Posts from ‘October, 2006’

By EDMUND L. ANDREWS
October 31, 2006

WASHINGTON, Oct. 30 — The Interior Department has dropped claims that the Chevron Corporation systematically underpaid the government for natural gas produced in the Gulf of Mexico, a decision that could allow energy companies to avoid paying hundreds of millions of dollars in royalties.

The agency had ordered Chevron to pay $6 million in additional royalties but could have sought tens of millions more had it prevailed. The decision also sets a precedent that could make it easier for oil and gas companies to lower the value of what they pump each year from federal property and thus their payments to the government.

Interior officials said on Friday that they had no choice but to drop their order to Chevron because a department appeals board had ruled against auditors in a separate case.

But state governments and private landowners have challenged the company over essentially the same practices and reached settlements in which the company has paid $70 million in additional royalties.

In a written statement, the department’s Minerals Management Service said it would have been useless to fight Chevron.

“It is not in the public interest to spend federal dollars pursuing claims that have little or no chance of success,” the agency said. “M.M.S. lost a contested and controversial issue” before the appeals board. “Had we simply wanted to capitulate to ‘big oil,’ the agency would not have issued the order in the first place.”

Chevron said in a written statement that it “endeavors to calculate and pay its oil and gas royalties correctly,” and it said that the Interior Department had agreed.

The agency notified Chevron of its decision in a confidential letter on Aug. 3, which The New York Times obtained recently under the Freedom of Information Act.

The reversal in the case, which involves Chevron’s accounting of natural gas sales to a company it partly owned, has renewed criticism that the Bush administration is reluctant to confront oil and gas companies and is lax in collecting royalties.

“The government is giving up without a fight,” said Richard T. Dorman, a lawyer representing private citizens suing Chevron over its federal royalty payments. “If this decision is left standing, it would result in the loss of tens of millions, if not hundreds of millions, of dollars in royalties owed by other companies.”

In return for the right to drill on federal lands and in federal waters, energy companies are required to pay the government a share of their proceeds. Last year, businesses producing natural gas paid $5.15 billion in government royalties.

But the Bush administration has come under fire on Capitol Hill for its record on collecting payments. While the Interior Department has sweetened incentives for exploration and pushed to open wilderness areas for drilling, it has also cut back on full-scale audits of companies intended to make sure they are paying their full share.

Administration officials knew that dozens of companies had incorrectly claimed exemptions from royalties since 2003, but they waited until December 2005 to send letters demanding about $500 million in repayments.

In February, the Interior Department acknowledged that oil companies could escape more than $7 billion in payments because of mistakes in leases signed in the 1990s. Top officials are trying to renegotiate those deals, but some Republicans and Democrats have complained that the administration is dragging its feet.

In addition, four government auditors last month publicly accused the Interior Department of blocking their efforts to recover more than $30 million from the Shell Oil Corporation, the Kerr-McGee Corporation and other major companies.

“This latest revelation proves that the Bush administration is incapable of preventing big oil companies from cheating taxpayers,” said Representative Edward J. Markey of Massachusetts, a senior Democrat on the House Committee on Resources. “The public has been systematically fleeced out of royalties that these companies owe for the privilege of drilling for oil and gas on lands belonging to all of us.”

The Chevron case offers a glimpse into what is normally a secretive process. To protect what energy companies consider proprietary information, the Interior Department does not announce that it is accusing companies of underpaying royalties nor does it announce its settlements in these disputes. The government also does not disclose how much money each company pays in royalties.

In theory, companies are required to pay the government a royalty of 12 percent to 16 percent of their sales. In practice, the definition of sales is as convoluted as a Rubik’s Cube.

In the Chevron case, auditors in the Minerals Management Service were addressing an issue that had bedeviled royalty enforcement for decades: How does the government make sure it gets its due when companies sell natural gas to businesses they partly own?

In 1996, Chevron sold its holdings in more than 50 processing plants to Dynegy in exchange for a 26 percent stake in the natural gas company, which is based in Houston. For the next seven years, Chevron sold virtually all its domestic natural gas to Dynegy for processing.

In their original accusations, dating to 2001, the auditors asserted that Chevron had understated sales, and hence its royalty obligations, by inflating costs for processing gas at Dynegy.

Companies are allowed to deduct processing costs from their sales revenues when they calculate their royalty obligations. Processing involves separating water and a variety of liquid fuels like propane and methane from raw natural gas. The auditors’ accusations were not unique. State officials in New Mexico challenged Chevron over the same issue — “non-arms-length” deals, as regulators call them — and Chevron agreed to pay $10.4 million in extra royalties without admitting wrongdoing. Private property owners who leased land to Chevron sued over the same issue in Oklahoma, and the company paid $60 million last year to settle out of court.

“The natural gas processing business lends itself almost uniquely to chicanery,” said Spencer Hosie, a lawyer who has represented the states of Louisiana and Alaska in several court fights over oil and gas royalties. “It is a complicated and opaque business, and there are many opportunities to shade judgments and numbers.”

From 2001 to 2003, after detailed audits of several Chevron leases, the Interior Department said the company was reducing its “sales value” by exaggerating processing costs at six of Dynegy’s many plants. At one plant, auditors estimated Chevron had claimed five times the actual costs.

At first glance, the suspected underpayments seemed trivial: about $6 million out of hundreds of millions in royalties. But the audits were limited to only a handful of plants. Had the Interior Department pressed its claims successfully, it could have recovered money tied to all the other plants, and for other years.

Chevron paid the $6 million but appealed. The file in that case now runs more than 900 pages, most of it still off-limits to the public.

Mr. Hosie, who represented Louisiana in a lawsuit that led to a $100 million verdict against Chevron over underpaid oil royalties, expressed surprise at the federal government’s decision in the natural gas case.

