Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources

Issue 8 - Evidence - June 10, 2010


OTTAWA, Thursday, June 10, 2010

The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 8:07 a.m. to study the current state and future of Canada's energy sector (including alternative energy); (topic: Canadian offshore oil/gas exploration and drilling: the current status of operations/applicable regulatory rules and regulations).

Senator W. David Angus (Chair) in the chair.

[English]

The Chair: Good morning, colleagues, members of the media, guests, special witnesses and our viewers watching on CPAC and the World Wide Web. We are continuing this emergency hearing of the Standing Senate Committee on Energy, the Environment and Natural Resources, which we convened following the tragic accident in the Gulf of Mexico involving the rig Deepwater Horizon. The purpose of these hearings is not to do an exhaustive study as to the whys and wherefore of that particular accident or, indeed, offshore drilling at large. Rather, we hope to allay the fears of Canadians over the alleged accident waiting to happen off our shores.

Polling data suggested that 51 per cent of Canadians were of a mind that all offshore drilling, which is an important aspect of our Canadian industry, should suddenly be stopped. Most of these people wanted it to be stopped forever, and a good portion of them want it to at least be stopped pending exhaustive studies into it.

We have heard from the regulatory agencies, the federal Minister of Natural Resources and officials from Natural Resources Canada, NRCan. We have heard from the World Wildlife Federation and from many knowledgeable folks regarding the situation here in Canada. I am happy to say that we have been advised and we understand there is actually no drilling happening on the West Coast of Canada or in the Arctic. What drilling we do have is happening in both gas and oil, offshore Nova Scotia and Newfoundland and Labrador.

Today, we are fortunate to have with us the actual people who do the operating. They are people from the industry, from Chevron Canada Limited. We are pleased you could be with us, Mr. MacInnis and Mr. MacLeod. Today we will hear a perspective of what is really happening and what is involved.

Mr. Mark MacLeod is the Vice-President for Atlantic Canada; and Mr. David MacInnis is the Vice-President, Policy, Government and Public Affairs. I will say a couple of words, if I may, about you both.

Mr. MacLeod's career with Chevron began in 1980 when he worked as a geophysicist in San Francisco, working in exploration. In 2000, he transferred to Calgary to work on the Hebron project, and in 2002, he became the Hebron project manager. In 2007, Mr. MacLeod moved to Oslo, where he was country manager for Chevron's Norway operations. In 2009, he transferred back to St. John's to take on the new role of VP Atlantic Canada with Chevron.

Mr. MacInnis, I believe that prior to joining Chevron Canada Resources, you were President of Canadian Energy Pipeline Association, CEPA, which represents Canada's oil and pipeline companies. He has served as Vice President Public Affairs with the Canadian Association of Petroleum Producers, CAPP, representing Canada's offshore industry. I might say parenthetically that we will hear from CAPP and their government representatives next week or the week after.

It would be helpful for you to know who we are. My name is David Angus, from Montreal, and I am chair of this committee. To my right is Senator Grant Mitchell, from Alberta, deputy chair of the committee. To his immediate right is Mr. Mark Le Blanc, from the Library of Parliament, who assists us in data gathering and research. To his right are Senator Tommy Banks, from Alberta; Senator Robert Peterson, from Saskatchewan; Senator Daniel Lang, from Yukon; and visiting today from Nunavut, Northwest Territories, Senator Dennis Patterson. I hope you will find this interesting, Senator Patterson, given that you follow the deliberations of the committee closely. To my left is our very able clerk, Ms. Lynn Gordon. To her left are Senator Richard Neufeld, from British Columbia; Senator Linda Frum, from Toronto; Senator Fred Dickson, from Halifax; Senator Judith Seidman, Montreal; and Senator Bert Brown, from Alberta.

You have heard us say that you have been following our proceedings. We have been advised that there is considerable fear that a potential or a possible overreaction to the terrible events in the Gulf of Mexico could set the offshore drilling industry back as much as 20 years. Our purpose is to determine the facts. Maybe there should be a big reaction; we do not know. We are here to learn the facts so that we can share them with Canadians. Much media attention has been paid to this event. To date, there has been some contradictory reporting of the regulations and whether they have been strengthened or reduced in recent months. We know that you are cognizant of the reality.

Mr. MacInnis, please proceed with your opening statement.

David MacInnis, Vice-President, Policy, Government and Public Affairs, Chevron Canada Limited: I have a couple of remarks before Mr. MacLeod presents our opening statement.

Thank you for the opportunity this morning to have this discussion. It is great to be here. Mr. Chair, I note your comment that the people in the know are here. I do not mean to begin this proceeding by correcting you, but the people who know are currently offshore Newfoundland. You have the second-best options before the committee today, for which I apologize.

The Chair: Like many of us, I listen to the CBC morning reports, and you would think that President Obama was out on the rig and that Mr. Hayward did the drilling and caused the explosion. We understand how the corporate model works. You are very good representatives of Chevron, and we will not kick any butt. We are most interested to hear your take on these events.

Mr. MacInnis: We appreciate that. In all seriousness, I want to give you an undertaking that if there are technical issues that our drilling and completions people need to respond to, we will undertake to get those responses in writing to the committee within the next week.

We are happy to be here. I gave the clerk of the committee a brochure that illustrates some of the quick facts on our Orphan Basin well offshore Newfoundland.

I also provided our general safety handbook. All members that work on the rig have a copy of this, and they are required to go through a multi-day training session. I draw your attention to a couple of pages in the booklet. You will see a page called "Operational Excellence Tenets of Operation." These are the key safety principles that we observe at Chevron throughout the company, which operates in over 160 countries. Those key principles simply are do it safely or not at all. There is always time to do it right, and if you see it, you own it. There are 10 tenets that accompany that. Before every meeting worldwide with Chevron begins, we have an operational excellence safety moment. Within these tenets, two are applicable today: First, meet or exceed customers' requirements. If I may refer to the committee as our customers today, we intend to meet or exceed your requirements. Second, comply with applicable rules and regulations. Again, for any questions that we cannot answer, we fully undertake to respond in writing within seven days.

The Chair: We appreciate that.

Mark MacLeod, Vice-President, Atlantic Canada, Chevron Canada Limited: I thank you for the opportunity to appear before this committee and to answer any questions you may have about our Orphan Basin exploration well being drilled offshore Newfoundland and Labrador. The hearings your committee is undertaking are certainly timely and relevant to Canadians, given what is going on in the Gulf of Mexico. We very much appreciate the invitation to participate.

Chevron employees around the world are truly saddened by the tragic incident in the Gulf of Mexico that resulted in the loss of 11 lives and the ongoing environmental disaster in that region. Along with our peers in the U.S. energy industry, we are providing both direct and indirect support to BP and the U.S. government as we try to stop the leak, assist with the spill response and assess opportunities to enhance offshore safety and environmental performance.

We recognize the significance of the Gulf of Mexico incident, and, like you, we await the outcome of the investigation so that we can gain detailed insight into the cause of the accident and can apply lessons learned from it. While the Gulf of Mexico incident precipitated us speaking with you today, Chevron is not in a position either to comment or to answer questions on the incident itself because we do not have the knowledge or the facts at hand. However, Chevron is applying additional due diligence, which we will talk about today.

