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By Sheila McNulty in Houston

US energy companies are converting rigs and trucks to run on natural gas, building fuelling stations and launching educational campaigns to increase demand for the domestic fuel that has flooded the market on the back of the shale boom.

With technological advances enabling gas production from shale rock, estimates of US supplies of natural gas have risen from 30 to 100 years’ worth, at current usage rates, with the US market now oversupplied.

Prices have been hovering at about $4 per million British thermal units, down sharply from 2008’s record of $13.69 per mBtu, and the industry believes they could remain at that level for several years.

To jump-start demand, Chesapeake Energy, the second-biggest natural gas producer in the US, is converting 100 of its own rigs, all its hydraulic fracturing equipment and almost 5,000 of its fleet vehicles to run on natural gas.

Taylor Shinn, Chesapeake’s senior director of corporate development, said the company was not going to stand by and wait for US demand to catch up with supply.

“This is not a technology problem,” Mr Shinn said. “We’re not waiting on an enhanced battery to make this product viable as a transportation fuel. What we’re waiting on is for economies of scale to develop.”

Chesapeake has pledged to redirect about 1-2 per cent of its forecast annual drilling budget away from efforts to increase natural gas supply towards projects to stimulate natural gas demand. Over the next 10 years, Chesapeake expects to commit $1bn towards investments to build crucial fuelling infrastructure and bringing gas-to-liquids fuels to market.

Chesapeake said converting the company’s medium and light-duty trucks to natural gas would reduce fuel costs by up to $20m a year. Converting drilling rigs and fracturing equipment would cut diesel fuel consumption by about 350,000 gallons a day, saving the company about $230m annually.

“The market needs a catalyst,” Mr Shinn said. “We felt it was a critical time for us to step up and provide that leadership for the benefit of our company and our country.”

ConocoPhillips also this week launched a campaign to promote the use of natural gas – now 40 per cent of its production – and a nationwide educational campaign.

Jim Mulva, ConocoPhillips’ chief executive, said using the country’s natural gas should be a very important part of US energy policy.

“It’s a big job creator,” Mr Mulva said. He noted that natural gas sustains 2.8m US jobs, directly and indirectly, with gas being extracted from shale fields in at least 15 states, including New York, Ohio and Pennsylvania – key election states.

“We believe that as the US enters the election campaign season, energy policy will be a key point of debate,” he said. “Hopefully, the debate will centre on using energy development, particularly of natural gas, to drive job creation.”

Other companies are installing natural gas fuelling stations across the country. US Steel, for example, has one for its vehicles, including a natural-gas fuelled tractor, at a plant in Pennsylvania. The industry notes that such companies can save as much as $2 a gallon compared with diesel.

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Offshore staff

WASHINGTON, D.C. – As a follow to its final investigative report on the Macondo disaster in the Gulf of Mexico, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) is continuing to define its reforms for offshore oil and gas regulation and oversight.

For drilling safety, BOEMRE says the following:

• Operators must demonstrate preparations to response to a blowout and worst-case discharge

• Permit applications must meet new standards for well design, casing and cementing, and these must be third-party certified by a professional engineer. Standards for exploration and development, equipment, safety, environmental safeguards, and oversight also are under development.

• A corporate compliance statement and review of subsea blowout containment resources is required

• BOEMRE will begin to use multi-person inspection teams.

On workplace safety, BOEMRE says it has imposed requirements for offshore operators to “maintain comprehensive safety and environmental programs.” This includes “performance-based standards for operations, equipment, safety, environmental safeguards and management oversight of operations and contractors. Also, a Safety and Environmental Management System must be developed and maintained.

The proposed SEMS rule is part of a series of reforms implemented by the Department of the Interior since the Deepwater Horizon oil spill. The proposed rule, which adds to the Workplace Safety Rule issued in October 2010, will add greater protection by supplementing operators’ SEMS programs with employee training, engaging personnel in safety management, and strengthening auditing procedures by requiring them to be completed by independent third parties, says BOEMRE.

BOEMRE is accepting public comments on the proposed regulations until Nov. 14, 2011.

The reorganization of the agency into two parts is continuing, and recruitment of personnel is under way.

Department of Interior Secretary Ken Salazar and BOEMRE Director Michael R. Bromwich also have established an Ocean Energy Safety Advisory Committee to provide guidance on offshore drilling safety, well containment, and spill response.

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By Associated Press, Published: September 15

PARIS — The International Energy Agency is ending an emergency program of releasing oil from rich-country reserves, an effort to increase supply amid disruptions prompted by Libya’s war.

The United States and 27 other countries agreed in June to release 60 million barrels of crude oil to the market to offset Libya-related disruptions, and stave off a spike in energy prices.