“Is it even remotely likely that oil companies systematically underpay private royalty owners and state governments, but pay the federal government perfectly properly?” Mr. Hosie asked. “Isn’t it more likely they are underpaying everybody?”

A Chevron spokesman, Donald Campbell, said laws regulating state and private leases often differed significantly from those of the federal government. “The rules governing valuation vary from jurisdiction to jurisdiction,” Mr. Campbell said in a statement.

Chevron argued that New Mexico’s rules presumed that a deal was “not at arms length” — and that costs had to be calculated differently — if one company owned 10 percent to 50 percent of the other. The federal regulations, Chevron said, required auditors to consider additional factors before making such a determination. Because of a backlog, the appeals board had not considered Chevron’s appeal when Interior Department officials decided they could not win. But if the appeals board had overruled the auditors, federal regulations would have allowed the interior secretary to let a federal court decide the issue.

In their letter to Chevron, department officials did not say the underlying facts had changed. Rather, they noted that the agency’s Board of Land Appeals had rejected similar accusations about non-arm’s-length agreements involving two other companies, Vastar Resources and Southern Companies.

The appeals board ruled in 2005 that the Minerals Management Service had failed to show that Vastar had any real control over a partnership it had formed with Southern to sell its gas. The board said Vastar had provided “uncontroverted evidence” that the sales prices had been negotiated at arm’s length between companies with “opposing economic interests.”

But the Chevron case differed in several important ways.

The government never audited Vastar in reaching its conclusions and had provided a largely theoretical opinion when the company asked for guidance. By contrast, auditors had scrutinized Chevron, which is based in San Ramon, Calif., and Dynegy and backed their arguments with supporting data.

Chevron’s ties with Dynegy also appeared to be closer than those between the other companies. Chevron described Dynegy as an affiliate in some reports to shareholders. Chevron was also Dynegy’s biggest supplier of raw natural gas, its biggest customer for gas processing and one of its biggest for processing byproducts like propane and methane.

Administration officials said they had “carefully reviewed” similarities and differences between the cases, but offered little elaboration.

“We recognize that other parties may assert various arguments regarding the relationship between the Vastar and Chevron situations,” the Minerals Management Service said in its written response to questions, “but the agency’s evaluation and deliberative processes are privileged.”

John Bemis, the assistant commissioner for gas and minerals in New Mexico, said his state was challenging a growing number of such alliances. In addition to the $10.4 million royalty settlement with Chevron, New Mexico persuaded ConocoPhillips to settle a similar case in August for $9.5 million and is negotiating with BP in a third case.

Interior Department officials have shown little interest in evidence from either New Mexico’s experience or a current court fight with Chevron over federal royalties.

On July 11, three weeks before the department dropped its case against Chevron, Mr. Dorman and other lawyers involved in a Texas lawsuit against Chevron wrote to Interior Department officials. The lawyers, who represent a whistle-blower seeking to recover money for the federal government, said they were suing Chevron over the same issues the department had raised.

“All we were saying was that they should wait to see what evidence we turned up, and that we would gladly share everything we had with them,” Mr. Dorman said. His firm faxed a letter to the policy appeals division. Getting no response, the lawyers sent a copy by U.P.S. Six days later, it was returned. The reason, according to the U.P.S. label: “Receiver did not want, refused delivery.”

The agency confirmed in a statement that it knew of the lawyers’ case. Asked why it refused to accept their letter, the Minerals Management Service said it could not comment “because these matters are the subject of pending litigation.”

By Upstream staff

Nigerian unions today threatened to shut all oilfields operated by Italian oil company Agip unless it paid staff a security bonus reflecting the rising risks of working in the Niger Delta.

The strike threat came as protesters left two of the four oil pumping stations they were occupying in Rivers State, and news emerged of another oil facility invasion in neighbouring Bayelsa.

Unions threatened to close all 200,000 barrels per day of crude oil produced by Agip, a unit of Italy’s Eni, from tomorrow unless the company agreed to the extra pay.

“We decided to shut down facilities by tomorrow if the management refuses to accept our demands,” Kala Otaji, chairman of the Agip branch of white collar union Pengassan, told Reuters.

Unions argue the company has shown bias against its Nigerian workforce by providing extra security only to expatriates in the face of a growing wave of violence in Africa’s oil heartland.

Dozens of oil workers – mostly foreign – have been kidnapped this year in a rising wave of attacks against the industry in Nigeria.

At Agip offices in Port Harcourt, the capital of Rivers State, many workers began a strike today to pile pressure on the management. The company was not available for comment.

Villagers of the Kula community have vacated two of four oil flow stations occupied since Wednesday, but company sources said output of 60,000 barrels per day was still shut and the dispute was unresolved.

“As a mark of respect for the state government we have allowed the reopening of two flow stations, Ekulama I and Belema,” said Kula community leader Dan Opusingi.

Both stations are operated by Anglo-Dutch supermajor Shell, but a company spokesman could not confirm Opusingi’s information.

Shell has already reduced output in another part of the Niger Delta by 500,000 bpd since February following a wave of militant attacks.

Ekulama I, which normally pumps 9000 bpd, was already shut down prior to last week’s invasion by villagers because of fighting in the area between militants and troops earlier in October.

Before the siege, Shell and Chevron were pumping about 62,000 bpd from Belema, Ekulama II and Robertkiri.

“We have not resumed production from those facilities,” a Shell source said, adding that some of the facilities had been vandalised during the occupation.

Opusingi said the two oil majors had rejected the community’s demand for contracts to supply speed boats and food to the oil platforms.

“We have lost trust in the companies,” he said, adding that a meeting was planned for this evening between the community, the companies and the Rivers state government.

Disputes between oil companies and communities who accuse them of not keeping promises of jobs and development are common in the impoverished Niger Delta, which accounts for all of Nigeria’s oil and gas production.

In a separate incident, a source at Agip said youths in neighbouring Bayelsa state had invaded an oil pumping station at Clough Creek on Saturday night and were still occupying it.