The Chair: To reassure you, unlike some committees, we do not pretend to be a court of law or an administrative tribunal investigating the cause of this terrible accident. We are here simply to learn the facts as they apply in Canada.

Mr. MacLeod: We are applying additional due diligence to our operations to enhance safety, environmental protection and reliability in our operations. I will begin by telling you a little bit about Chevron Canada Limited and what we stand for in safety and environmental protection.

Chevron Canada Limited is a wholly owned subsidiary of Chevron Corporation, one of the world's leading energy companies. We have been working in Canada since 1938. We are headquartered in Calgary, Alberta, and we have an office in St. John's, Newfoundland, where I work. Chevron Canada Limited's upstream arm is focused on exploration and production activities in Atlantic Canada, the Canadian Arctic and the Athabasca Oil Sands.

Offshore Newfoundland and Labrador, Chevron discovered the Hibernia field in 1979 and continues to hold significant interest in that field today. We also own a stake in the Hebron and Terra Nova projects, and we have exploration activities and licences in the Orphan Basin and offshore Labrador.

The Chair: I hate to interrupt you, but since you were telling us a bit about Chevron and your entire shareholder, is it a public company? Is there a significant dominant shareholder? Would you call yourselves a Canadian company, an American company or an international company?

Mr. MacLeod: The company is a publicly traded company based in the United States.

Chevron's corporate vision is to be the global energy company most admired for its people, partnership and performance. We are committed to uncompromising standards of operational excellence. Our priority is to ensure safe and incident-free operation and protection of the environment and the public. That is fundamental in everything we do, including the drilling of our exploration well in the Orphan Basin.

The Lona O-55 well is approximately 430 kilometres northeast of St. John's, in a water depth of 2,600 metres. Chevron is the operator, and our co-venturers are ExxonMobil Canada Limited, Imperial Oil Resources Ventures Limited and Shell Canada Energy.

I will now talk about our deepwater drilling experience. We have extensive experience around the world, and we have drilled over 300 deepwater wells in the Gulf of Mexico, West Africa, the U.K., Norway, Brazil and Australia. Chevron is a proven leader and a safe and environmentally responsible operator in both exploration and production, with over 60 years of experience operating in the Gulf of Mexico.

At the end of 2009, Chevron was the largest leaseholder in the Gulf of Mexico and one of the largest producers in the Gulf of Mexico. I am pleased to be able to tell you that in 2009 we had a record year for safety.

Chevron is also an industry leader in drilling safety performance. Our safety statistics back that up.

Our company has a number of unique characteristics, and I would like to point to some of those now. First, we have an in-house well-control training program that drives our philosophy of well-control equipment and procedures, and we ensure that those procedures are applied to every well we drill around the world. Second, we have an in-house subsea blowout preventer specialist team. In fact, one of the team members is assisting BP with its incident now. That team ensures that blowout preventers used by contractors are suited to each individual project and that there is consistency in the application of those procedures. Third, we have a very disciplined management-of-change procedure. Therefore, any change, no matter how big or small, that is applied must be done with a high degree of rigour. Every change is applied to all wells. Fourth, a demanding risk and uncertainty management standard is applied to all of our complex wells. This Lona well is indeed a complex well. Finally, we have well-suspension procedures that exceed regulatory requirements.

I will talk about the Lona well now.

The Chair: Again, to get the picture correctly, I mentioned the misinformation or simply the lack of understanding. There is the drilling and exploration stage, I take it, where you identify where the hydrocarbons may be, the deposits, and then there is a drilling phase, such as I gather was happening in the Gulf of Mexico. You locate the well and start to drill it. Once it is identified, the well is drilled and you go into production; you have equipment, and a rig — I think it is called — stays there on the scene like in Hibernia today. I am told there is no drilling, but there are operations.

For our audience, the people of Canada, in the drilling industry there are obviously certain types of risks you are describing and how you manage those risks in the exploration and drilling phase. Then, when you are finished the drilling, you are still there on site, and the people who work there I take it are still at some kind of risk. I supposed there could be leakages or blowouts, but I do not know.

We need that distinction at some point, and I wanted to mention that. Do not assume we know. We are liberal arts people, most of us here.

Mr. MacLeod: I will explain that now, if I may. There are three phases. The first phase is exploration, which is what we are undertaking now in the Orphan Basin. This is high risk from a geologic perspective. Our chance of success is not particularly high. We have not found hydrocarbons in the Orphan Basin yet. We have drilled one well, and it was dry. We are drilling a second well.

The next phase we call the development phase, where we construct a facility such as Hibernia. That is the phase for the Hebron project right now.

The final phase is the producing phase. As you said, the Hibernia field is producing oil today, but it is also drilling. In fact, two rigs on the Hibernia platform are drilling wells today. Other facilities offshore Newfoundland and Labrador, such as the Terra Nova field and the White Rose field, are producing oil, but they are also drilling at the same time.

The Chair: The drilling goes on. Even though you found the deposits, got the well in place, and production is starting to happen, you carry on exploration drilling in that particular field.

Mr. MacLeod: Right. I would also like to clarify with respect to the well we are drilling today that if we find hydrocarbons, we will abandon the well and come back at a later date. We have no intention of testing this well, of flowing oil, should we find oil in this well. Should we have a discovery, we would abandon the well and come back at a later date to drill further wells to appraise the discovery. That is the process.

The Chair: That is very helpful. We are into something, because some of the other information we have had has perhaps led us to some slightly different conclusions about how much drilling is going on. The public sees the big black tide and all the birds and everything covered in oil. Some drilling has to have taken place, and there is the risk of oil escaping. When you abandon a well, at what point is there the biggest opportunity for oil to get loose into the environment?

Mr. MacLeod: First, obviously you have to find oil, and we have not found oil yet. We are hopeful. There are no instances where we can reduce risk to absolutely zero. There is risk in everything we do, in all manners of life. I would not say any one phase is any more or less risky than another phase. However, to spill oil you have to find oil, and we have not found oil yet.

I would like to talk about our team on the Lona O-55 operation. We have a dedicated team that has been working for the past two years designing and planning this well. On May 10, 30 days ago, we began drilling the well. We are one month into a four-month program. I am very pleased to be able to tell you today that we have drilled this well safely and without incident. We have not had one injury on board the drill ship. We have not had a cut finger. We have had no lost time incidents. We have been safe, and we continue to be safe; we intend to be safe for the rest of the program. We are confident that we have plans and measures in place that will enable us to drill this well incident-free.

I will speak about the regulatory procedures we have undertaken. As you know, the Canada-Newfoundland and Labrador Offshore Petroleum Board is the regulator responsible for approval and oversight of the Lona O-55 well. That well has undergone two levels of environmental assessments, and we have received regulatory approval for all aspects of the program, including approval of a myriad of plans, such as our safety plan, blowout contingency plan, emergency response plan, oil spill response plan and declaration of fitness.

Chevron is committed to uncompromising standards in the protection of people and the environment. We are applying these demanding standards for safety and reliability offshore Newfoundland. Our rigorous approach to the Lona O-55 well has encompassed environmental assessments; well design and equipment selection; contractor selection, certification, training and competency; assurance reviews; established management processes and standards; and verification systems.

