of the behemoths in the industry will lead to potential safety incidents in the future, unless these issues are addressed very seriously world wide today. Over time, the reaction will be for these very large companies to break themselves up into refining, marketing, midstream and downstream businesses. I sensed that the noble Lord, Lord Browne—an eminent former CEO of BP—came very close to this point.

A second issue, which is well known to the Minister from his previous professional life, results from insufficient capacity in the insurance market. The liabilities are now too big for few except the majors to deal with. The question that I pose is whether the insurance market can be encouraged to provide more cover and, if so, how. Most available capacity is about £2 billion yet, post the Deepwater Horizon disaster, capacity needs to be of the order of £20 billion or more.

The nature of deep-water drilling—indeed, the nature of our offshore licensing regime—requires work in partnerships. On many occasions in the North Sea, BP has benefited from working with small independents, which often have the ability to show more ingenuity, more innovation, more responsiveness and more fleetness of foot. Small independents can be more focused on the success of an individual well, which can have a major impact on an independent’s balance sheet, whereas the majors can sometimes lose sight of the detail within a wider portfolio of assets and innumerable drilling activities, which dilutes the focus of the senior management. Put simply, on many occasions independents have brought a more user-friendly approach to drilling activity. I am a believer in diversity in the industry, as you get the most out of any situation from having a range of players involved in an activity. However, the disaster in the Gulf of Mexico has pushed back deep-water exploration to the big battalions, in an unseemly battle between a major oil company and a sovereign Government.

If I were running an independent today, the first question that I would ask my management team is, “Are we engaged in operations anywhere in the world that could bring down the company?”. If so, deep-water drilling is not a risk that I would be prepared to take. However, there is little evidence that the independents can receive protection from the insurance market. I put it to the Minister that this is potentially a huge loss to an industry that is focused on the deep-water exploration that, as I outlined earlier, is so essential to the future of oil and gas production. We must avoid a scenario in which the independents are precluded from deep water.

I turn to the implications that I believe will follow. The first and most important issue for any oil and gas company—indeed, for any company—is safety. Safety is everything. Safety cases need to be in place on oil rigs, not gathering dust. Active, live safety regimes are critical to the safe performance of activities in very hostile conditions. Nothing is more important than a strong safety culture. There needs to be more on-board safety exercise, with all persons on rigs required to participate.

I propose for the consideration of the industry that, in each country world wide, a single entity should have broad safety and pollution prevention responsibility to avoid the gaps, overlap and confusion that exist in some safety and regulatory regimes. The regulator’s core responsibilities and objectives must be clearly identified. Safety management and regulatory priorities should also be identified through a comprehensive risk assessment programme.

At the heart of safety is training. Training and competency programmes must take account of new risk information. Contracting strategies need to take account of safety and risk implications.

I have always believed that government and industry should promote an improvement mentality, not a compliance mentality. Continuous communication is essential—communication among regulators, operators, contractors, workers, industry associations and public interest groups—if we are to achieve that objective of a continuous improvement in safety. Operators and contractors must manage their companies to achieve safety objectives and must continually assess the effectiveness of their management programmes. I believe that regulators world wide should seek not to resolve problems but to serve the industry by distributing information by, for example, hosting workshops so that the industry itself can solve the problems.

Wherever possible, the best standards should be identified and applied internationally. The industry should not have different standards in different countries. Accident investigations should always be conducted independently, and findings should be promptly and broadly distributed and discussed with all personnel.

Industry and government cannot rely solely on incident data to identify risks. New indicators must be explored and assessed, particularly for major hazards and safety culture. Worker input into safety culture is absolutely essential—you are as strong in safety as your weakest link. Peer-based audit programmes should be considered for both regulators and operators. I hope that the Minister will agree that all personnel should be trained to be safety leaders and should be empowered to stop work on a rig without blame. In the context of the disaster in the Gulf of Mexico, inspection of life capsules also needs to be reviewed. Why were two life capsules not deployed on the Transocean rig?

As I mentioned, training is critical. Back on land, training to plan for managing disasters offshore—from media training and helicopter co-ordinator training to incident command training—needs to be reviewed in order to understand better how to handle an incident.

A final point on the implications of those safety considerations is the importance of a clearer definition of the respective roles of the drillers and operators. While the operator is the overall supervisor and co-ordinator of the project, the processes and the people lie within the control of the driller.

