Think the oil and gas industry marches in lock-step when it comes to all things energy?
Think again.
During a meeting of the National Petroleum Council in The Woodlands last week some of the disagreements were on clear display as the CEOs of ExxonMobil and Anadarko Petroleum debated the best way for the industry to make sure it operates safely.
First, a primer on the National Petroleum Council: it’s a collection of industry, academic, government and other officials who gather to give advice and issue reports on topics for the Secretary of Energy. The most recent report was a 2007 study on the global energy supply and demand situation
The group was meeting last week to go over a draft of a report on the size of U.S. natural gas resources, a report requested by Energy Secretary Steven Chu more than a year ago.
Details of the study weren’t discussed at the quasi-public meeting last week (the meeting was open to the public but the event isn’t publicized — I found out about it accidentally) but NPC member Susan Tierney summed it up like this:
“No. 1, the North American gas resource base is really big news. You probably know that, but we think it’s really important to bring that up as the very top line conclusion of the study,” she said.
“Secondly, and perhaps surprisingly to some of us and certainly to many Americans, our Canadian and American oil resource base is also very big news.”
Anadarko CEO Jim Hackett chaired the meeting, where feedback on the draft report was discussed. One point of contention appears to be how the industry ensures the best practices are being followed when it comes to drilling wells, completions and production. These issues matter as the industry faces increasing resistance to drilling that uses hydraulic fracturing as more rural homeowners are claiming their drinking water was or air is being tainted by the operations.
The draft report is recommending the creation of “Centers of Excellence,” collections of experts on what works best for drilling, completions and production in the different shale plays around the country.
“I think that it has to be somehow informative by region and locality,” Hackett said during the meeting. “It may be as small as locality because of the hydrological issues and the geological issues. Therefore, it cannot be first national. It has to be first, at best, regional.”
The information in the Centers of Excellence “can be informed” by the standards established by the American Petroleum Institute and the Society of Petroleum Engineers, Hackett said, but it also needs to take account the local concerns that operators may face.
ExxonMobil’s Tillerson then chimed in with what seemed like a surprisingly blunt counter-argument.
“I think the idea, Jim, is a grand idea. But I think it’s naive to think it will succeed to accomplish the objective, which is to prevent incidents from occurring,” Tillerson said.
“The nature of this business, onshore shale gas development, is it has thousands of players. You talk about more than 7,000 producers, more than 2,000 service contractors. And to suggest that a Center of Excellence is somehow going to set the bar and all 7,000 will adhere to it I think is naive.”
Tillerson also countered that creating the Centers of Excellence might muddle the roles of regulators and operators. If the industry creates a new body to set standards and then there’s an accident by a drilling firm that was following the standards, it could create a chain reaction.
“If there is a failure of any industry participant within the purview of that COE, then, in effect, has the COE failed?” Tillerson asked. “And, therefore, the regulatory environment has failed. And, therefore, the activity must cease until that is corrected.”
“That is exactly what has been the post-Macondo environment we live in. Because an operator failed, the industry failed, the regulatory structures and the standards that the industry used failed and, therefore, the activity was ceased. It’s a very erroneous and mistaken conclusion, which none of the rest of the planet earth has come to.”
Tillerson said he’d rather stick with the system that’s been in place for decades, where best practices and standards are set by an arm of the American Petroleum Institute that’s separate from the lobbying arm.
But Hackett didn’t completely agree.
“Rex, I would ask you to think about it in light of the fact that API sits where it sits in terms of people being willing to listen to it,” Hackett said. “You and I both admire so much of what it is and stands for and what it’s done.”
But not everyone else has the same view of API, Hackett said, meaning officials at the local level might not be as open to taking recommendations from an organization that’s focused mainly on creating national standards and that’s tied to the industry’s lobbying arm.
“But I think that there is a gap between the API’s current approach of national standards and this more localized view of how you inform state regulators on what people are actually doing [in drilling operations] in a very organized fashion,” Hackett said.
Tillerson countered that a Center of Excellence would essentially be made up of the same experts that take place in the existing standard-setting system — namely the same group of engineers from industry and experts from academia and regulatory bodies.
And he also questioned whether there was really a need for significantly different standards from one shale basin to the other.
“I don’t understand it, I guess, technically, or operationally, other than the fact that sometimes you operate in the hills and sometimes you’re operating in the plains and sometimes you’re operating in the marshes,” Tillerson said. “But there’s not a whole lot of technical differences around operating in the Marcellus, operating in the Barnett, operating in the Haynesville in terms of the kinds of risks that have to be managed.”
The argument about whether to continue to rely on API or create a new body to develop best practices is similar to one raised earlier this year by William Reilly, one of the co-chairs of the presidential commission looking into the Deepwater Horizon Accident.
Reilly argued for a new offshore safety institute that was not attached to API because of the conflict of interest presented by API’s lobbying work. In the end API created its own safety institute anyhow.
How will the debate be settled in the NPR’s final report (due out later this year)? It wasn’t clear from last week’s meeting, but it is clear there’s plenty of room for argument.