The typical Chevron employee in our operating team that is conducting the Orphan Basin exploratory well program has decades of experience worldwide. Indeed, we require well-trained, experienced, competent people in our drilling operations, and I am pleased to say we have that on the Orphan Basin operation. It is also worth noting that many of the people we have in this operation were involved in the first deepwater well we drilled in the Orphan Basin in 2006-07.

Chevron employs a process that we call Stop Work Authority. That process authorizes, and in fact obligates, every employee and contractor working for Chevron to immediately stop work at a site when they see an unsafe condition.

Additionally, after the April 20 incident, Chevron immediately held safety stand-downs with our drilling personnel to review our operations around the world, including the Lona operation. Drilling personnel used the session to discuss the ability of any employee or contractor to stop work if they see a safety concern, as well as the regular practice of making safety observations by all employees. We reviewed the drilling processes and examined blowout contingency plans across our global operations.

Let me turn to the Stena Carron drill ship, which is the ship that is drilling our well today.

The Chair: This is another point where I feel it would be helpful to clarify. With regard to the Gulf of Mexico incident, people have come in a layperson's way to know the names Transocean and Halliburton when they are trying to point fingers.

We see in your brochure that the Stena Carron is the drill ship at this operation and that it is owned by Stena Drilling Ltd. of Aberdeen, Scotland. Would that be the equivalent of Transocean? As you go through this, could you mention the contractors that are not directly with Chevron?

Mr. MacLeod: Sure. Stena Drilling is the drilling contractor. They are in the same league as the Transocean. The Stena Carron drill ship is specially designed for use in harsh environments, such as those found offshore Newfoundland and Labrador. The ship can operate in water depths of up to 3,050 metres. It has been used in the West of Shetlands region in the U.K., where it drilled a number of wells for Chevron. The Stena Carron was also used off the south coast of Newfoundland, drilling for another operator, last year and into this year.

The Stena Carron is a state-of-the-art drill ship, and we believe there is no better drill ship in the world for this type of drilling operation. The Stena Carron is a dynamically positioned sixth-generation drill ship. Of course, it has a subsea blowout preventer system. I would like to talk about that blowout preventer today. I know there is a lot of attention on those.

The blowout preventer we are using has seven components — two annular blowout preventers and five rams — that can secure the well, depending on the nature of the situation. There are several means of activating the blowout preventer, but the primary means is from the drill floor, through a combined hydraulic and electrical system.

There are other means. If the blowout preventer ever became disconnected from the drill ship, the blowout preventer would automatically activate and shut in and secure the well. That is called the automode function. There is another auxiliary function, called the acoustic system, where an acoustic transponder can send a signal to the blowout preventer and activate the blowout preventer.

There is a third system with remotely operated vehicles, and in fact we added an extra remotely operated vehicle, or ROV, on board the Stena Carron for this operation. An ROV can go down to the blowout preventer, activate it and close the rams.

There is a fourth and final system, called an emergency disconnect system. In the event we did not have the time to safely secure the well, with a single push of a button, the Stena Carron could activate a series of measures that would disconnect the ship and the riser from the blowout preventer and automatically close the rams, and we could get out of harm's way. All of that can happen in 42 seconds.

The Chair: Assuming everything is working properly.

Mr. MacLeod: Absolutely. We will talk about the testing of our blowout preventer in a minute.

In Appendix II of our submission, you will see a detailed list of additional steps we have taken on the Lona O-55 well to ensure safe and incident-free operations. In some cases, these additional steps had been built into our well plan from day one, while others were implemented directly as a result of the April 20 Gulf of Mexico incident.

Let me start by saying that from day one, more than two years ago, our president said that we would drill this well incident-free and that we would be over the top on safety. He said, "Pull out all the stops in everything you do. We will drill this well incident-free." Leadership from the top is very important.

The Chair: You are saying that was a year or more ago, nothing to do with the April 20 incident?

Mr. MacLeod: Absolutely. In early in 2008, we were talking about an over-the-top plan for safety for this particular well.

On May 1, with the Stena Carron offshore Newfoundland, prior to arriving on site, we had what we called a Stand Up for Safety day. Senior leadership and senior drillers went offshore. We stopped all the operations for 24 hours, met with the crew and employees, gave them our commitment to safely drill this well, and got their commitment to safely drill the well. We also emphasized the Stop Work Authority that each and every employee and contractor on board that rig has and is expected to use.

To your earlier comment about the blowout preventer, we have added an additional function test on the BOP to ensure it is working reliably. We have paid particular attention to the secondary well-control systems that I mentioned earlier. The blowout preventer was fully pressure tested on board the Stena Carron. We lowered it to the seabed and tested it again.

We have put additional equipment on board the Stena Carron. I mentioned the second ROV that has been added on board as additional backup and redundancy.

Prior to drilling into the potentially hydrocarbon-bearing zone, Chevron will conduct yet another emergency response exercise to ensure that all our emergency protocols are in place and functioning, and the Canada-Newfoundland and Labrador Offshore Petroleum Board, the regulator, will witness this exercise.

In addition to our over-the-top preparedness for drilling this well incident-free, Chevron fully supports and is compliant with the additional special oversight measures that have been introduced by the Canada-Newfoundland and Labrador Offshore Petroleum Board. We have been asked to monitor the developments at the Gulf of Mexico incident, and we will provide periodic assessments of the impact of any lessons learned from that situation to our operation at Lona O-55.

Personnel from the board will visit the rig approximately every three to four weeks. A traditional schedule of audits is every three to four months. Again, prior to penetrating any potentially hydrocarbon-bearing zone, Chevron will hold an operations time out to review and verify that all appropriate equipment, systems and procedures are in place to allow operations to proceed safely and without polluting the environment.

The Chair: Mr. MacLeod, I cannot resist; this is where the drill hits the water. We had here the regulator, Mr. Max Ruelokke, and he told us basically what you are saying. He said he was going out to the Stena Carron and that he would actually sleep on board and stay there for a week. We all heard that and went back to our rooms. On TV, we saw the criticisms that sometimes these regulators get too close to the operators. There is an opportunity here for you to make clear what the reality is. I suspect it is just the opposite.

Mr. MacLeod: The reality is that the oversight is extremely thorough. Mr. Ruelokke and a team of his staff went offshore and conducted very stringent reviews of our safety systems and our safety culture on board the rig. I am pleased to say he came back and said he was very impressed with the safety systems and culture on board that ship.

I will say the regulatory environment is quite thorough on this particular operation and on operations in Newfoundland and Labrador. In fact, a colleague of mine closely associated with this particular drilling operation — and who has decades of experience worldwide — said to me the other day that this is one of the toughest regimes he has ever worked in. It is a very thorough regime, and we are under stringent and strict oversight. We welcome that. It gives our stakeholders more confidence that we are operating safely.

Another point Mr. Ruelokke might have mentioned is that we meet with the board every two weeks. In fact, we met with the board yesterday to thoroughly review the progress of the well plan; the safety record to date, which, as I alluded to, is excellent; and the plans forward. Every two weeks we have a thorough operational review with the board.

Our plan sees us continuing with this over-and-above approach and additional safety and spill response drills, equipment tests and inspections, and safety audits. Senior leadership rig visits will take place over the course of the next few months until the end of the program.

