Sensible risk management or bureaucratic over-kill? That�s the question raised by the regulatory-inspired delays Karoon Gas and its partner ConocoPhillips are facing as they wait to start their planned Browse Basin drilling program.
A week ago Karoon told the ASX that as part of the normal preparation for the drilling program off the north-west coast of Australia regulatory approval had been sought under the Environment Protection and Biodiversity Conservation Act.
Unhappily for Karoon and ConocoPhillips, the Commonwealth Department of Sustainability, Environment. Water, Population and Communities decided to declare the proposed drilling a "controlled action" and therefore subject to far more intense scrutiny which could delay the program for anything up to a year or even more.
With drilling rigs costing up to $500,000 a day and rigs having to be booked 12 to 18 months in advance, that kind of delay could be very expensive. Apart from any penalties the partners might face from the rig operator there would also be the complication and cost of getting access to a new rig.
The partners have provided more information to the department and have asked it to reconsider its decision. They have added additional environmental controls that they hope with satisfy the department and are still planning for drilling to start in the first half of this year.
The question raised by their experience is whether the declaration by the department relates to the specific of their program and their application or whether it reflects a much deeper risk-aversion by the bureaucrats in the wake of the 2009 Montara oil spill in the Timor Sea and last year�s catastrophic Deepwater Horizon blow-out in the Gulf of Mexico.
It isn�t at all surprising that the department has adopted a more stringent approach following those incidents. The Montara spill was the first well blow-out in 25 years and, while the damage it caused was contained and relatively modest, the Deepwater Horizon experience underscored the potential for disaster with deep water wells.
The inquiry into the Montara spill was critical of both the operator, the Thai-based PTTEP Australasia, and the regulator, the Northern Territory�s Department of Resources. Following the spill the NT government and the commonwealth government agreed to a far more robust process for assessing proposals for offshore drilling. The federal department also initiated a review of the integrity of wells, focusing particularly on those completed and suspended since 2005.
The response of the governments and the bureaucrats to the Montara experience was necessary and unavoidable, particularly after the Deepwater Horizon incident reinforced their initial conclusions.
The big oil and gas companies operating offshore say that it is taking longer, and costing more to obtain approval for drilling and the department is seeking more and more rigorously-developed information and environmental risk mitigation. Even proposals for seismic exploration are being more closely scrutinised and questioned.
It doesn�t appear, however, that the kind of departmental intervention and potential delays faced by Karoon and ConocoPhillips is commonplace. Certainly none of the other offshore operators have publicly � or privately � cited similar experiences or complained about over-zealous or risk-averse bureaucrats.
That suggests that ConocoPhillips might not have properly appreciated the degree to which the offshore drilling environment has changed post-Montara and Deepwater Horizon in its initial submission to the department.
There is a fine balance between ensuring that operating standards in the offshore oil and gas standards are as safe as possible and ensuring the sector operates as efficiently as possible, given the scale of the costs involved.
Clearly, the absolute priority � for the industry as well as the bureaucrats and their political masters � is in avoiding another incident.
The industry will, however, be monitoring the fate of Karoon and ConocoPhillips program closely and watching for similar regulatory interventions to determine whether their experience is unique or part of a larger, even more interventionist and cost and time-consuming approach by the environmental bureaucrats than they had anticipated.
KAR Price at posting:
$7.56 Sentiment: None Disclosure: Not Held
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