GE Hydril LMRP connector

Are Faulty Bolts Threatening Global Offshore Drilling?

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February 7, 2013

GE Hydril LMRP connector

(Bloomberg) — Deep-water oil exploration has been disrupted from the Gulf of Mexico to Brazil by the discovery of faulty bolts used in safety equipment less than three years after the worst-ever U.S. maritime crude spill.

Energy explorers such as Chevron Corp., Royal Dutch Shell Plc and Transocean Ltd. said they have been directed by U.S. regulators to suspend work aboard rigs that employ General Electric Co. devices connecting drilling tubes to safety gear and the seafloor. The equipment must be retrieved so defective bolts can be replaced, the U.S. Bureau of Safety and Environmental Enforcement said in an alert issued on Jan. 29.

Installing new bolts and resuming drilling may take as long as three weeks for each rig, Credit Suisse Group AG said. For oil companies paying upwards of $600,000 a day to rent the most- sophisticated deep-water vessels and another $500,000 a day to staff and supply each of them, the delays may be significant, said Craig Pirrong, director of the University of Houston’s Global Energy Management Institute.

“This certainly will be costly for the industry,” Pirrong said in a telephone interview yesterday. “This is a result of increasing government scrutiny of deep-water activities. The question is, will the increased costs be so onerous that they discourage some companies” from searching the deep oceans for crude.

Lower earnings from the Gulf may be a consequence for service companies due to potential for longer downtime than expected, Bill Herbert, an analyst at Simmons & Co. in Houston, wrote today in a note to investors.

“GE bolt revelations yesterday galvanized the market as Macondo scar tissue sensitivity remains acute,” he wrote. “Think of this as a modest tropical storm, albeit in January.”

GE Hydril H-4 connector
Diagram of the GE Hydril H-4 Connector

Defect Discovery

The defect was discovered last month after a leak of drilling fluid was linked to bolts that failed because of stress corrosion, according to the Jan. 29 alert. The regulator didn’t identify the owner of the rig or which oil company was leasing it. GE declined to identify the manufacturer of the bolts.

Nations with active offshore crude exploration have been alerted to the bolt defects, said Sean Gannon, a spokesman for Fairfield, Connecticut-based GE. In the Gulf of Mexico, 24 of the 83 rigs actively drilling wells at the time of the alert carried connectors that may have flawed bolts, the bureau said. Of those, six rigs have so far been cleared to return to drilling operations.

Global Regulators

“Everyone in the industry is aware of it,” Gannon said in an interview yesterday. “We’ve contacted every customer, global regulators. There’s a whole overlapping set of layers where active drilling rigs in particular have been apprised and they’re on top of it.”

About 30 to 40 GE customers are potentially affected, Gannon said in an e-mail.

Anadarko Petroleum Corp., the second-largest U.S. independent oil and natural gas producer by market value, said it will be swapping out bolts at its Phobos well and a Caesar/Tonga development well.

“We will be able to replace the bolts at the next available stopping point with minimal downtime and no impacts on production,” John Christiansen, a spokesman, said today in an e-mail.

Weeks of Downtime

Deep-water oil exploration involves extending steel tubes from floating rigs more than a mile to the seafloor and inserting a drill bit through the tube to carve a hole in the Earth. Five-story stacks of valves and pressure-control gear known as blowout preventers, or BOPs, are planted atop the well to snuff out unpredictable surges of gas and crude that pose a danger to rig crews on the surface.
It was just such a surge that exploded onto the deck of Transocean’s Deepwater Horizon rig in April 2010, killing 11 workers, injuring 17 and triggering an 87-day oil spill that fouled thousands of square miles and shut much of the Gulf to fishing and exploration for months. The $365 million rig that sank during the disaster still rests on the seafloor.