In summary, as Mr. MacInnis said, we will not commence any operation unless we feel it can be conducted safely and without environmental incident. We believe in the principles of "Do it safely or not at all," and "There is always time to do it right." We live by those. This includes our drilling operation at the Lona O-55 well.

We are confident in our well design and in our procedures for well control and deepwater drilling. We are fully committed to ensuring safe and incident-free operations.

I would like to reiterate again the high-level measures that Chevron has taken to ensure safe operations at the Lona O-55 well. We have adhered to Chevron's industry-leading safety standards in designing all aspects of the well program; we have implemented additional measures in light of BP's Gulf of Mexico incident; we have a very experienced team in place both on shore and offshore to manage the drilling program; and we are compliant with and have met all the regulatory approvals and work fully cooperatively with the additional oversight from the Canada-Newfoundland board.

We are committed to ensuring that all of our employees and contractors working on the Stena Carron return to their families safe and healthy; that we preserve the environment in which we are working; and that we execute the drilling program reliably and efficiently. Chevron will continue to work with the responsible regulatory authorities, departments and agencies in Canada to find ways to improve the safety and reliability of offshore oil and gas operations in Canada.

I look forward to your questions.

The Chair: Thank you, Mr. MacLeod and Mr. MacInnis. I have to congratulate you for having gotten through nearly three quarters of an hour without mentioning the buzz words "relief well." I can assure you that you will hear them when my colleagues ask their questions.

Senator Mitchell: Thank you, gentlemen. That was a very good presentation, and it has clarified many questions for me and for other members, I am sure. It does raise some other questions I would like to ask.

You outlined very well and clearly the tremendous effort that Chevron puts into safety, both in a leadership way and also with technology. It is impressive; your description of the Stena Carron was quite compelling.

It does beg the question, however, of how your technology compares to BP's technology. I know you do not want to get into too detailed a declaration of what BP was doing. Could you reassure us in some ways that your technology is different than BP's or is applied in a different way, such that we could assume reliably that the likelihood of the same thing happening is less?

I think the Stena Carron is for drilling rather than production. The problem with BP was that they were at a production stage, is that not right? Therefore, the issues would be different there.

Mr. MacLeod: First, I cannot compare and contrast our equipment to BP's equipment because I do not know the facts of their operation. I can say that safety and their safety record is of utmost importance when we select equipment and our contractors. We are very confident about the equipment we have selected, the people we have trained up to run this operation and the safety culture we have embedded on board the Stena Carron. We have the utmost confidence in the equipment, the contractors and the people running this project.

Senator Mitchell: What about the other side of it? You have described the Stena Carron. What about the production side?

Mr. MacLeod: As I said earlier, this is an exploratory well. We do not know whether there are hydrocarbons there. If there are, we will abandon the well safely, and I can describe that procedure if you would like. We have no plans to produce that oil from the well. It is a well to gather information.

Senator Mitchell: When you abandon that, what procedures do you use to secure it in a way that inspires confidence?

Mr. MacLeod: The best way to talk about it is to refer to the previous exploration well we drilled in the Orphan Basin in 2006-07, the Great Barasway. We abandoned that well with four mechanical barriers, which are cement plugs and bridge plugs. Four barriers were cemented in that well. Additionally, the drilling mud, a heavy-weight special fluid, was left in the well. That well is safe, secure, and abandoned. By the way, no oil was found in that well.

Senator Mitchell: A recent newspaper article suggested that regulations had been changed in December 2009. I am not judging it or agreeing with it, but the suggestion was that somehow regulations had been weakened to some extent, particularly with respect to relief wells.

The distinction here is a move from direct regulation to guidelines. I do not know whether that is significant or not. Regardless, was that the case in your experience, and would it constitute some kind of weakening? If so, what does it mean for being ready to drill relief wells and for access to the ships in the state of an emergency and the time it would take to get one from somewhere else in the world to drill a relief well?

Mr. MacLeod: I am pleased to answer that question. The Lona well was in a rather unique situation. When we made the application to drill the well, it was made under the old regime, the so-called prescriptive regime. The approval we received was after the goal-based regulatory environment was in place. They were not guidelines.

I am unaware of any relaxation in the need for a relief well. The Canada-Newfoundland Offshore Petroleum Board asked us to identify which equipment we could bring in to drill a relief well if required, which we fully believe will not be required. We have complied with that. We have identified two advanced drill ships in the Gulf of Mexico available to come in the event of a need for a relief well.

Senator Mitchell: How long would it take to get them?

Mr. MacLeod: The transit time from the Gulf of Mexico is approximately 11 days.

Senator Lang: I was heartened to hear your comments about your relationship with the regulatory body and about observations noted to you by a third party that this is the most stringent regime he has come across in the world. Perhaps that gives our viewers some comfort, because that is obviously important in overseeing your operations.

My question pertains to deepwater drilling and the well incident we have witnessed in the Gulf of Mexico. I believe the depth of the Lona well in the North Atlantic is 2,600 metres, if not deeper. How does that relate to deepwater drilling around the world? Is that a normal deepwater drilling depth, or is it deeper than most wells? Perhaps you could elaborate on that.

Mr. MacLeod: I am pleased to do that. Chevron will not conduct any operation unless we feel we can do it safely. That is a key principle for us. We are confident in our ability to drill in these water depths. The water depth at the Lona location is 2,600 metres. Chevron has drilled in depths greater than that. In standard units, we are in 8,500 feet, and we have drilled in the Gulf of Mexico in excess of 10,000 feet. This is a complex deepwater well. There is no doubt about that, but we are very confident of our equipment, our people, our experience and our track record and that we can and will drill this well safely.

Senator Lang: You referred to the Gulf of Mexico, which is in part why we are here. We are comparing ourselves to that. You talked about the equipment and highlighted both the contractor and the number of mechanical and technological procedures in place in case of emergency or discrepancy. Are your process and safety procedures offshore Newfoundland comparable to those in the Gulf of Mexico? Are you doing exactly the same thing there as is done in the Gulf of Mexico?

Mr. MacLeod: I cannot speak to any particular Gulf of Mexico operation, but as I said earlier, if we are not comfortable that we can do it safely, we will not do it. In the Gulf of Mexico, we would apply our same internal blowout preventer team. They would review our plans for the well and the BOP systems in place to ensure consistency across the globe in all of our operations. It is rather unique with Chevron that we have that team, and we apply those standards across the globe. Of course, the operation with the drill ship Stena Carron meets those standards.

Senator Lang: For clarification, you indicated that you have exceeded the minimums required by a regulatory body. Therefore, am I to understand that if I were another company in the Gulf of Mexico, I could use a lesser standard if I wished to do so and still comply with the regulatory requirements for that area?

Mr. MacLeod: I cannot speculate about what another company could do or would do, but I can speak for Chevron. We will fully comply with the regulations; and in many areas, such as well abandonment, which I described earlier, we will exceed the regulatory requirements.

Senator Lang: You have procedures in place and experience in other parts of the world, and you know the offshore drilling business very well. Whether in the North Sea, Australia or the Arctic, have those procedures been followed so well to the point that there has never been an emergency blowout?

Mr. MacLeod: Again, I cannot speak to other people's operations. I can speak to Chevron and our track record, in particular in Atlantic Canada. We have not had a blowout in Atlantic Canada. In fact, Mr. Ruelokke told the committee a couple of weeks ago that there has never been a blowout in Newfoundland and Labrador. Chevron has not had a blowout in Newfoundland. As to other operations, I cannot speak to any of those areas. As you know, no wells today are being drilled in the Arctic.