The Paris-based agency said Thursday that the collective action “has been terminated.”

The IEA’s governing board “concluded that the interrupted Libyan supplies have been successfully addressed” by the collective release and increased production from producer countries. It also notes weakening growth in oil demand.

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BOULDER, Colo., Sep 14, 2011 (BUSINESS WIRE) — There are currently about 12.6 million natural gas vehicles (NGVs) in use worldwide, and sales of NGVs vary widely from region to region and country to country. The majority of NGVs are located in Latin America, the Middle East, and Africa, particularly in countries like Pakistan and Iran that lack extensive gasoline refining capacity. In North America, due largely to a lack of convenient refueling stations, demand for NGVs is largely relegated to the fleet market. Worldwide sales of natural gas vehicles are expected to grow rapidly over the next five years, to 3.2 million units annually by 2016 from 1.9 million in 2010, according to a recent report from Pike Research. The consumer market will continue to lag growth in commercial fleets, however: three-quarters of the new growth between 2010 and 2016 will come in corporate and government sales.

As a portion of the worldwide total, the percentage of commercial NGVs will rise from 59% to 65% in that period, according to senior analyst Dave Hurst.

“Many manufacturers and industry observers are looking forward to the time when consumer NGVs become the next big thing,” says Hurst. “But the number of refueling stations remains too low for the consumer market to really take off in many parts of the developed world.”

One solution to the current inadequacies in NGV infrastructure is the spread of bi-fuel vehicles. Popular in Latin America, where almost 90% of NGVs have bi-fuel engines, these vehicles can run on either gasoline or compressed natural gas (CNG).

India, which has one of the largest fleets of CNG buses in the world, is expected to overtake Iran for the lead in NGV sales by 2014. By 2016 there will be 612,000 NGVs in India, according to Pike Research’s analysis. The strongest growth, however, will occur in the United States, where a compound annual growth rate (CAGR) of 25.4% will result in nearly 33,000 vehicles sold in 2016.

Pike Research’s report, “Natural Gas Vehicles”, provides a comprehensive examination of natural gas vehicle technologies, compressed and liquefied natural gas shipping and storage, governmental incentives and regulations, and key drivers of market growth. The report includes forecasts of NGV sales, refueling infrastructure, and natural gas usage through 2016 for light-duty vehicles and medium/heavy duty trucks and buses. Key market players are also profiled. An Executive Summary of the report is available for free download on the firm’s website.

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By Bernie Becker – 09/15/11 12:42 PM ET

The oil-and-gas industry has a message for the supercommittee: Let us get down to business.

On the heels of a recent study asserting the industry could create more than a million jobs over the next decade, American Petroleum Institute officials said Thursday they were ready to tell the 12 lawmakers on the deficit-reducing panel that the energy sector could help spark economic growth and rein in the national debt.

“You have a choice here,” Marty Durbin, API’s executive vice president, said on a conference call. “If you implement policies that allow this industry to get back to work, we can end up creating jobs.”

API officials also said on the call that they were organizing grassroots efforts to get their message across.

The group’s lobbying efforts come as Democrats continue to push for ending tax breaks for the oil-and-gas industry, with President Obama calling for the sector to pay more to help fund his $447 billion jobs bill.

Some Democratic supercommittee members have also signaled that the panel should look at eliminating credits and deductions used by the industry to roll back deficits.

But industry representatives argue that the Democratic push is short-sighted, and said Thursday they plan on making that point to supercommittee members.

In all, the study commissioned by API and conducted by Wood Mackenzie, a consulting firm, found that increasing energy development would add $127 billion to the Treasury by 2020.

Many of the actions that would be needed to increase oil-and-gas production, and thus increase jobs, wouldn’t require congressional action, Durbin added Thursday, specifically mentioning the controversial Keystone XL pipeline to Canada’s oil sands.

But increasing taxes on the industry, the study argues, would actually spark $27 billion in lost revenue over that time span, as the new tax policies would mean fewer projects get greenlighted.

On Thursday’s call, Durbin said that the industry is more than open to having policymakers examine the credits and deductions it uses as part of a broader tax reform effort.

But the API executive added that the industry already pays a higher effective tax rate than other sectors of the U.S. economy. “We shouldn’t be singled out in a punitive way for the tax provisions, the standard tax provisions that we have for our business,” he said.