“We expect rig downtime to be 2-3 weeks” including time to bring equipment up, replace the bolts and return to the seafloor, Gregory Lewis, a New York-based analyst for Credit Suisse, said in a note to clients yesterday. While the government order affects only drilling in the U.S. Gulf, “discussions with one driller lead us to believe it will be up to each operator whether to pull the BOP and replace the bolt outside the U.S. Gulf,” he wrote.

Everyone ‘Aware’

Oil production from wells in federal waters of the Gulf accounted for 20 percent of total U.S. crude output as of the end of November, according to the Energy Information Administration. The region produced about 7 percent of the nation’s gas.

The defective bolts are part of a GE product known as an H-4 Connector, an 18.75-inch (47.62 centimeters) clamp that attaches blowout preventers to the well below it and to the pipes that lead to the rig on the surface.

GE was unchanged at $22.44 at 9:53 a.m. in New York. Transocean Ltd., the world’s largest offshore rig operator, fell 0.4 percent to $56.53. Transocean said it doesn’t expect the issue to have “significant impact” on its business.

Transocean has the greatest exposure, with 55 of its rigs around the world outfitted with GE’s connectors, including a dozen in the Gulf of Mexico, Luke Lemoine and Joseph Gibney, analysts at Capital One Southcoast in New Orleans, wrote today in a note to investors.

400 Tons

The Deepwater Horizon catastrophe prompted U.S. regulators to increase scrutiny and testing of subsea equipment and call for upgrades. BOPs cost about $45 million and weigh as much as 400 tons. Some rig operators have begun using multiple BOPs at a drilling site to speed the inspection process and bolster safety.

Statoil ASA delayed the plugging and abandonment of its Krakatoa well in the Gulf by one week to allow new bolts to be installed, Ola Morten Aanestad, a company spokesman, said in a phone interview yesterday. Transocean owned the rig in use at the site.

Aanestad declined to say if there was any added cost to Statoil due to the delay. In general, downtime because of an issue that’s a rig owner’s responsibility, such as one related to a blowout preventer, would mean that an operator isn’t required to pay the day rate, he said.

Shell is assessing whether the bolt corrosion matter is applicable to two of its rigs in the Gulf and found it doesn’t apply to a third rig, Kelly Op De Weegh, a spokeswoman for The Hague-based company, said yesterday in an e-mail.

Global Impact

“If needed, we will take the appropriate safety steps,” she said. “Currently, our operations have not been impacted.”

Diamond Offshore Drilling Inc. is replacing bolts for connectors on about 30 of its blowout-preventer packages around the world, including two in the Gulf of Mexico, John Vecchio, executive vice president for the Houston-based company, said in a phone interview yesterday.

The “vast bulk” of the bolt replacements should be done in the next six weeks, Gary Krenek, chief financial officer for Diamond Offshore said in the interview.

Replacing all bolts on all blowout preventers would have a “significant impact” on the offshore drilling industry, Matt Ralls, chief executive officer of Rowan Companies Plc, told investors yesterday at a conference in Vail, Colorado.

Industry Backlog

“Everything these days is on significant back order,” Ralls said. “Deliveries have been pushed out on everything and I’m sure if they have to replace all those bolts, it will take a while to get through the whole fleet.”

The bolts targeted by regulators are used “in every major producing region of the world, and in every type of offshore environment,” according to GE’s website.

Sales at GE’s oil and gas division totaled $15.2 billion last year, more than double the amount five years earlier, according to filings with the Securities and Exchange Commission.

Corrosion caused by hydrogen in the liquids in the drilling pipe occurs frequently and can be prevented if operators use the right kind of steel in their equipment, according to Les Ply, a retired drilling engineer who has worked for ConocoPhillips and other operators.

“This concern adds to numerous transitory risks facing the offshore drillers as the new rig delivery cycle unfolds and investor focus shifts to delivery execution, potential cost overruns and unplanned downtime on recently delivered units,” James West, an analyst at Barclays Capital in New York, wrote yesterday in a note to investors.

-By Joe Carroll, Tim Catts and David Wethe. Copyright 2013 Bloomberg.

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