We will not drill a well anywhere in the world unless we believe we can do it safely.

The Chair: I welcome Senator Massicotte, from Montreal, Quebec.

Senator Frum: Gentlemen, you speak about uncompromising standards. I am one of the liberal arts people the chair referred to. As a non-engineer, I get the sense that beyond 5,000 feet, you are into highly compromised depths, by definition. I ask about that because I read an article that appeared in The Wall Street Journal last month that quoted Robin West, former President Reagan's adviser on offshore drilling, who likened that depth to being in outer space because of the comparable level of complexity of the operating environment. Another engineer quoted in the same article said that beyond 5,000 feet, if something happens to the wellhead, it is beyond reach. You cannot touch it because it is too far away to access.

I want to read you another paragraph from that same article, because you talked about how we rely on blowout preventers in the event of an accident:

Drilling companies have pushed the limits of technology in blowout preventers, also known as BOPs. Multiple technical papers have called into question whether the shears are powerful enough to cut through the tough steel used in modern drilling pipe at the deepest wells. A 2004 study commissioned by federal regulators found that only three of 14 newly built rigs had shears powerful enough to cut through pipe at the equipment's maximum water depth.

In other words, at those depths, the wellhead required is so thick that you cannot cut through it.

Mr. MacLeod: You have a number of questions that I will try to answer. Clearly, the offshore oil and gas industry has been moving into deeper and deeper water. Nothing magic happens at 5,000 feet beyond which things change. Certainly, the challenges increase with deeper water depth, but nothing magical occurs at 5,000 feet. It is not a break-over point. Industry has overcome these challenges and has a good track record, of which it was quite proud, until April 20, unfortunately.

Today, Chevron is producing oil safely and without incident in water depths of approximately 7,000 feet. Allow me to bridge to our safety record in the Gulf of Mexico. Remember that Chevron is one of the largest producers in the Gulf of Mexico. Between 2004 and 2008 our spill volume rate was half a barrel per million barrels produced, which is far lower than the industry average, and much of that production is in deepwater. We have demonstrated that we can produce and operate safely in deepwater.

There were other question; I am sorry.

Senator Frum: If everything goes well, it works beautifully. However, we have heard a lot in the last few weeks about the use of blowout preventers for emergency response. A lot of information seems to say that the effectiveness of these BOPs is overrated.

Mr. MacLeod: Again, if Chevron was not comfortable or confident it could be done safely, we would not do it. We are very confident in the blowout preventer we have at the Lona well.

In regard to your point about cutting casing, there are pieces of the casing, whether in shallow water or deepwater, that the rams cannot cut through. They are called drill collars. They are very thick pieces of pipe, and they are fairly short. An experienced driller would know when a drill collar was passing through the ram. If he had to close the ram, he would simply raise or lower the drill pipe and then cut it. The thickness of pipe does not change dramatically with deeper water drilling.

The blowout preventer on this particular operation has a closing force of 15,000-pounds per square inch, which is far greater than a typical blowout preventer. It is a rather massive device. Again, we are very confident in the ability of the BOP we are using at the Lona O-55 operation. We have tested the blowout preventer at the surface. We have tested it at the seabed. Every time we do a test, which is now approximately every three weeks, we provide all of the test results to the regulator, the Canada-Newfoundland and Labrador Offshore Petroleum Board. The blowout preventer is operating well. There are redundant systems on it, and we are confident.

Senator Frum: One of the charges is that these things have not been tested in real-world circumstances or in real disaster circumstances. I guess the good news is that you have not had the opportunity to test them in a real disaster.

Mr. MacLeod: I will tell you about an incident we had while drilling a well in the Orphan Basin in January 2007. A storm was rapidly approaching. There were quite significant storm surges, and some tensioning wires on the drill ship broke as a result of this rapidly encroaching storm. We were in an emergency situation. We had to cut the pipe using the blowout preventer and move off location. Everything worked. The well was sealed; the pipe was cut; we moved off location and out of harm's way. It worked, as designed, in very deep water.

Senator Frum: That is good to hear. Thank you.

Senator Neufeld: Having experienced drilling all around the world and in deepwater, has Chevron ever had a blowout?

Mr. MacLeod: No, we have not, senator.

Senator Neufeld: You have never experienced a blowout in any place, other than I read in your documents where some drilling fluids were released because of what you just described. Is that correct?

Mr. MacLeod: That is right.

Senator Neufeld: That is good news. That should help with the fears a bit.

Can you tell me how many wells you have drilled around the world offshore? You do not need to be exact, but give me a sense. Is it 1,000 or 100?

Mr. MacLeod: We have drilled in excess of 300 deepwater wells. If I added up all the shallow-water wells, it would be in the thousands.

Senator Neufeld: That is important for Canadians to hear.

We have discussed the blowout preventers. You have been very thorough on that. There are downhole procedures, because it is not just the BOPs that you use. There are drilling fluids, cement and all those kinds of things. Can you explain that a bit? I know what drilling mud is and I know how that is used, but many people do not. Could you explain the concepts of drilling mud and the cementing?

Second, would you confirm for us that your downhole procedures offshore Newfoundland would be similar to those in other parts of the world, or are they different from other parts of the world? I am not talking just about the Gulf of Mexico. I am talking about the North Sea and some of those areas. Can you explain that a bit? I know that will take a long time, but I would ask you to encapsulate that.

Mr. MacLeod: I will try first to explain the conventional drilling operation. I will be brief and hopefully fairly straightforward.

We start with a fairly big hole, in fact 36 inches in diameter. We drill a little bit and then put wide-diameter cement casing in that hole. We continue to drill the well, with smaller and smaller drill bits and smaller and smaller casing, and as we go down we cement the casing in place, and we fully pressure-test that casing to ensure the seal has been made.

We mentioned mud. It is not the mud you scrape off the ocean bottom or anything. It is specially designed chemicals and fluids that are a very specific weight. The weight of that mud keeps fluids from flowing into the wellbore. If the mud is too heavy, the mud will flow into the rocks. If it is too light the water or oil in the rocks will flow out of the well, and that is a problem. The drilling technology is achieving the appropriate balance of the drilling mud to the pressure in the formation.

I will make a point about the well we are drilling now and pressure. In many areas of the Gulf of Mexico you encounter abnormally high pressure. I cannot speak to the BP site, but Chevron has encountered high pressure. That makes drilling a bit tricky, and we have to carefully balance the mud weight with the pressures in the formation.

At our Lona operation, primarily based on the first well we drilled, the Great Barasway well, and other scientific information, we are very confident we will encounter normal pressures, which I will say is less tricky in balancing mud weight and formation pressures.

Again, the mud and the casing that we cement in the well and barriers we place in the well are the primary means of keeping control of the well. The blowout preventer is there more or less as a last resort. We do not expect to have to use a blowout preventer. It is not there to control the well; the mud and the casing are there to control the pressures and the fluid in the well.

Senator Neufeld: That helps. It makes it clear that it is not just the blowout preventer you depend on. That is one part of the safety procedure, but there are other procedures you use to actually control wells.