An Eni spokesperson in Milan said there was practically no impact on the company’s production there.

Tuesday, October 31, 2006. Issue 3530. Page 1.
By Miriam Elder
Staff Writer  
 
EU Energy Commissioner Andris Piebalgs urged Russia on Monday to improve its investment climate and cautioned that the country needed a lot of cash quickly if it hoped to meet the growing European demand for natural gas.

A senior U.S. official, meanwhile, criticized increasing energy cooperation between Europe and Russia.

Piebalgs’ remarks came during a Moscow conference aimed at bolstering energy dialogue between the European Union and Russia. In contrast, the United States has all but abandoned energy talks after the 2003 arrest of Yukos founder Mikhail Khodorkovsky, the leading proponent of cooperation between U.S. and Russian companies.

“There is a recognition that there is a need for secure and predictable investment conditions to both the European and Russian companies,” Piebalgs said.

Dark clouds are hanging over Shell-led Sakhalin-2, the country’s largest foreign investment project, and several other large oil and gas ventures after authorities threatened to shut them down over possible environmental violations. Some investors fear the threats are linked to a state drive to secure control over energy resources.

Piebalgs said the EU would like more information about what the state is thinking. “The regular flow of information with respect to policy will increase our understanding,” he said.

He added: “There is also a need for a level playing field in terms of market access and access to infrastructure, including third-party access to pipelines in both Russia and the EU.”

The EU has long urged Russia to let European companies have access to its natural gas pipelines, and Piebalgs warned that Gazprom’s monopoly on gas production and exports might make it harder for the company to gain access to European retail markets.

The Kremlin has said it is seeking “strategic reciprocity” from Europe. Industry and Energy Minister Viktor Khristenko stressed that point Monday, telling the conference that Russia was seeking “mutual access to markets.”

“We must coordinate our energy strategy together,” he added.

With European gas consumption due to grow by two-thirds in the next 20 years, many countries have begun looking increasingly to Russia to meet anticipated demand. Europe currently imports one-half of its gas, but Piebalgs said that amount was set to jump to three-quarters by 2030.

The EU is seeking “transparency and certainty” that significant investment will be made in the near future to meet the demand, Piebalgs said. “There is a need for investments in new oil and gas fields to be made in good time,” he said.

Europe already relies heavily on Russia for gas, importing around 25 percent of its total supply from its eastern neighbor, with Germany leading the pack. That amount will rise to 33 percent within a decade, said Matthew Bryza, U.S. deputy assistant secretary of state for European and Eurasian affairs.

Bryza criticized Europe’s dependence on Russian gas and took special issue with the $6 billion North European Gas Pipeline project, which is to ship Russian gas under the Baltic Sea to Germany.

“That project simply raises the question what diversification means when it comes to gas supply,” Bryza said in an interview published Monday in the Financial Times Deutschland. “If you live in Germany, you do not want to go through what happened last winter with Ukraine.”

Gazprom briefly cut gas to Ukraine amid a price dispute in January, causing a drop in supplies to Europe. Most Europe-bound gas goes through Ukrainian pipelines.

Bryza also warned that growing European support for the Baltic pipeline could undermine the continent’s solidarity in negotiations with Russia, since the pipeline bypasses Poland.

State-controlled Gazprom holds a 51 percent stake in the pipeline, with the remainder held by Germany’s E.On and BASF, which are to cede some shares to Dutch Gasunie in a deal signed this month.

“Very often the monopolist will work to cut a specific deal with an individual country,” Bryza said in an apparent swipe at Gazprom. “If that happens, it’s much harder for Europe to stand together.”

EU leaders put on a united front during energy talks at a mini-summit with President Vladimir Putin in Helsinki this month.

Sweden and Finland expressed concern Monday about the environmental impact of the Baltic pipeline. Swedish Foreign Minister Carl Bildt said Sweden would demand an environmental study of the effects of the pipeline. Defense Minister Sergei Ivanov, who is visiting Stockholm and will meet Bildt on Tuesday, offered reassurances. “The construction will be done in a very open and transparent way, with every consideration to environmental issues,” he said. Ivanov said the Navy would help Gazprom lay the underwater pipeline.

Piebalgs also said Monday that attempts to convince Russia to ratify the international Energy Charter Treaty were no longer the focus of the energy dialogue but that the issue was still under discussion. Russia has refused to ratify the treaty because of its accompanying Transit Protocol, which would open its pipeline monopoly to third parties.

October 31, 2006

There is much talk, some of it vacuous, about a “tipping point” for the global climate. But the debate has certainly reached a tipping point. The Treasury has published Sir Nicholas Stern’s review when public concern is mounting and all three main political parties are scrambling to claim a green mantle.

Sir Nicholas acknowledges that no one can predict the consequences of climate change with complete certainty. There is no need, after all, to extrapolate into fantasy catastrophe, as far too many “forecasters” are wont to do. But Sir Nicholas believes that enough is now known to take a very sober and sobering view of the risks — and that these make action a necessity. His calculations are certainly compelling: he estimates that spending 1 per cent of GDP each year to tackle climate change would save potential costs of between 5 to 20 per cent of GDP by the end of the century. 
 
The report is absolutely right to take a rigorous look at the potential costs of adaptation and mitigation. Too often this part of the analysis has been missing from the breathless depictions of climate change in the style of The Day after Tomorrow (in which an icy tidal wave engulfs New York). Global warming clearly represents an enormous challenge to human ingenuity, and to some wasteful human habits. But we need as much objectivity as possible about the risks.

International co-operation is clearly essential to combating this problem. But international co-operation cannot mean that all countries contribute equally. Some politicians still seek to argue that there is no point in Western nations taking steps to combat global warming while China, for example, is opening one new coal-fired power station every week. This is jingoistic nonsense. Developing countries such as India and China may be the fastest growing contributors to greenhouse gas emissions, but this must be seen in context. The average US citizen still produces six times more carbon emissions than the average Chinese citizen, according to the World Resources Institute. It is incumbent on the West to take a lead.

