Regulatory revival near for U.S. energy industry

WASHINGTON – The energy industry is bracing for a suite of new environmental mandates and safety rules as President Barack Obama’s second-term administration flexes its regulatory muscle.

The regulatory revival will include finalizing a handful of looming regulations that were stalled before the Nov. 6 election.

“The Obama administration begins its second term with dozens of unfinished environmental items on the to-do list, including new regulations for coal, electric generation, hydraulic fracturing (and) offshore drilling,” said Benjamin Salisbury, an analyst with FBR Capital Markets.

Here are five coming regulations that will affect the way oil and natural gas companies do business.

1 Hydraulic fracturing

Energy companies would have to disclose the chemicals they use when drilling for oil and natural gas on federal lands, under a rule proposed by the Interior Department’s Bureau of Land Management in May.

The agency is still evaluating nearly 200,000 public comments on the proposal and tweaking the mandate in response to concerns raised by industry and environmentalists.

The proposed rule aims to tighten standards for hydraulic fracturing, which involves pumping a mix of sand, chemicals and water underground to free hydrocarbons trapped in dense rock formations.

Although the regulation would cover only a sliver of the United States’ onshore oil and natural gas production – roughly 6 percent and 13 percent respectively, according to ClearView Energy Partners – industry officials fear it could provide the foundation and justification for broader mandates in the future.

The proposed rule also would impose new well construction standards, testing requirements and mandates for managing and storing water that flows back to the surface as part of the fracturing process.

Environmentalists were disappointed that the Interior Department so far has decided not to force oil and gas companies to disclose the chemicals they plan to use before pumping the substances underground.

Meanwhile, energy companies argue that the mandates will discourage energy production on federal lands by increasing compliance costs.

The industry insists state regulators are better positioned to oversee hydraulic fracturing, given wide regional differences in geology.

2 Emergency offshore drilling equipment

The 2010 Gulf of Mexico oil spill disaster revealed shortcomings in the blowout preventers used to safeguard off- shore wells and spurred regulators to consider mandates that would boost the performance of those emergency devices.

During an emergency, shearing and sealing rams in the devices can be activated to cut drill pipe and block off the well hole. But a forensic investigation of the blowout preventer used at BP’s failed Macondo well concluded that a powerful rush of oil and gas caused drill pipe to buckle and shift, ultimately preventing rams on the device from cutting the pipe and sealing the hole.

The Bureau of Safety and Environmental Enforcement is likely to require more frequent maintenance of blowout preventers, stronger training for the people operating them and better sensors to track their performance deep underwater.

The Interior Department agency also is likely to lay out specific standards for the devices’ performance, such as a mandate that blowout preventers be capable of cutting through the thick tool joints where pieces of drill pipe connect.

Another possible requirement: A second set of blind shear rams to increase the odds of successfully cutting through drill pipe, a redundancy already being used at some offshore drilling sites today.

The safety bureau appears likely to give the industry a generous phase-in period to allow time for blowout preventers to be redesigned, sold and installed on drilling rigs used in U.S. waters.

3 Offshore safety

In September 2011, the Bureau of Safety and Environmental Enforcement proposed a rule that would add teeth to a requirement for oil and gas companies working offshore to implement programs for systematically identifying risks and reducing those hazards.

Bureau leaders say they are on track to finalize the regulation early this year, for the first time requiring third-party audits of the “safety and environmental management systems” mandated offshore in 2010.

The new measure also would set out guidelines for reporting unsafe work conditions, mandate an employee participation program for implementing the programs and would set fresh requirements for establishing who has the ultimate work authority for operational safety and decision-making at any given time.

The rule also would force companies working offshore to create stop-work policies authorizing all employees to halt work if they see risky or dangerous activity.

The industry has raised concerns about how the bureau’s new rules would overlap with Coast Guard regulations.

4 Offshore production equipment

The last significant rewrite of oil and gas production safety system regulations was in 1988, before the industry started moving into ever-deeper waters.

Now, the Bureau of Safety and Environmental Enforcement is aiming to revise the rules with a twist: mandates for broader life-cycle analysis of critical equipment, with standards and safety elements embedded in every step of the process, from design to retirement.

Bureau Director James Watson has said he envisions a system that includes design verification, quality assurance, a process to identify design defects, repair and maintenance requirements and standards certifying equipment and personnel.

5 Sulfur emissions

The Environmental Protection Agency is expected to formally propose early this year a requirement for cutting the smog-forming sulfur emissions allowed from gasoline, after a long delay tied to fears the mandate could cause fuel costs to spike.

The standards probably would force refiners to slash sulfur emissions in the fuels they produce from 30 parts per million to 10 parts per million.

These fuels would allow catalytic converters to work more effectively, so vehicles would emit fewer smog-forming compounds. Automakers then could manufacture cleaner combustion engines, helping them meet their own environmental mandates.

But oil refiners worry they would be hit with new costs, potentially squeezing profits while also raising gasoline prices.

Estimates range from an extra 9 cents per gallon, according to an industry-backed study, to the EPA’s prediction of just one penny more per gallon.

Supporters argue that the short-term increase in gasoline prices would be outweighed by cuts in health care costs tied to a reduction in respiratory illnesses and the severity of asthma attacks.

Industry lobbyists also are making the case that the mandate could do more harm than good, by forcing refiners to invest in energy-hogging hydrotreaters to strip sulfur from gasoline and consequently boosting greenhouse gas releases at their plants.