]July 15, 2010

A special edition from the editors of Platts

Oilgram News/OPR ExtraAs it has during other crises affecting oil and other energy markets, such as hurricanes Katrina, Rita and Ivan, Platts is producing this special summary of events surrounding the Deepwater Horizon rig disaster in the Gulf of Mexico. This special jointedition of Platts Oilgram News and OPR Extra will be published as frequently as Platts believes necessary to give its readers aquick summary of developments surrounding the leak at the wellhead, the growing footprint of the spill, and the impact theseoccurrences are having on markets and on US federal energy policy.

For now at least, the leaky pipe is stoppedFor the first time since April 20, Macondo oil

stopped flowing into the Gulf of Mexico July 15as BP successfully closed the runaway explo-ration well to begin a much-anticipated pres-sure test of the wellbore that will determinethe next phase in response to the crisis. “Weare very encouraged that the well is shut inand no oil is going into the Gulf of Mexico atthis time,” said BP senior vice president KentWells during a press briefing in the afternoon.Wells said the closure occurred at 2:25 pmCDT, after the company halted collection opera-tions about two hours earlier as a final prepa-ration for closing the final choke line allowingoil to flow. The test is designed to determinewhether BP can use its recently installed seal-ing cap to effectively plug the well or if itneeds to convert the cap into a productionsystem capable of moving most of the leakingMacondo oil to vessels on the surface. And itbegan after two days of starts and stops, high-lighted by discovery July 14 that a choke linewas leaking and had to be replaced overnight.“We saw no signs of hydrocarbons outside ofthe well,” said Wells, referring to the videocamera scenes relaying the latest afternoonimages from the sea floor, 4,993 feet belowthe surface. On July 13, the US government’snational incident commander, retired CoastGuard Admiral Thad Allen, had abruptly haltedthe first test attempt at the last second for 24hours so a government technical team couldperform additional analysis on the risks. TheMacondo test could last from six to 48 hoursdepending on the pressure readings from theshut-in wellbore.

Regardless of the decision on the nextphase of the response--plug or production--BPand Allen have continually said the ultimate

Macondo solution lies with completion of arelief well to intercept and kill Macondo atthe reservoir 18,000 feet below the surfaceof the Gulf. That well is expected to completeits mission in August, but drilling was sus-pended temporarily as a precaution while BPconducts the wellbore integrity test. Beforethe testing began, Allen spoke enthusiastical-ly during a morning press conference aboutBP’s chances of at least proceeding with aproduction system that could divert most ofthe leaking oil, in the event the cap fails toshow potential as a plug. “It offers a tremen-dous increase in production capability regard-less of what comes out of this,” said Allen,citing temporary readings that showed theHelix Producer I floating production vesselwas collecting oil from the well at a rate of24,000 b/d before it was disconnected forthe test. “We’ll be in a much better position,”Allen said. The Helix Producer is just one offour connections BP would use to capture asmuch as 80,000 b/d if it decides to deploythe sealing cap as a production system. Thatfigure compares with the government esti-mate of 35,000 to 60,000 b/d leaking fromMacondo since the April 20 blowout thatdestroyed Transocean’s Deepwater Horizondrilling rig and created the largest marinespill in US history.

Allen said BP would reconnect its collectionsystem after completing the integrity test inthe next few days and then assess theresults of that test to determine whether toattempt to use the sealing cap as a pluggingdevice or a production system. “Once we aresatisfied there is no indication we have com-promised the wellbore, we can go back andput the system under pressure again and we

can consider shutting it in,” Allen said. Thebrief 24,000 b/d rate of collection by theHelix Producer I compares with a rate of25,000 b/d total for two other containmentsystems in operation since the middle ofJune. Allen has warned that a production sys-tem still might need to allow some oil toescape to prevent pressure from building todangerous levels in the wellbore. He stressedthat BP never intended for the new sealingcap to become a plugging device when engi-neers designed it. “The intention of the cap-ping stack was never to close in the well perse,” Allen said. “As a side benefit, it offersthe opportunity to shut in the well. But the pri-ority was to contain the flow of oil.” Allensaid: “It is a two-fer if we can do it. I have ahigh degree of confidence that we can sub-stantially decrease the amount of oil goinginto the environment.

Two bills get committee OKThe House Energy and Commerce Commit-

tee July 15 approved legislation by a vote of48-0 that would direct federal officials torequire the use of blowout preventers on USoffshore wells and to prohibit permits to drillif it is determined that well designs are notsafe or BOPs lack redundant systems to pre-vent or stop a blowout. The bill is intended to“make sure the problems that caused theDeepwater Horizon blowout can never happenagain,” said Committee Chairman Henry Wax-man, Democrat-California. The DeepwaterHorizon “tragedy can be termed an accidentin name only,” Waxman said. “BP (the majoritylease holder and operating company) made aseries of reckless decisions and took short-cuts to save money. Neither BP or any othercompany will be able to make these same

Oilgram News / OPR ExtraDirector of News: John Kingston

This special edition of Platts Oilgram News and Platts OPR Extra is published by Platts, a division of The McGraw Hill Companies. Registered office: Two Penn Plaza, 25th Floor, New York, NY 10121-2298.Officers of the Corporation: Harold McGraw III, Chairman, President and Chief Executive Officer; Kenneth Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice Presidentand Chief Financial Officer; John Weisenseel, Senior Vice President, Treasurer. Copyright © 2010 by Platts, The McGraw-Hill Companies, Inc. Platts is a trademark of The McGraw-Hill Companies, Inc.