The next question I have is about relief wells. Senator Mitchell talked a bit about it. Are the two ships you identified in the Gulf of Mexico that would drill a relief well if something went wrong, heaven forbid, on contract to you for that? If Chevron had an incident, could you pick up the phone and tell them to get that ship here and it would disconnect from whatever it is doing? You must pay a standby for that service. Will it come and do whatever is needed at your site? Is that how that works?

Mr. MacLeod: Yes. We have identified those ships. The two ships are Discoverer Clear Leader and Discoverer Inspiration, and actually there is a third ship, Discoverer Deep Seas. They are all under long-term contract to Chevron and all capable of drilling in the water depths in the Orphan Basin. Because of the moratorium, they are all available immediately to move to Newfoundland and Labrador, should we need them.

Senator Neufeld: We also talked to the boards from Atlantic Canada. If a spill happened, Chevron's commitment through permits and such is that immediately, without any questions asked, you would deploy whatever it takes to contain the oil as much as you could, clean it up and restore everything that was damaged by any leaking oil. Would that be correct? Would I be correct in saying that there would be no questions asked, that you just go ahead and do that?

Mr. MacLeod: That is exactly right. There are no questions asked. Chevron would do it, yes.

Senator Neufeld: I like to hear that.

My last question is about abandonment of wells. Some people might be alarmed when you talk about abandoning a well. That is normal in the oil and gas industry. If you abandon a well and are not intending to come back, who is responsible for that abandoned well? That could happen; I do not know and I am not asking that. That might be proprietary information. If you abandon a well — you know you are finished — who becomes responsible for that well should something happen at that well site a decade in the future? Does the government say, "Yes, Chevron, you have met all the regulations; you have met all the qualifications of abandoning that well, and now it is someone else's problem," or does it still rest on Chevron's shoulders?

Mr. MacLeod: My understanding is that Chevron is responsible for that abandoned well.

Senator Neufeld: You are responsible, for the lifetime of that well?

Mr. MacLeod: Yes, that is my understanding.

Senator Lang: I want to follow up on Senator Neufeld's question about the ability to contact these drill ships if we have a blowout and your statement that they could come to you immediately. You were very specific. You said that with the moratorium, the drill ships are available. If there were no moratorium, would the ships still be available on a day's notice?

Mr. MacLeod: Let me be clear. If those three ships I mentioned were busy drilling wells, and if we had an incident — which we do not expect to have, because we are confident in drilling this well incident-free, as I said — the well would have to stop what it is doing. My point was that those ships are not doing anything right now because of the moratorium. If they were drilling, they would have to suspend operations and transit to Newfoundland. The understanding is that they would be there.

Senator Brown: Thank you for your presentation.

The Louisiana oil rig was apparently 5,000 feet down and drilled 18,000 feet before it blew up. Are you suggesting that in Newfoundland you will drill 10,000 feet of water before you drill the actual seabed?

Mr. MacLeod: No. The water depth at the Lona O-55 location is 2,600 metres, or 8,500 feet.

Senator Brown: How deep can you actually drill in the seabed after you are down there?

Mr. MacLeod: The rig itself is capable of drilling upwards of 30,000 feet in total — 30,000 feet of drill string. The depth we are drilling our well is proprietary information.

Senator Brown: Have you ever stacked blowout preventers, since that is the last line of defence? Have you ever had more than one blowout preventer on the same drill site?

Mr. MacLeod: I am not aware that we have, but if you would like, I can follow up and find out whether we have ever stacked two BOPs, if that is the question.

Senator Brown: I would like to know, and I think the committee would like to know. Considering what has happened in Louisiana and the ensuing costs for everyone, not just the well but damage to the coast, it seems that you could afford to string about 10 blowout preventers, one on top of the other, and it would still be a minor amount of money compared to what is happening in Louisiana.

Mr. MacLeod: Let me reiterate that Chevron is very confident in the equipment, processes and training we have in place to drill this well incident-free. If we thought adding a BOP would significantly change the risk profile, I imagine we would do it. I remind you of the redundancies built into the BOP systems. I remind you that we have a tremendous safety track record in drilling in deepwater around the world.

I live in Newfoundland and Labrador. I was raised in Maine. I do not want to see oil on the coast. I am confident that we will not see oil on the coast, that we will not have a spill and that we will not have an incident on this operation.

Senator Brown: I certainly hope you are absolutely right. My only concern is that we hear about regulation upon regulation for safety and everything else, but to ensure that another Louisiana situation does not happen, the equipment must be strong enough to meet the pressures that you are going for.

Mr. MacLeod: Absolutely.

Senator Brown: You are going for tremendous pressures when you drill that deep. Every foot you go down, more pressure is added to the drill stem. For every bit of deepwater you go down, you are facing pressures already. The pressure at Louisiana was supposedly 2,200 pounds per square inch at the bottom, before they started drilling the well.

The pressures are phenomenal. That is why I say everyone should focus on the equipment and on making it two or three times what is necessary to handle that kind of pressure. I know there must be a limit, but looking at the Louisiana situation, at what point do you say the equipment must be two or three times better than what it is now?

Mr. MacLeod: I believe equipment is important. We have reviewed the equipment that we have selected for this operation. We have tested and retested the equipment. However, it is also about people, behaviours and the safety culture we have on the rig. It is also about knowing who is in charge and about a regulatory regime and requirements. We are very confident in all of that. It is not just about equipment. Equipment is critical and it must work, but these other elements are also vitally important.

I will tell you a story about our Stop Work Authority. I have read what you have read about the BP incident. I cannot comment on it. However, I can tell you a story about a crane operator aboard our rig who was preparing to lift equipment off a supply boat. The manifest said that piece of equipment weighed 12 tonnes. The operator looked at the equipment, and in his judgment, that was not right.

He exercised his Stop Work Authority. He shut down the entire operation. People got around, talked about the situation, looked at the equipment in question and determined it weighed 20 tonnes. Because he exercised his Stop Work Authority, that employee was given a significant reward by Chevron and congratulated publicly. That is an example of how powerful behaviours can be, such as rewarding exercise of the Stop Work Authority. Even if it slowed down our operation, that is not an issue.

Senator Brown: I can appreciate good operators. There is no question that there must have been many good operators. They have about 3,000 wells in the Gulf of Mexico. However, there is also the bad operator who will make a mistake. No charges have been brought forward yet, but there are all kinds of hints that this incident involved some kind of human failure.

That is why I go back to stacking blowout preventers, because if someone makes a mistake and does not shut down the rig fast enough, you need to have two or three more blowout preventers, maybe at the top or maybe at the bottom; I do not know. I am just suggesting that you need more duplication of protection.

Mr. MacInnis: I will touch on a point that Senator Brown and Senator Frum raised in their questions. I take your point that the equipment must constantly be improved, because of new circumstances and new lessons learned.

To your point about blowout preventers, back in 2007, about three years ago, Chevron began development of our Alternative Well Kill System. The Alternative Well Kill System is a next-generation blowout preventer. It is in the testing phase right now. There is a year and a half to go before we know that the design will be commercially viable. There is a lot of work to be done.

I do not intend to raise expectations that there is a game changer afoot. What I am suggesting, however, at least with respect to Chevron, is that your point is well understood. The technology must constantly be updated. Currently we are testing our program. It has gone through two phases, both successful. We have a number of other phases to go through, including one that would ultimately require us, working with the National Energy Board, to ensure the tests we are doing conform to their requirements.