Furthermore, countries that take a lead in reducing their energy use will undoubtedly benefit. While politicians continue to posture — some EU member states almost sank the EU Emissions Trading Scheme at birth, by doling out too many permits to pollute — many businesses are racing into the future. They are demanding more certainty with which to make investment decisions. James Smith, chairman of Shell UK, expressed the hope yesterday that the Stern review would prompt action to help to give UK companies first-mover advantage in the low-carbon economy of the future.

Some companies are way ahead of the politicians. While the Chancellor should be congratulated on commissioning this report, he might also think about how to make it easier for business to be green. The climate change levy, for example, is a windfall tax on energy, not a targeted tax on carbon. Business will find it difficult to respond to changes in the environment, if the environment is hostile to business.

The Stern review argues that the world does not need to choose between averting climate change and promoting growth and development. Sensible decisions, not emotional responses, are required and the planet deserves the benefit of the doubt.
 
http://www.timesonline.co.uk/article/0,,542-2429203.html
 

Natural resources 
October 31, 2006
Need to Know

BP had a “checkbook mentality” towards safety and was aware of maintenance backlogs and unsafe equipment at Texas City years before the fire that killed 15 workers in 2005, said US safety officials. 

US crude oil futures fell more than $2, dropping under $59 a barrel, as concerns eased about a threat to Saudi Arabia infrastructure. Industry sources also pointed to a report of slower China demand growth and fund selling.

Shell said it returned to service the smaller of two crude units at its joint-venture refinery in Deer Park, Texas, as scheduled. The unit, which can process 70,000 barrels per day of crude oil, was shut down for 21 days of planned work.

http://business.timesonline.co.uk/article/0,,9072-902468.html

(Lord Browne: facing demands to testify in a Texas court)

By Russell Hotten, Industry Editor Last Updated: 1:11am GMT 31/10/2006

An interim report into a fatal oil refinery explosion accuses BP of ignoring “catastrophic safety risks” and of knowing about “significant safety problems” at another 34 facilities around the world.
 
The US Chemical Safety Board (CSB), which publishes the damning findings today, believes that BP may have been aware for years of major problems at its Texas City refinery, which exploded in March last year killing 15 workers and injuring 180.

The report will add weight to demands by a US judge that Lord Browne, the BP chief executive, testify in a Texas court, as the company has denied knowing of critical safety concerns before the blast.

BP now accepts that there were failings at the Texas facility, and has set aside $1.6bn (£840m) to compensate victims of what was America’s worst industrial accident for a decade. While BP has settled with many families of victims, Eva Rowe, whose parents died, is determined to take BP to court to avoid aspects of the case being kept secret.

The CSB report praises BP’s co-operation with investigators and attempts to improve safety since the explosion, but this will be drowned out by the board’s stinging verdict on the way Texas City operated.

advertisementCommenting ahead of today’s publication of the report, Carolyn Merritt, the CSB chairman, said: “The CSB’s investigation shows that BP’s global management was aware of problems with maintenance, spending and infrastructure well before March 2005. BP did respond with a variety of measures aimed at improving safety. However, the focus of many of these initiatives was on improving procedural compliance and reducing occupational injury rates, while catastrophic safety risks remained.

“Unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated.”

In an earlier report the CSB, one of several US agencies investigating the blast, said Texas City had been using obsolete equipment already phased out in most refineries and chemical facilities.

The blast was caused when flammable vapours ignited. The CSB has found eight previous instances between 1994 and 2004 when flammable vapours could have caused a similar explosion.

The CSB cites a 2003 external BP audit of Texas City which said the infrastructure and assets were “poor”. And the CSB says that in a further BP report in 2004 the company found another 34 operations with “widespread tolerance of noncompliance with basic safety rules”.

Industry analysts have been concerned that during the years when oil prices were low, companies cut back on maintenance.

Ms Merritt appears to agree, saying: “BP implemented a 25pc cut on fixed costs from 1998 to 2000 that adversely impacted maintenance expenditure and infrastructure at the refinery.”

A BP spokesman said: “We agree with the CSB that the Texas City explosion was a preventable tragedy but we do not understand the basis of some of the comments from the CSB.”

He said the company would wait until the final report was published before commenting further.

Lord Browne has instigated a worldwide review of BP’s operations, not just because of Texas City. The company has suffered leakages at a facility in Alaska, and faces allegations of rigging the oil market.

Today’s preliminary findings are the first major update since a CSB report a year ago. The board is not expected to publish its final report before March next year.

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=YKEHFBXVWUK5ZQFIQMFCFF4AVCBQYIV0?xml=/money/2006/10/31/cnbp31.xml

Tuesday October 31, 2006

Scientists

“This should be a turning point in a debate which has pitted short term economic interests against long-term costs to the environment, society and the economy”.
Martin Rees, president, Royal Society

“The review closes a chasm that has existed for 15 years between the precautionary concerns of scientists and the cost-benefit views of many economists. It finds most economists’ methods have been inadequate for a problem of this scale”
Michael Grubb, Imperial College

“The time for procrastination is over. Pay today and it might take your savings, pay tomorrow and it will take your shirt”
Dave Reay, Natural Environment Research Council
“It provides the vital missing link between global economics and the emerging and overwhelming evidence of human influence on climate change”
Dr Chris Huntingford, Centre for Ecology and Hydrology

NGOs

“We always knew the scientific and moral case for action was overwhelming, but this report is the final piece in the jigsaw. There are no more excuses left, no more smokescreens to hide behind”
Charlie Kronick, Greenpeace