Against that background, I congratulate the Government on their measured response to the incident. However grave the human and environmental disaster—and there is no denying the scale of severity of both—this was not the time for the fury of a nation to be turned on a major drilling accident. The aftermath became grossly political and over-reactive, from the press coverage to the McCarthyesque attempt at character assassination by some at the congressional hearings. Both of those damaged American national interest and were in stark contrast to our reaction to the Piper Alpha disaster, with its huge loss of life.

The Secretary of State, Chris Huhne, was right to state that the Deepwater Horizon gives us pause for thought and, given the beginning of exploration in deeper waters west of Shetland, there is every reason to increase our vigilance. DECC has increased the oversight of drilling operations by requiring additional inspectors in its Aberdeen office. Can the Minister confirm that the number of annual inspections of drilling rigs will double? If that is the case, do the Government feel that there should be further changes to the inspections, both in content and frequency?

I understand that DECC is also reviewing the indemnity and insurance requirements for operating on the UK continental shelf. Can the Government respond to my earlier observations on the cost of cover and exposure, which will be prohibitive for many of the independents on which the success of North Sea exploration and production has been built? Does my noble friend agree that this could seriously damage future activity in deep-water, high-pressure fields to the detriment of activity in UKCS waters? If so, what action do the Government intend to take in this context? Have the Government asked the insurers to work with a new group of regulators and oil companies—the oil spill prevention and response advisory group, or OSPRAG—to study this issue and come forward with solutions? If action is not taken, only the very few, strongest self-insured operators will, as I have argued, be able to participate.

Having made some observations earlier on the chairman of BP, I hope that the House will allow me to end by paying tribute to the substantial contribution that Tony Hayward made to the company throughout his lifetime of service. His knowledge base and talent were identified, recognised and nurtured by the noble Lords, Lord Simon and Lord Browne, who as his predecessors encouraged his exceptional talents. On the occasion of the explosion of the Macondo well, in terms of the safety culture that he had rigorously sought to implement since first setting foot in the CEO’s office, Tony Hayward’s instincts, initial judgments and strategy were sound in the immediate aftermath of that crisis and helped to pave the way to assist many thousands of people affected by the tragedy. The problem grew into an issue of how those judgments and strategy were put into effect and how to handle the media and inevitable US pre-election political assault. History will show that it can never be said that Tony Hayward did not recognise the incident’s heavy toll on the Gulf, its inhabitants and the workers on the rig. Nor can anyone doubt his total commitment in seeking to address the nightmare that was engulfing the industry, BP, his colleagues, his family and himself on the very subject to which he was committed—the safety of his workforce in the world’s most hostile yet necessary industry. That industry will fuel much of the world’s economy in the 21st century through deep-water offshore oil provinces, in which so much of the industry’s future will be based.

--- Later in debate ---

[Lord Moynihan]

My Lords, I am most grateful to the Minister and to noble Lords for participating in this debate. Over the past 10 years, I have learnt much about the family history of my noble friend Lord Selsdon. Once again, the House enjoyed his contribution, expertise and family insights. May he speak on any subject on which I am fortunate enough to win the ballot in future.

If American politicians were listening, they would have been impressed by the noble Lord, Lord Grantchester, because of his well researched speech and his calm, professional, all-party approach, which has also characterised the approaches of this House and another place to oil disasters, both within the UKCS and beyond our shores. It was echoed in content, delivery and expertise by the noble Baroness, Lady Smith of Basildon, as well as in her welcome focus on the changes that BP has made in the light of the disaster.

I thank my noble friend Lady Falkner for widening the debate to the challenge of macro-energy policy. As the Minister states, the truth is that, whatever steps we take—and we are about to hear about more welcome ones—the global demand for oil and gas will continue to grow over the next 30 years and we had better be prepared for the technical challenges, the political issues and the high prices that will accompany the world’s insatiable demand for hydrocarbons.

I particularly thank the Minister for his speech, for the work undertaken by his excellent officials, some of whom I recognise from over 20 years ago when I was in the department, for his answers to noble Lords’ questions and, above all, for focusing, as indeed has the House, on safety. An unremitting focus on safety is essential and is the most important implication that we should draw from the Deepwater Horizon oil tragedy. I thank noble Lords for their contributions to this debate and I beg leave to withdraw the Motion.

Motion withdrawn.