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Thomas Pyle is the president of the Institute for Energy Research

On Wednesday, September 8, the Joint Select Committee on Deficit Reduction—or so-called “super committee”—held its inaugural meeting to discuss ways to curb federal spending and reduce the national deficit. At the meeting, each of the committee’s 12 members gave opening statements pledging to work toward the common goal of coming up with at least $1.5 trillion in savings over a 10-year period, but ideological disagreements on where those savings should come from were apparent. Senator Patty Murray, the Committee’s co-chair, said the following: “There is broad understanding among us that economic growth and job creation are the best ways to reduce the deficit and debt—though we certainly have some real differences regarding how to achieve that.”

“Differences” is a nice euphemism for “radically different approaches.”  While panel member Rep. Fred Upton called for “the kind of revenue you generate not with tax increases, but by harnessing our nation’s great resources,” fellow panel member Rep. Xavier Becerra insisted that “the individuals and groups who received the most benefits should be willing and ready to ante up to meet their patriotic duty, to contribute revenue.”  Becerra’s statement was clearly in reference to the oil and gas industry, which has become the primary target of those who believe that raising taxes on a productive industry is the best way to increase revenue. Although similar proposals have failed to gain passage in Congress, the super committee has indicated that everything is on the table—including tax increases.

Further complicating matters is the president’s jobs plan—unveiled September 6—which also recommends that a portion of the $447 billion price tag come from eliminating tax deductions for only the oil and gas industry. We know President Obama is a lawyer and not a mathematician, so we will cut him some slack, but the repeal cannot count towards both the committee’s cuts and serve as offsets for his jobs bill.

The wisdom of raising taxes on an industry that has been one of the sole bright spots in a down economy and that has the potential to create 1.4 million additional jobs is questionable, if you’re coming from a purely economic standpoint. North Dakota—which is home to the giant Bakken Shale Oil Formation—has the nation’s lowest unemployment rate at 3.3 percent, according to the latest Bureau of Labor Statistics data, and the average wage in the state’s oil and gas extraction industry is more than $90,000.

Furthermore, the one-time benefit of repealing a tax deduction for oil and gas while leaving it in place for all other manufacturing industries won’t exceed the costs by a long shot. According to a study by Louisiana State University Professor Joseph Mason, revisions to the Section 199 and Dual Capacity tax provisions would raise approximately $30 billion over 10 years, while resulting in a loss of $83.5 billion in reduced tax revenues. Worse yet, the study finds that targeting the oil and gas industry would cost the economy $341 billion in economic output and 155,000 jobs. A study by energy consulting firm Wood Mackenzie echoes these concerns, estimating a loss of 170,000 direct and indirect jobs by 2014 and 700,000 barrels per day in reduced domestic production.

That can’t bode well for a nation suffering from high energy costs and high unemployment.

Adding insult to injury, proponents of the discriminatory deduction repeal also argue that the industry is only being made to contribute its fair share, but apparently haven’t thought to have a look at the industry’s recent earnings reports. Reports for the first quarter of 2011 show that oil and gas industry earned 8.2 cents of net income per dollar of sales, compared with 19.4 cents for pharmaceuticals, 17.9 cents for beverage and tobacco products, and 9.2 cents on average for all other manufacturing industries.

On the taxation side of things, contrary to popular reports that oil and gas receives preferential tax treatment, the industry pays an effective rate of 41 percent while the average tax bracket for industrial companies is 26 percent. And yet, some would take away the deduction they receive for producing goods in America. That’s right—Section 199 is intended to incentivize the domestic production of goods by offering a deduction to manufacturers in the United States, but we want to repeal it for those who contribute both jobs and much-needed energy resources.

When will the president and Congress learn that the best way to create jobs and economic growth is to get out of the way?

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By Kevin Mooney

Up to 20 oil rigs could leave the Gulf of Mexico, in addition to the 11 that have already left, since the Obama Administration imposed a moratorium on deepwater oil and gas drilling in May 2010, a new report from FBR Capital Markets has concluded.

Unless the permitting process is accelerated, FBR analysts anticipate that anywhere from eight to 20 rigs could depart the deep waters within the Gulf. The moratorium was imposed in response to the explosion of British Petroleum’s (BP) Macondo oil well on April 20 of last year. The accident resulted in the death of 11 workers and caused an estimated five million barrels of crude oil to spill into the Gulf.

Although federal officials announced they were lifting the restrictions last October, a “de-facto moratorium” remains in effect that stifles energy production and undermines large and small businesses in the Gulf region, industry officials have argued.

“I don’t think the people in Washington D.C. who implement these policies have an understanding of how much this has impacted our economy, especially in Louisiana,” Renee Baker, the state director for the National Federation of Independent Business (NFIB), has observed. “We can’t just look at the large businesses to understand what’s happening, there are small businesses that do a lot of services for the rigs and they have been set back.”