“Poor communities and nations are the worst hit by climate change … Without a strong focus on aiding ordinary people’s struggle to adapt to new conditions, we can kiss goodbye our goal of reducing world poverty”
Camilla Toulmin, director of the International Institute for Environment and Development

“It turns the conventional attitude to the economics of climate change on its head. For too many years industry lobbyists have claimed that action was not affordable, but this proves this is not the case. The good news is that we have the economic and technological ability to avert catastrophe”
Tony Juniper, director, Friends of the Earth

“Global average temperatures must not rise by more than 2C. This means committing to the toughest end of Sir Nick Stern’s range of targets. Anything less and we will be entering dangerous and uncharted waters”
Paul King, WWF

“It changes the terms of the debate on climate change and removes the last refuge of the ‘do-nothing’ approach on climate change, particularly in the US. Those who deny climate change have been smoked out”
Simon Retallack, Institute for Public Policy Research

Business

“A low-carbon future has the potential to deliver a range of economic benefits to companies and countries that take the lead in tackling climate change”
James Smith, chairman of Shell UK, for the Prince of Wales’s Corporate Leaders Group on Climate Change

“It shows that immediate action against climate change could boost the economy. The government urgently needs to use this opportunity to develop a green manufacturing strategy”
Brendan Barber, TUC general secretary

Contrarians

“Not since Nostradamus … has a publishing event had the anticipated impact of today’s report. The great satirist Jonathan Swift mocked scientists by inventing a scheme by which they made sunbeams out of cucumbers. Making money out of the air, on the back of a scientifically unproven panic, would surely defy even the powers of a Swift to invent a more preposterous fiction”
Melanie Philips, Daily Mail

“Highway robbery practiced by armies of obnoxious, intrusive, money-grabbing bureaucrats dressed in green suits will make millions see red, not green, and induce resistance”
Michael Martin-Smith, CCNet

http://environment.guardian.co.uk/climatechange/story/0,,1935711,00.html

 

British oil major opts for positive spin as production delayed by subsea systems faults, writes Martyn Wingrove, Lloyds List: Published: Oct 31, 2006

BP WANTS to use the lessons it learns at the troubled Thunder Horse project in the Gulf of Mexico to help develop its next generation of projects, including the large Kaskida discovery.

But the British oil major will need contractors to develop subsea equipment that can be deployed in ultra-deepwater environments and cope with harsher reservoir conditions.

BP has been forced to delay first production on the Thunder Horse platform, its key project in the region, until the third quarter of 2008 after finding faults with the subsea systems.

For the London-listed group this is a major setback to its expansion in Gulf of Mexico oil production, so finding a silver lining in tackling technology challenges and making sure these problems do not happen again is the only positive from an otherwise disastrous project.

On the up side this year, BP discovered a substantial oil field with its Kaskida exploration wildcat in ultra-deepwater Keathley Canyon block 292 that promises to become a key project for the future.

BP plans to go back there next year to drill an appraisal well and firm up some of the reserves, but needs to enhance the ability of subsea equipment before a development plan can be formulated.

‘Kaskida is a Tertiary discovery in the Gulf of Mexico that is in ultra deepwater, has a deeper reservoir and with higher pressures than other discoveries in the area,’ said Andy Inglis, BP’s deputy chief executive of exploration and production.

‘It has significant scale, having encountered a net hydrocarbon column of more than 800 ft.

‘Challenges at Kaskida are the deepwater, remote location, the reservoir’s high temperature and pressures and the strong metocean conditions, including loop currents,’ he added.

Mr Inglis said subsea equipment required for developing Kaskida would need to cope with reservoir pressures of 20,000 pounds per square inch and none has been developed yet for these conditions. In comparison the Thunder Horse subsea systems have been developed to tackle 15,000 psi pressures.

‘We need to use the lessons learnt at Thunder Horse so we can go deeper and hotter on our developments. We will apply them to new projects including Kaskida,’ said Mr Inglis.

BP’s other potential projects in the future include its non-operated interest in Shell’s Perdido development and its operatorship of several discoveries including Tubular Bells and Puma.

The Thunder Horse subsea manifolds, originally supplied by FMC Technologies, suffered damage on the seabed because they were sitting there idle while the production semi-submersible was repaired. BP’s lack of confidence in the system’s integrity means new units were ordered from FMC.

‘We presently estimate production at Thunder Horse to start up in the second half of 2008 compared with our earlier estimate of first half of 2007,’ said BP’s chief executive John Browne.

‘The subsea equipment has remained in a cold state, with cathodic protection, on the seabed for some time following the listing of the platform after evacuation during the 2005 hurricane season.

‘We have concluded that these unusual circumstances led to hydrogen embrittlement of the equipment so that it could not perform its intended high pressure, high temperature service,’ said Lord Browne.

BP is changing the metallurgy of the subsea manifolds and has used this experience on the upcoming Atlantis project, which also involves a large production semi-submersible in deepwater.

‘Based on our findings from the Thunder Horse investigation we have also taken the opportunity to retrieve and make precautionary modifications to the Atlantis manifolds. Estimated start-up is now mid 2007,’ said Lord Browne.

Mr Inglis said the modifications on the Atlantis systems onshore should not take too long as they are less intensive than the units for Thunder Horse. They could be reinstalled on the seabed by January.

BP has also secured subsea construction vessels to reinstall the Thunder Horse subsea manifolds early in 2008.

Published: Oct 31, 2006

SHELL will be breaking several water depth records with its Perdido development project in the US Gulf of Mexico including taking subsea completions to new depths, writes Martyn Wingrove.

The Anglo-Dutch oil major will be working with California-based Chevron and British oil group BP to develop three fields in ultra deepwaters in the Alaminos Canyon area.

Shell will be operator of the Perdido regional development and will instal the world’s deepest production spar over the Great White oil field and then will tie back Tobago and Silvertip oil fields as satellites.