I cite the National Energy Board because this project came out of our plans hopefully to start to do some work in the Canadian Arctic at some point down the road. We will need a different type of tool by way of blowout preventer there, and we are looking to develop that unique application.

Senator Brown: Thank you. I think the public needs to hear that new and better equipment is being developed all the time.

Senator Dickson: As a supplementary on the blowout preventers that Senator Brown and others were asking about, an article referred to the question of whether in the U.S. new redundancies for blowout preventers will be mandated by law.

What are the laws now in the Gulf of Mexico regarding redundancies for second-tier systems? Also, would you like to comment on radio-operated valves, whatever those might be?

Mr. MacLeod: I cannot speculate as to what the new changes, if any, will be. We look to understand the facts and take on board the lessons learned. We look forward to improving the safety and the environmental performance of our industry. I cannot speculate whether additional redundancies will be called into question or added to the requirements.

However, I can talk about that remotely operated valve you asked about. We have an acoustic transponder system. I think that is the question. Using a signal from above the waterline, perhaps onboard a ship, a standby vessel can send a signal to the blowout preventer and actuate the blowout preventer remotely. That is one method of actuating the blowout preventer; it is a backup method, if you will.

The other remote method is using ROVs, which are unmanned submarines. They can go down and turn valves for the blowout preventer. We have both of those systems, as well as the automode function and the emergency disconnect system onboard the Stena Carron. We tested that. We are confident the equipment works as designed for those pressures in our location.

The Chair: We will be come back to the Atlantic Canada senator. I do not know whether the next senator is a liberal arts graduate or not; he is a Liberal. Regardless, the point is he is a renaissance man: Senator Banks.

Senator Banks: I am only a graduate of the school of hard knocks, Mr. Chair. Thank you for being here, gentlemen. Mr. MacInnis, I think you are an Albertan, if I am not mistaken.

Mr. MacInnis: I am originally from Nova Scotia, but I moved to Edmonton in 1980. I have enjoyed many of your performances while in Edmonton. Thank you for that, as well.

Senator Banks: I hope you enjoy this one. You have said twice, Mr. MacLeod, that this is a complex well. Is it the depth that makes it complex?

Mr. MacLeod: It would be the depth, yes.

Senator Banks: There are five rams in the blowout preventer in place in the well you are talking about off Newfoundland. We understand what the rams are. However, you said that, in addition to that, there are two annular aspects of the blowout preventer. Can you explain to us what that means — what they are and how they work?

Mr. MacLeod: I will need to defer to my drilling experts to get exact answers. There are sheer rams that cut pipe. There are blind rams that seal. There are pipe rams that bind around the pipe. Regarding your specific question about annular rams, I would have to get back to you.

Senator Banks: I would be grateful if you would.

Mr. MacLeod: Will do.

Senator Banks: It is a term we have not heard before. We understand the rams and the sheers, but if you could get back to the clerk about what an annular function is, that would be great.

My hands-on information about drilling is from 1949. My uncle owned a pipe-pulling company. In those days, there was always a casing from the point where the ground began — though I do not know about the water — inside which the drill stem worked. Is there a casing between the top of the water and the seabed through which the drill stem proceeds, or is that just a drill stem?

Mr. MacLeod: That is a good question. There is a riser, which is, in effect, a casing that the drill string goes through.

Senator Banks: I presume casing is put in once you hit the seabed and you are going into rock. The drill stem works from inside that; is that right?

Mr. MacLeod: Yes. From the seabed to the last casing section, yes, there is casing.

Senator Banks: It is not intermittent, but continuous, correct?

Mr. MacLeod: As I said earlier, we start with large diameter casing and we go to successively smaller diameter casings as we get deeper down the well.

Senator Banks: But there are no blanks?

Mr. MacLeod: No.

Senator Banks: Therefore, those collars you referred to were not intermediate pieces of casing, were they?

Mr. MacLeod: No. We set plugs in the well as we leave the well.

Senator Banks: You said the blowout preventer is pressure-tested on board and again once you hit the seabed. Is it tested again?

Mr. MacLeod: Yes.

Senator Banks: Continuously or intermittently?

Mr. MacLeod: Intermittently. I believe we test the BOPs every three weeks.

Senator Banks: Mr. MacInnis, you talked about leases in the Arctic, in the Beaufort Sea, I think.

Mr. MacInnis: Yes.

Senator Banks: We have heard evidence from the National Energy Board that it was so. In those leases, is there an obligation on the company to drill within a specific time?

Mr. MacInnis: In the Beaufort Sea, there is an obligation to spend a certain amount of money during that period of time. If you do not spend that money in that period, you are obligated to pay a percentage fee. That is the way the system up North works.

Senator Banks: It just talks about spending money, but it does not say what you must spend it on. Does it not say you must drill?

Mr. MacInnis: No. It just says you have to spend a certain amount of your commitment. The commitment has a certain dollar value you are required to spend within a certain period of time. That obligation is what allows the regulator to compare one company's commitment to another and decide whom to award the lease to. If you do not fulfill that commitment, then a penalty is assessed.

Senator Banks: Yet you could spend that money without drilling a well, however unlikely?

Mr. MacInnis: You could, but yes, it would be highly unlikely.

The Chair: I am not cutting you off, Senator Banks. On the contrary, I am thinking of putting you up for law school. I am not sure where you were going with this, but this might be a good point to make something clear. We have been told there is no drilling in the Beaufort or the Arctic at the moment. Therefore, Canadians ought to relax. At this point in time, there will not suddenly be an oil disaster in the Arctic or the Beaufort.

However, it has been suggested by some that there are commitments on paper and in binding agreements that force people like your company and your competitors to drill within a certain period of time and that this is sort of like an irrevocable commitment. I find that hard to believe, because the reality is there is no drilling right now.

Senator Banks, you are wondering whether there will be drilling pursuant to those leases, are you not?

Senator Banks: Not today, but we have heard there is an obligation in those leases that requires that drilling must commence by a drop-dead date. This is what we have heard, and we are now hearing differently.

Mr. MacInnis: I would suggest that the issue is moot, because the National Energy Board has said that there will be no activity and that it will conduct a review of Arctic drilling issues. I understand the NEB is currently developing the scope of the review. You can rest assured that no one will do anything in the Arctic anytime soon.

The Chair: For our viewers, and Senator Banks you would agree with this, Mr. Gaétan Caron, Chair of the National Energy Board, who will appear before the committee this month, said there is effectively a moratorium on any kind of drilling, although the word "moratorium" might not have been used.

Mr. MacInnis: That word certainly has not been used, but the NEB has announced its review. Mr. Caron will be able to go into more depth on that issue.

Senator Banks: The other day, we raised the matter of the relationship between the operator and the drilling contractor. Do you pass on some of your undertaken liability by virtue of the lease? Do you have recourse to that driller? To what extent is the driller exposed? Do your agreements include words such as "indemnify and save harmless"?

Mr. MacLeod: The board has granted Chevron the permit to drill the well. Chevron is ultimately responsible. Our contract with our drilling contractor is confidential. It includes terms and conditions with respect to liability, gross negligence and what have you, but I would rather not get into those details. As a senator said earlier, the board, the public and the government would look to Chevron primarily to manage in the event of an incident, when we would be the responsible party.