Although the Department of Interior (DOI) has been issuing permits with “relatively few political barriers,” according to the report, there are “limited bureaucratic resources” available to meet existing demands.

But Bonner Cohen, a senior fellow with the National Center for Public Policy Research (NCPPR), does see a political agenda at work.

“What you are seeing in Louisiana is only a small piece of larger mosaic being put together by the Obama Administration to make affordable energy as inaccessible as possible,” he said. “From the administration’s war on coal to the serious consideration it is giving to imposing a nationwide regulation of hydraulic fracturing, to its shut down of deepwater drilling in the Gulf of Mexico, to its ‘endangerment finding’ from the EPA [Environmental Protection Agency], the administration is practicing its own form of selected industrial sabotage.”

The backlog of permits that have been approved, but not activated, must reach a level of 60 as opposed to the 30 that were counted at the end of August to support the active rig count, which now stands at 20, the report says. The current pace permitting pace is down dramatically from where it has been in recent years. Historically, there have been three times the number of permits in backlog than there have been deepwater rigs operating in the Gulf, FBR analysts point out.

“Between 2006 and 2010, there were typically three times the number of permits in backlog than there were deepwater rigs working in the GOM (Gulf of Mexico),” the report says. “…Using the August 2011 pace of eight unique well APDs (A Permit to Drill) per month, the best-case scenario would be a rig count of just 14 rigs, less than the 28 marketed rigs in the Gulf. However this assumes sustainable just in-time permitting which, in our opinion, is unlikely. Based on the historical 3X ratio between APD backlog and rig count, a pace of 27 permits per month would be needed to support 28 rigs by the end of the year.”

FBR has also identified “structural headwinds” that include “hiring and funding constraints, potential safety and permitting legislation, pending drilling safety regulation revisions and ongoing environmental litigation,” that will specifically impact the Bureau of Ocean Energy Management Regulation and Enforcement (BOEMRE)’s ability to improve upon the current pace of permitting.

In a letter addressed to DOI Secretary Ken Salazar and BOERME Director Michael Bromwich, Sen. David Vitter (R-La.) expressed his “ongoing concern with the pace of permitting for offshore production in the Gulf of Mexico.”

The latest figures available show there were 19 floating units operating in the Gulf, which up from a low of four in third quarter of 2010, but down from the average of 28 in the period ranging from 2007-2009, Vitter told federal officials in his letter.

“A rough estimate would suggest that each rig consumes 3 permits per year in order to stay actively working in the Gulf (28 rigs divided by 84 permits equals 3 permits/rig), Vitter wrote.  “Given that a typical deepwater well takes approximately 120 days to drill, one can also assume that the roughly estimated numbers are fairly accurate.  Accordingly, at Interior’s 2011 pace of permitting what is the anticipated attrition rate of rigs from the GOM?  Over the next two years, what are the anticipated production and employment impacts from the current pace of permitting? ”

Vitter also inquired the number of times permit requests have been filed. Some operators claim they have filed an average of 3.6 times, with multiple permits surpassing eight times.

The letter then asks federal officials to address the economic fallout attached to diminished rig activity.

“For each rig not operating in the Gulf of Mexico, what is the multiplier effect on the Gulf economy?”

Vitter asks.  “How are small businesses, including but not limited to helicopter firms, restaurants, welders, carpenters, marinas, and hotels impacted by the loss of each rig?  How is our economy impacted if in 2012 there are 1/3 the drilling rigs working in the Gulf than there were in 2009?”

The letter concludes by asking how much money the federal government has awarded to various environmental groups, which have filed suit over a new drilling plan. It reads as follows:

“On June 9, 2011 the Natural Resources Defense Council, Defenders of Wildlife, Center for Biological Diversity, Sierra Club, Inc., Gulf Restoration Network, Inc, and Florida Wildlife Federation filed suit challenging BOEMRE’s approval of Shell’s drilling plan.  Can you please provide the total amount in attorneys’ fees that Interior Department has awarded these environmental groups under the Equal Access to Justice Act and Judgment Fund for fiscal years 2008 through 2011?

The oil rigs that have departed the Gulf include the Stena Forth, Ocean Confidence, Ocean Endeavor, Transocean Marinas, Ensco 8503, Ensco DS-4, Noble Clyde Boudreaux, Discoverer Spirit, Transocean Amirante, Noble Paul Romano and Ocean Monarch.

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HOUSTON, Sept. 14

By Paula Dittrick

OGJ Senior Staff Writer

A final report into the April 2010 Macondo deepwater well blowout and resulting massive oil spill in the Gulf of Mexico off Louisiana identified a number of causes for the blowout, concluding that a central cause was failure of a cement barrier in the production casing string.