The direct vertical access spar platform will be tethered to the seafloor in water depths of around 8,000 ft or 2.4 km, 200 miles south of Freeport, Texas and will be connected to the US coast by new oil and gas export pipelines.

The platform will have a drilling system and production capacity to export 100,000 barrels of oil and 20m cu ft of associated gas per day, said a Shell spokesman.

The subsea facilities linking the Tobago field to the spar platform will be the world’s deepest subsea completions in water depths of some 9,600 ft, he added.

The whole project will be a benchmark for new ultra-deepwater projects as it is in depths of 2,270 to 3,000 m and will drive onwards the development of subsea and floating production technology for ultra-deepwaters.

‘We are now well positioned to develop energy supplies that were not within our reach even 10 years ago,’ said Chevron’s executive vice-president for upstream and gas operations George Kirkland.

Shell’s executive vice-president for exploration and production work in North and South America Marvin Odum said the project’s other challenge is the rugged seafloor terrain and reservoir geology.

‘To accomplish this record-breaking feat, we will apply cutting edge technology, engineering expertise and industry leadership,’ he said.

‘This geological setting is different from what has previously been produced in the Gulf of Mexico and will establish the first production from the lower Tertiary play in the Gulf of Mexico.’

The partners have reached their final investment decision for the Perdido project and will commence the front-end engineering and design phase, said a Shell spokesman.

It is thought engineering is under way by Technip on the spar hull, while Alliance Engineering is working on the topside designs.

Texas-based contractor Kiewit Offshore Services is thought to be in the lead to fabricate the platform topsides.

The project will also require more than 30 wells throughout the life of the three fields and in the long term the spar platform could be the host of other satellites.

Shell will have a 35% stake in the host spar platform, Chevron a 37.5% and BP a 27.5% interest.

Discovered in 2002, Great White is one of the region’s largest oil discoveries in Alaminos Canyon blocks 812, 813, 814, 857, 900 and 901.

Tobago was drilled in 9,600 ft of water in Alaminos Canyon block 859 in 2004 and Silvertip was discovered in that year in block 815 and in 9,200 ft of water.

US major Chevron claims to be at the forefront of efforts to develop the resources of the lower Tertiary, after its acquisition of Unocal last year.

It now operates the Tiger and Trident oil discoveries in the Perdido Foldbelt area, close to Mexican waters.

Chevron is the leading acreage holder in the lower Tertiary, which includes being operator of the large Jack discovery, tested this summer.

U.S. Cites Cost Cuts’ Role In BP Refinery Blast Safety Board Lays Blame With Top-Level Decisions, Raising Firm’s Legal Risks
By CHIP CUMMINS
October 31, 2006; Page A3

Cost-cutting efforts by senior management at BP PLC contributed to a deadly explosion at a refinery in Texas last year, federal investigators said, a finding that ratchets up the legal stakes for the London-based oil giant.

In a summary of its preliminary findings yesterday, the Chemical Safety and Hazard Investigation Board didn’t name specific senior managers or members of BP’s executive suite in London. But the federal agency alleged for the first time that high-level decisions to defer overhauls, cut staff and rein in costs at the Texas City, Texas, plant helped cause the accident, which killed 15 people and injured 180.

BP already faces a criminal probe into the accident as well as civil claims from victims and survivors’ families. Though the board hasn’t any regulatory role or prosecutorial powers, its findings could be taken up by civil litigants or by other agencies probing the disaster.

The development further sullies BP’s corporate image after a spate of operational, compliance and environmental problems in the U.S. Federal authorities separately are investigating BP’s energy-trading activities and federal and state officials are probing corrosion problems at BP’s big Prudhoe Bay oil field in Alaska.

BP has issued its own findings that painted a picture of widespread maintenance and safety shortcomings at the Texas City refinery. But it laid the lion’s share of the blame on the actions of a handful of lower-level workers and supervisors.

Ronnie Chappell, a BP spokesman, yesterday said the company stood by its findings. BP investigators “didn’t find evidence of budgetary decisions which were an immediate cause or critical factor in this terrible tragedy,” he said.

BP’s chief executive, John Browne, set off an industry-changing wave of consolidation in the late 1990s, when oil prices were low. Big oil companies gobbled up competitors and cut costs to stay profitable. Lord Browne and his management team won kudos for the effort, especially as oil prices recovered later, leading to currently flush industry profits. BP took over the Texas City refinery when it purchased Amoco Corp. in 1998.

In July 2005, The Wall Street Journal detailed in a page-one article how cost cuts and staffing reductions preceded the blast. Current and former workers interviewed blamed the cuts for reducing safety and causing equipment problems at the refinery. BP denied those claims.

In an interview, Don Holmstrom, the safety board’s top investigator in the BP inquiry, said BP executives had been sent company documents months or years before the accident that indicated cost-cutting had undermined safety at the plant. The agency said it wouldn’t release those documents at the present time.

“The documents themselves that we have reviewed identify the impact of the cost-cutting on the integrity of the refinery,” Mr. Holmstrom said.

The board also said internal BP documents indicated managers were aware of safety problems at 34 other unnamed BP businesses world-wide. “Every successful corporation must contain its costs,” the board’s chairwoman, Carolyn Merritt, said in the statement. “But at an aging facility like Texas City, it is not responsible to cut budgets related to safety and maintenance without thoroughly examining the impact on the risk of catastrophic accident.” Ms. Merritt linked BP’s cost-cutting and the accident in an interview broadcast Sunday on the CBS television network’s “60 Minutes” program.

Mr. Chappell, the BP spokesman, said BP agrees “that the explosion and fire was preventable, but we don’t understand the basis for some of the comments made by the [safety board]” in its statement. He said BP won’t comment publicly on specific statements made by the safety board until the agency issues its final report, expected in March.

The board listed BP financial decisions that the agency determined played a role in the accident. For instance, in order to save money, BP decided in 2002 not to replace a venting system that failed during the accident with a safer system, the agency said.

