by Larry Smith
Before the crab cakes arrived, BPC chief Simon Potter and others spoke about the British company's plans to drill for oil about 200 miles southwest of Nassau, on our maritime border with Cuba. A day later, they made the same presentation to the Caribbean Contractors Association.
Potter is a former British Petroleum geologist from Wallingford, England who joined BPC last year. He has worked on oil operations in the North Sea, the Middle East, Africa, Australasia and Russia, and was backed up by Roberta Quant, BPC's environmental officer (who previously worked for the BEST Commission) and Jobeth Coleby, a lawyer who is responsible for compliance and risk management.
Their presentation coincided with publication of the company's environmental impact assessment, which was produced by Acorn International and is now available on the BEST Commission website. One of the key takeaways from the presentation was that although the Bahamas already faces significant environmental risks from oil production, it does not enjoy any of the benefits.
"The Florida Straits are as busy as the Straits of Hormuz (in the Persian Gulf) in terms of oil shipments," Potter said. "And the world's fourth largest oil storage terminal is on Grand Bahama. Also, six wells are being drilled just a few miles from Bahamian waters and commercial production has already been established along the north coast of Cuba near the BPC licenses."
According to the EIA, BPC is developing an environmental plan "to manage the potential impacts of the proposed drilling activities such that they remain at acceptable levels throughout the exploration." And the potential impacts of drilling a well just off the edge of the Great Bahama Bank in water depths of approximately 1650 feet are described as having "a low level of significance".
More than 50,000 wells have been drilled in the US Gulf of Mexico since the 1930s, and the rate of blowouts in the industry is rated "very low", the EIA says. However, the catastrophic blowout of British Petroleum's Macondo deepwater well in the Gulf two years ago refocused public attention on the serious risk of pollution in the sensitive waters of the Bahamas, which are the basis for our lucrative tourism and fishing industries.
That unprecedented disaster - in water depths of 5,000 feet - led to the discharge of 53,000 barrels of crude oil into the Gulf every day for 83 days. An official investigation concluded that the disaster would have been preventable if BP - one of the world's biggest oil companies - had used best industry practices and technologies.
"This catastrophic failure appears to have resulted from multiple violations of the laws of public resource development, and its proper regulatory oversight," the investigating body reported. "A capable and productive industry needs equally capable and productive governance."
But although BPC's exploratory well will likely be drilled by a semi-submersible rig similar to the Deepwater Horizon rig associated with the Macondo blowout, the company's environmental impact assessment points out that Bahamian geology is vastly different from that of the Gulf, and previous wells drilled here have never encountered the high pressures that led to the Macondo blowout.
"All wells drilled in this exploration programme will be equipped with well control equipment...capable of shutting off the flow of fluids, and containing the pressure in the well," the EIA says. "…In the event of an accidental spill, the drilling rig and support vessels will be outfitted with the necessary safety and emergency response equipment to manage all potential emergencies."
The EIA also says that trajectory modelling by the University of Miami has confirmed that prevailing winds and ocean currents would sweep any spilled oil towards Cuba, and then northward via the Gulf Stream system where it could affect the Florida coast or the western Bahama Islands.
Another key takeaway from the crab house meeting was that BPC's sole asset at present is the right to explore in a few selected areas of the Bahamas - and after investing $50 million so far, they still have quite a ways to go before contemplating an actual revenue stream.
To start with, the company will drill an exploratory well to about 22,000 feet below the sea floor in water depths of about 1650 feet. They will use a contracted self-propelled drillship or a towed semi-submersible rig for this work. Both types of rig incorporate facilities for a crew of up to 200 people, and will either be moored above the drill site or rely on a computer-controlled positioning system. The cost for this is put at about $120 million.
According to Potter, the exploratory well could show "any number of encouraging results ranging from an oil discovery to a working hydrocarbon system – even a hole with non-commercial deposits of oil could be encouraging as long as you understand the dynamics of the result – faulting, reservoir, seal trap etc. The 'level' of encouragement may well depend on how deep we drill as to what it is we are likely to see."
Assuming the results are encouraging, BPC will then drill three appraisal wells "in order to be able to declare commercial reserves and take that to the bank," Potter said. "Right now we are being funded by the capital markets. It will take $400 to 600 million to drill the appraisal wells over a period of a couple of years and to fund that we are seeking a partner, but realistically this activity awaits clarity from the government on the forward process as a whole."
BPCis currently working with the government to develop new rules to replace the outdated 40-year-old regulations governing oil drilling in the Bahamas. Consultants for the previous administration had left a proposed set of new regulations on the table. At the same time, the Christie administration has said it will hold a national referendum before allowing any drilling to proceed.
"We would be in a difficult position if the referendum said no," Potter conceded. "Pre-referendum we will have to talk to Bahamians in any way that we can in order to expand our case. There is a November to June window for exploratory drilling to avoid the hurricane season so we would need to order the rig by March-April of next year by the latest to take advantage of that window."
At the crab house meeting several questions were raised about the level of royalties on any oil that is produced in Bahamian waters. Our original petroleum act was passed in 1945 to facilitate exploration by Gulf Oil, Standard Oil, Superior Oil and Shell. It was replaced by legislation enacted by the Pindling government in 1971, which came into effect seven years later and remains in force today.
The current legislation sets a a sliding scale of 12.5 to 25 per cent of production value based on the quantity of oil produced, and would automatically give BPC a renewable 30-year lease to begin commercial production. Offshore oil production in the US attracts a royalty of 18.5 per cent, and there are corporate and other taxes on top of that. But according to Potter, "a deal is a deal. We have to rely on the government's word and the deal that we made. We act on integrity and trust."
The reality is that experts have long believed that large quantities of oil and gas lie beneath the Bahamian seabed, and now that drilling technologies and market conditions have reached the point where exploitation is not only feasible but profitable, we can reasonably project a massive influx of petroleum revenues in the near future. This would be a difficult prospect for environmentalists to counter.
Potter says that development of a 2 billion barrel oil field at a 25 per cent royalty level would generate some $30 billion for the Bahamas over a 10-year period - or twice the nation's current budget spend every year for a decade.
According to former Environment Minister Earl Deveaux, there is an urgent need to overhaul complex legislative, environmental and financial regimes to lay the groundwork for the orderly development of a commercial oil industry (whether you like it or not).
"Without detailing all the issues inherent in something so materially significant, it is a clear responsibility of the government to prepare the country for oil and its likely consequences," he told me before the general election. "This means that all the essential elements of oil and gas governance should be in place before drilling begins."
The new government has remained largely silent on these matters since the election, although both Prime Minister Perry Christie and Deputy Prime Minister Philip Davis were consultants for BPC when out of office.
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