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JULY 15, 20102

SPECIAL EDITIONHOME

mistakes again.” The bill’s provision wouldcover all wells on the Outer Continental Shelf.The bill would not cover wells on state landsunless the federal government determinesthat the state cannot effectively regulate thewell. States would be able to challenge thatdetermination in federal court and the federalgovernment would have to prevail in court inorder to regulate the state well. It also coverswells that are not located on federal or triballand that, in the event of a blowout, couldresult in extensive and widespread harm topublic health and safety or the environment.The bill would not cover marginal wells. Thebill would deny a drilling permit unless a CEOdemonstrates, and the secretaries of energyor interior verify, that, in addition to having asafe well design and redundant blowout pre-venter system the company has an oil spillresponse plan to promptly control and stop ablowout if control measures fail. It would alsorequire the applicant to have the capacity tobegin drilling a relief well promptly and com-plete drilling expeditiously.

In separate action July 15, the House Nat-ural Resources committee by a 27-21 voteapproved a sweeping bill that would reorgan-ize regulation of oil and gas leasing on feder-al lands, bar companies with poor safetyrecords from bidding on leases, and create abipartisan commission to investigate the April20 Deepwater horizon blowout. The bill nowmakes its way to the full House, where Demo-cratic leaders have indicated it will becomepart of a package of bills aimed at tighteningsafety and environmental regulation of the oiland gas industry in the wake of the BP spill.The bill includes an amendment offered byRepresentative George Miller, Democrat-Cali-fornia, that, while not mentioning BP by name,is clearly structured to punish BP for its April20 Macondo well blowout in the Gulf of Mexi-co and a record of safety violations at refiner-ies and other facilities. The amendmentwould specifically require oil and gas compa-nies to certify that, anytime within a trailingseven-year period, the company was not foundto have committed “willful or repeated viola-tions” under the Occupational, Safety and

Health Act (OSHA) at a rate higher than fivetimes the rate determined by the InteriorDepartment to be the oil industry average forsuch violations in that period. The companyseeking a lease or drilling permit must alsocertify that it did not have more than 10 fatal-ities at its “exploration, development and pro-duction facilities and refineries” as a result ofviolations of state or federal health, safety orenvironmental laws. Finally, the companywould have to certify that it was notassessed, or did not pay, civil penalties andcriminal fines of more than $10 million forviolations under either the Clean Air Act orthe Clean Water Act.

Nexen sees no impact yetCanadian independent Nexen has seen no

material crimp in operations from the US gov-ernment’s six-month moratorium on deepwa-ter drilling in the Gulf of Mexico, but hasdelayed its exploration program and appraisalof discoveries, the company said July 15.“The current drilling moratorium (in the USGulf) has not had any real impact on us,”Nexen chief financial officer Kevin Reinhartsaid in a quarterly earnings conference call.“Our production has not been affected andwe don’t have any rigs working for us at thistime, so we’re not paying for any idle rigs.”Reinhart said Nexen does have two deepwa-ter rigs under contract which are scheduled toarrive in the Gulf later this year. “We’reassessing our options now, including use ofthe rigs for other activities in the Gulf andpossibly subletting them outside of the Gulf.”In a statement from its second-quarter finan-cial results, the Calgary-based company saidthe “timing impact” of the exploration delaysis not material because deepwater Gulf proj-ects involve long cycle times. “To date, themoratorium has not resulted in any cashcosts and for the remainder of the six-monthperiod, we expect our costs to be modest, ifanything,” Nexen said.

BP getting a royalty billThe US Interior Department notified BP on

July 15 that it should immediately start payingroyalties on all oil and gas produced from its

Macondo well, which blew out on April 20 andhas been spewing crude into the Gulf of Mexi-co. In a letter to BP America’s tax department,Michael Bromwich, head of the Bureau ofOcean Energy Management, Regulation andEnforcement (formerly the Minerals Manage-ment Service), said he expects the companyto immediately begin reporting the amount ofoil and gas produced from the Macondo well.Bromwich noted that BP asked MMS in Junefor temporary relief from the obligation of filingroyally reporting forms. BP also told MMS itdid not believe it was required to file a reportfor the April reporting period, Bromwich said.

Royalties are due on all oil and gas cap-tured from the well and the company must fileall required forms immediately, the letter said.Additionally, BP could be liable for royalties onall lost or wasted gas and oil if it is deter-mined that negligence or violations of regula-tions caused or contributed to the DeepwaterHorizon disaster. Interior had previously saidit intended to collect royalties on the oil. BPspokesman Toby Odone said July 15 the com-pany intends to pay all royalties due. “We arefully aware that royalties will be paid and thatwill be done,” Odone said. He said royaltieswould be paid according to the schedule laidout by regulators. Odone said BP has cap-tured more than 800,000 barrels of crudefrom the well. He would not say how much ofthe oil has been sold into the market or towhom. Previously, a BP spokesman said someof the Macondo oil had been sold to GulfCoast refineries, but would not identify whichrefiners had purchased the crude. Under BP’slease terms, royalties are due by the end ofthe month following the month that the oiland gas is produced. Typically, offshore royal-ties range from 12.5% to 16.67% dependingon a number of factors, including the depth ofthe well. BP has said it would pay all net rev-enue from sales of the Macondo crude to theNational Fish and Wildlife Foundation. Thecompany already has made an initial commit-ment of $5 million. Odone confirmed on July15 that the money to be donated to the foun-dation is “net of royalties that will be paid tothe government.”