It also found that BP cut the size of the training staff at the refinery to eight people in 2004 from about 30 in 1997. The training department’s budget was reduced by half from 1998 to 2004, it found.

The board also said that it determined BP cut fixed costs at the refinery about 25% from 1998 to 2000 and that those cuts “adversely impacted maintenance expenditures and infrastructure at the refinery.”

Write to Chip Cummins at chip.cummins@wsj.com

Text of Update on BP Probe
October 30, 2006 12:12 p.m.
CSB Investigation of BP Texas City Refinery Disaster Continues as Organizational Issues Are Probed

For more information, go to: BP Investigation Information Page

Washington, DC, October 30, 2006 – In preliminary findings released today, the U.S. Chemical Safety Board (CSB) stated that internal BP documents prepared between 2002 and 2005 revealed knowledge of significant safety problems at the Texas City refinery and at 34 other BP business units around the world – months or years prior to the March 2005 explosion that killed 15 workers, injured 180 others, and was the worst U.S. industrial accident in more than a decade.

CSB Chairman Carolyn W. Merritt said, “The CSB’s investigation shows that BP’s global management was aware of problems with maintenance, spending, and infrastructure well before March 2005. BP did respond with a variety of measures aimed at improving safety. However, the focus of many of these initiatives was on improving procedural compliance and reducing occupational injury rates, while catastrophic safety risks remained. Unsafe and antiquated equipment designs were left in place, and unacceptable deficiencies in preventative maintenance were tolerated.”

Ms. Merritt pointed to earlier CSB findings that the equipment directly involved in the flammable release on March 23 was of an obsolete design already phased out in most refineries and chemical plants, and that key pieces of instrumentation were either known to be not working or known to be unreliable by unit supervisors.

The CSB has scheduled a news conference for Tuesday, October 31, in Houston, Texas, where additional new findings and safety recommendations will be presented.

Due to the complexity of the investigation, Chairman Merritt said that a final CSB report would not likely be issued before March 2007, but it was important for the public and the rest of the industry to remain informed on what the investigation has found.

Chairman Merritt also praised BP’s positive moves in the aftermath of the accident: “Since the tragedy, BP has expressed a strong desire to improve its safety performance globally, has made public its own detailed investigation report on the accident, has cooperated with federal investigators, has made organizational changes to better identify and communicate risks, and has done extensive positive outreach to the rest of the industrial community. BP has also voluntarily funded and supported the work of an independent panel recommended by the CSB to examine BP’s safety culture.” That 11-member expert panel, chaired by former U.S. Secretary of State James A. Baker III, is expected to report its findings on the safety of BP’s five North American refineries in late November.

Today’s preliminary findings were the first significant update in the Board’s investigation since October 27, 2005, when preliminary findings were issued at a public meeting before Texas City employees and residents.

The March 23 accident occurred during the startup of the refinery’s octane-boosting isomerization (ISOM) unit, when a distillation tower and attached blowdown drum were overfilled with highly flammable liquid hydrocarbons. Because the blowdown drum vented directly to the atmosphere, there was a geyser-like release of highly flammable liquid and vapor onto the grounds of the refinery, causing a series of explosions and fires. Fatalities and injuries occurred in and around work trailers that were placed too near the ISOM unit and were not evacuated prior to the startup. Alarms and gauges that should have warned of the overfilling equipment failed to operate properly on the day of the accident.

After the accident, BP admitted that the placement of the trailers was unsafe and supported an industry-wide move to develop safer siting guidelines, following a CSB urgent recommendation in October 2005.

Don Holmstrom, the CSB supervisory investigator who is heading the inquiry, said that since last October the Board has uncovered additional previous incidents involving the same ISOM unit blowdown drum, which was designed in the 1950′s.

Mr. Holmstrom said that his team has now documented the occurrence of eight previous instances where flammable hydrocarbon vapors were discharged from the same blowdown drum between 1994 and 2004. In two of these incidents the blowdown system caught on fire. The eight incidents were not properly investigated, and appropriate corrective actions were not implemented. The investigation of a 1994 incident resulted in an action item to analyze the adequacy of the blowdown drum. The area superintendent was responsible for the completion of this item. However, the item was never finished, and management officials did not follow up to assure completion.

The explosion on March 23, 2005, was not the only major accident the Texas City refinery had experienced, CSB investigators said. The history of major accidents and fatalities at the plant was summarized in a meeting held in November 2004 by the refinery manager for 100 supervisors. He gave a sobering presentation entitled “Safety Reality” on the 23 deaths at the plant in the previous 30 years; on average, one worker had died every 16 months.

Mr. Holmstrom said, “In 2004, BP Texas City had the lowest injury rate in its history, nearly one-third the oil refinery sector average. However, the injury rate does not take account of catastrophic hazards or distinguish between injuries and fatalities. That year, the refinery experienced three major accidents that resulted in a total of three fatalities. One of these accidents was a major process-related fire. In late 2004, following these major accidents and other near misses, the Texas City leadership was attempting to improve the refinery’s safety performance. Several years of audits and reports had identified serious safety system deficiencies. However, the safety initiatives that were undertaken focused largely on improving personnel safety – such as slips, trips and falls – rather than management systems, equipment design, and preventative maintenance programs to help prevent the growing risk of major process accidents.”

“When personnel safety statistics improved, the refinery leadership believed they had turned the corner,” Mr. Holmstrom said. However, existing process safety metrics and the results of a safety culture survey indicated continuing serious problems with safety systems and concerns about another major accident. A Health, Safety, and Environment Business Plan presented on March 15, 2005 – just eight days before the ISOM unit accident – identified as a key risk that the Texas City refinery “kills someone in the next 12-18 months.”

Earlier, a 2003 external BP audit referred to the Texas City refinery’s infrastructure and assets as “poor” and found what it termed a “checkbook mentality.” Budgets were not large enough to manage all the risks, but rather than expanding the budget, expenditures were restricted to the money on hand, in the opinion of the BP auditors.