The report comes from a Joint Investigation Team (JIT) of the US Bureau of Ocean Energy Management, Regulation, and Enforcement and the US Coast Guard. On Apr. 22, JIT released Vol. I, which outlined the panel’s findings on five aspects of the incident under USCG jurisdiction.

The incident killed 11 people on the semisubmersible. Many lawsuits remain pending regarding the spill that has been estimated at nearly 5 million bbl of oil and that took 87 days to stop. Industry, lawmakers, and regulators have altered offshore drilling procedures and rules since the incident, and BP PLC has called itself “a changed company (OGJ Online, Apr. 14, 2011).”

The Sept. 14 Vol. II report includes findings on the causes, both direct and contributing to the blowout of the well, operated by BP, and the resulting explosion and fire on Transocean Ltd.’s Deepwater Horizon semi.

The report concludes that BP, Transocean, and Halliburton’s conduct violated federal offshore safety regulations under BOEMRE’s jurisdiction. Vol. II also includes recommendations for the continued improvement of the safety of offshore operations. Halliburton Co. was responsible for the cement work.

“The loss of life at the Macondo site on Apr. 20, 2010, and the subsequent pollution of the Gulf of Mexico through the summer of 2010 were the result of poor risk management, last-minute changes to plans, failure to observe and respond to critical indicators, inadequate well control response, and insufficient emergency bridge response training by companies and individuals responsible for drilling at the Macondo well and for the operation of the Deepwater Horizon,” the report said.

At the time of the blowout, the rig crew was involved in temporary abandonment activities to secure the well after drilling was completed and before the Deepwater Horizon left the site, investigation said.

“In the days leading up to Apr. 20, BP made a series of decisions that complicated cementing operations, added incremental risk, and may have contributed to the ultimate failure of the cement job,” the report said. “These decisions included:

• The use of only one cement barrier. BP did not set any additional cement or mechanical barriers in the well, even though various well conditions created difficulties for the production casing cement job.

• The location of the production casing. BP decided to set production casing in a location in the well that created additional risk of hydrocarbon influx.

• The decision to install a lockdown sleeve. BP’s decision to include the setting of a lockdown sleeve (a piece of equipment that connects and holds the production casing to the wellhead during production) as part of the temporary abandonment procedure at Macondo increased the risks associated with subsequent operations, including the displacement of mud, the negative test sequence and the setting of the surface plug.

• The production casing cement job. BP failed to perform the production casing cement job in accordance with industry‐accepted recommendations.”

Investigators concluded BP and Transocean crew members on the Deepwater Horizon “missed the opportunity to remedy the cement problems when they misinterpreted anomalies encountered during a critical test of cement barriers called a negative test, which seeks to simulate what will happen if the well is temporarily abandoned and to show whether the cement will hold against hydrocarbon flow.”

JIT noted BP and Transocean had problems in detecting a kick on Mar. 8, 2010, that went undetected for 30 min. BP did not conduct an investigation into the reasons for the delayed detection of the kick, the investigation report said.

“Ten of the 11 individuals on duty on Mar. 8, who had well control responsibilities, were also on duty on Apr. 20,” the report said.

Investigators also concluded that simultaneous rig operations complicated the crew’s well monitoring efforts and that the crew bypassed a critical flow meter once it discovered a hydrocarbon flow.

JIT concluded stronger and more comprehensive federal regulations might have reduced the likelihood of the Macondo blowout.

In the aftermath of the accident, BOEMRE already has changed some regulations involving cementing procedures and testing, blowout preventer configuration requirements and testing, well integrity testing, and other drilling operations (OGJ Online, July 20, 2011).

The report concludes with recommendations to improve the safety of offshore drilling operations, including:

• Well design. Improved well design techniques for wells with high flow potential, including increasing the use of mechanical and cement barriers, will decrease the chances of a blowout.

• Well integrity testing. Better well integrity test practices (e.g., negative test practices) will allow rig crews to identify possible well control problems in a timely manner.

• Kick detection and response. The use of more accurate kick detection devices and other technological improvements will help to ensure that rig crews can detect kicks early and maintain well control. Better training also will allow rig crews to identify situations where hydrocarbons should be diverted overboard.

• Rig engine configuration (air intake locations). Assessment and testing of safety devices, particularly on rigs where air intake locations create possible ignition sources, may decrease the likelihood of explosions and fatalities in the event of a blowout.

• Blowout preventers. Improvements in BOP stack configuration, operation, and testing will allow rig crews to be better able to handle well control events.

• Remotely-operated underwater vehicles (ROVs). Standardization of ROV intervention panels and intervention capabilities will allow for improved response during a blowout.

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