A 2004 BP Group internal audit of 35 business units including Texas City found significant common gaps, including a lack of leadership competence which pointed to “systematic underlying issues,” widespread tolerance of noncompliance with basic safety rules, and poor implementation and monitoring of safety management systems and processes.

Chairman Merritt stated that stringent budget cuts throughout the BP system caused a progressive deterioration of safety at the Texas City refinery. “BP implemented a 25% cut on fixed costs from 1998 to 2000 that adversely impacted maintenance expenditures and infrastructure at the refinery,” she said. Maintenance spending fell throughout the 1990′s at the then-Amoco refinery, and following the merger with BP further cuts were imposed. “Every successful corporation must contain its costs. But at an aging facility like Texas City, it is not responsible to cut budgets related to safety and maintenance without thoroughly examining the impact on the risk of a catastrophic accident.”

By 2002, an internal BP report had identified the cost reductions as contributing to a decline of infrastructure in Texas City that would require significant investment to correct. These findings were corroborated in a survey of the refinery’s safety culture in 2005 just prior to the accident, known as the Telos study. The survey interview with the Texas City refinery manager identified a history of decapitalization and a culture of “things not getting fixed.”

“The refinery manager was not alone in this candid assessment,” Chairman Merritt said. “Large majorities of the survey respondents reported significant maintenance backlogs that were harming safety. Disturbingly, most employees agreed that ‘production and budget compliance gets recognized and rewarded before anything else at Texas City.’”

Economic pressures were evident in numerous decisions that were causally related to the March 23, 2005, accident.

For example, in 2002, the refinery undertook an environmental initiative known as Clean Streams, during which plans were made for the elimination of the ISOM unit blowdown drum. Lead Investigator Holmstrom said, “To economize, a decision was made not to replace the blowdown drum with a flare system. The refinery did not conduct federally required safety reviews that likely would have taken into account BP’s own existing policy recommending the elimination of blowdown drums.” The required study of the ISOM unit relief valve system was never completed, though the need was first identified in 1993.

In addition, Texas City’s central training staff was reduced from 30 staff in 1997 to eight in 2004, and the training department budget was cut in half from 1998 to 2004. Trainers were given other duties, so that some spent little time on actual training. For example, the ISOM trainer spent only 5% of his time on training. Control board operator positions were downsized, and workloads were increased. Four open process safety coordinator positions for the ISOM and other area process units were not filled prior to the incident.

Operator fatigue and a lack of effective training and supervision were all cited in earlier CSB preliminary findings describing the causes of the unsafe startup on March 23.

The CSB is an independent federal agency charged with investigating industrial chemical accidents. The agency’s board members are appointed by the president and confirmed by the Senate. CSB investigations look into all aspects of chemical accidents, including physical causes such as equipment failure as well as inadequacies in safety management systems. The Board does not issue citations or fines but does make safety recommendations to plants, industry organizations, labor groups, and regulatory agencies such as OSHA and EPA. Please visit our website, www.CSB.gov.

For more information, contact Daniel Horowitz at (202) 441-6074 cell (Houston) or Sandy Gilmour at (202) 261-7613 / (202) 251-5496 cell.

A Chronology of the CSB Investigation

March 24, 2005 – CSB investigators arrive at the BP Texas City refinery

March 26, 2005 – The CSB team points out the hazard of placing trailers so close to operating refinery units

April 1, 2005 – CSB investigators make initial entry into the damaged ISOM unit and identify the atmospheric blowdown drum as the likely source of the release

April 28, 2005 – CSB investigators say diminished outflow from an ISOM unit distillation tower resulted in overpressurization and flooding and led to the flammable release during startup

June 28, 2005 – CSB lead investigator Don Holmstrom announces that a review of computer records shows that two alarms and a level transmitter, which could have warned operators of the flooded condition of ISOM unit equipment, failed to operate properly in the hours leading to the explosion

July 28, 2005 – The Texas City refinery experiences a serious hydrogen fire in the Resid Hydrotreater Unit that causes $30 million in property damage and forces residents to take shelter

August 10, 2005 – Another incident related to mechanical integrity in the refinery’s Gas Oil Hydrotreater forces another community shelter-in-place alert

August 17, 2005 – The Chemical Safety Board issues its first-ever urgent safety recommendation, calling on BP to convene an independent panel to assess safety culture and oversight at all five of its North American refineries

October 24, 2005 – BP announces formation of the 11-member panel of experts, chaired by former U.S. Secretary of State James A. Baker III

October 25, 2005 – The Chemical Safety Board issues new urgent safety recommendations calling on the American Petroleum Institute to develop new safety guidance for the placement of trailers away from hazardous process areas

October 27, 2005 – In preliminary findings released at a public meeting in Texas City, CSB investigators describe a history of abnormal startups in the ISOM unit, previous vapor releases, and mechanical failures; they refer to the unit’s blowdown system as “outdated and unsafe”

November 10, 2005 – CSB Chairman Merritt testifies before the newly established Baker panel, notes the role of worker fatigue and operator downsizing in the accident

December 22, 2005 – The CSB releases a narrated computer animation of the events leading the accident; the video is viewed in refineries and chemical plants worldwide

June 30, 2006 – The CSB releases blast damage information for 44 trailers located near the ISOM unit; notes serious damage to a distance of almost 600 feet from the center of the explosions

October 15, 2006 – The CSB issues a safety bulletin based on the July 28, 2005, hydrogen fire, calling for expanded use of positive material verification to prevent accidental releases

The CSB investigation of the accident at BP Texas City is the largest, costliest, and most complex in the nine-year history of the agency. To date, more than $2 million has been spent conducting this independent federal investigation.

Source: U.S. Chemical Safety and Hazard Investigation Board