Senator Banks: Period.

Mr. MacLeod: Yes.

The Chair: It follows that they would have their own recursory actions in terms of the contractual relationship.

Mr. MacLeod: Indeed.

Senator Seidman: We have heard and are confident that regulations and oversight minimize risk and that corporate standards, best practices and safety protocols further reduce risk. What you have presented this morning is truly impressive with respect to your safety protocols, which are clear, well-designed and well-written. We know that all we can do is minimize risk.

We also know that more released contracts mean more drilling and more rigs and, given the law of probabilities, a greater likelihood of an accident. You have spoken a lot about drilling technology. Clearly, there has been and continues to be a significant amount of research and development in this area. We know that the technology has been developed to drill in water to depths of 2,500 metres, but we have not heard much or know much about the science and technology to remedy the kind of catastrophic event that can occur at such depths.

I am sure that all Canadians, Americans and probably everyone around the world have watched this oil gusher in the Gulf of Mexico via the media and the efforts to stop the flow with mud, tires, golf balls, cement and cutters that do not work. We are all asking how this is possible.

Does your company have ongoing R & D? You talked about a commitment to spend a certain amount of money on a contract in the future, but do you have a commitment to spend a certain amount of money on R & D in order to develop the science and technology to deal with a potential catastrophic event, as we are seeing in the Gulf of Mexico? Should you have an enormous spill or blowout in the Arctic or offshore Newfoundland, do you have or are you in the process of developing the science and technology that could deal with that? Does your company have a relevant fund? Could you tell us a bit about that?

Mr. MacLeod: There are several questions in there that I look forward to answering. If I miss one, remind me.

You made a statement about the increasing risk and probability. I point to Chevron's safety performance over time, which has improved quite significantly. In 2009, we had a record safety year, yet our drilling activity and production did not decrease. In fact, it was the highest ever. With increasing activity, we are seeing better safety performance.

The industry is showing better safety performance over time. The industry and Chevron, of course, were very proud of our safety performance and our drilling performance in particular. Our low lost-time injury rate is industry-leading, even with the increasing amounts of activity over time. Until six months ago, you could not find a rig in the world because they were all busy drilling wells, many of which are complex deepwater wells. I do not expect to see dramatic increases in accidents. The data do not support that, and our results do not support that.

As to your question about R & D, Chevron is a very large corporation with a large technology company. We invest R & D funds in oil spill technologies, drilling technologies and improving safety. I can speak to one in particular. We are looking at oil spills in ice-infested waters. We co-founded an industry project in the Barents Sea. Oil was spilled in the ice, and recovery methods were investigated. We indeed spend significant sums of money on research and development.

In Newfoundland and Labrador, as Mr. Ruelokke mentioned at a previous meeting of your committee, there is a requirement to spend a certain proportion of our earnings on research and development. We are obligated to spend that money, and we will spend it in Newfoundland and Labrador, which is also part of the requirement. Some investment opportunities we are looking at go directly to making the offshore safer. I am proud of that effort, and there are more things to come on those investment decisions.

Senator Seidman: What proportion of your earnings is spent on R & D under the contractual responsibility? Is the R & D specifically on cleanup technologies?

Mr. MacLeod: The board in Newfoundland has not mandated what the R & D must be spent on. It can be spent on true R & D or on education and training. The industry in Newfoundland and Labrador is considering a range of opportunities for research investments. To date, we have not made any firm commitments on those expenditures. The R & D expenditures are in the hundreds of millions of dollars over the next 10 to 20 years to be spent in Newfoundland and Labrador.

Senator Seidman: I appreciate that and find it hopeful. However, we are a little cynical in our thinking. Private industries spend a lot of money on developing their drilling technologies so they can do it better and better, but very little of their money is spent on the hypothetical environmental disaster. That kind of cynical thinking is reinforced by an event such as the one unfolding in the Gulf of Mexico. Clearly, the oil would not gush all these days into the gulf if there were R & D that could produce an immediate solution. Could you please say something to increase our confidence in this area?

Mr. MacLeod: Here I am speculating. As we understand it, as we learn more about what happened we will look at containment opportunities or methods to improve our ability to contain.

Our focus is on preventing incidents like this from happening, and we believe that it is very possible, through equipment, through procedures, through people and a culture, and we have done so.

How to contain an incident like this is quite challenging. That is very clear, and I do not deny it. I read, perhaps as you did, that BP has committed to spend I believe $500 million in research and development in offshore safety, so there is one company stepping up.

The Chair: You were able to bring out and into the record the DWC, the Danny Williams clause, the licence — anyway, hundreds of millions.

Senator Peterson: Your safety culture is very reassuring, and you certainly have done everything you can on the human element. We hear a lot about relief wells and that after all else fails this is the final solution.

Could you explain exactly what that is? Do you have to drill into the original formation or intercept the existing well? How does this go and what is the timing?

Mr. MacLeod: My understanding of drilling a relief well is not thorough, and if my answer does not provide you comfort then let me know and we will find out more information.

The basic idea of a relief well is to intercept the original wellbore and to cement off the formation to stop the flow of oil out of that wellbore. The timing to drill that relief well depends on where the issue is located. It could be shallow up the hole or could be deeper, and shallower generally takes less time to drill.

We will be approximately three months getting to our total depth at the Lona well, so if we had to drill to that depth to drill a relief well it would take approximately that amount of time. However, I am speculating here.

Our focus, of course, is on preventing these incidents from happening, to have the equipment, the people, the procedures, the training, and the regulations so that we will never, ever need to drill a relief well.

Senator Peterson: You indicated that you are monitoring the pressure continuously all the way down.

Mr. MacLeod: Absolutely.

Senator Peterson: Can you ascertain the reservoir pressure before you get into the hydrocarbon, or is that an issue?

Mr. MacLeod: First, you mentioned hydrocarbon. In the exploratory well we are drilling, we hope to find hydrocarbons. Some technologies can give an estimate of pressure ahead of the drill bit. The best technology is to have drilled a nearby well, and in the Orphan Basin we have drilled a nearby well and have sampled the pressures. Therefore we are pretty confident in what the pressure regime will be in the location we are drilling now. However, we are prepared for all circumstances.

If we encounter high pressures we would know that; we would be prepared, and we have procedures in place to manage any pressure regime we encounter in the well we are drilling now.

Senator Peterson: I believe we were told earlier that if there was an oil spill, and we hope there will not be one, it would travel only 100 kilometres. Why would that be? Is there something special about the area you are in?

Mr. MacLeod: I do not know the particular number you are talking about. I have not heard that. As part of the approval process for drilling this well, we conducted an environmental assessment. As part of that environmental assessment, we contracted a third-party company to evaluate what would happen in the event of an oil spill. We evaluated many scenarios. Part of that evaluation included weather, current and sea states in the North Atlantic.

In one of the cases we modelled, we modelled a 30,000-barrel a day blowout, which of course we do not ever expect to have happen. Some 14,000 trajectories and simulations were run of that particular envisioned disaster, and none of the oil spilled in any of those trajectories reached any shore. It dispersed; it evaporated because of the high sea states. The sea states are challenging, but in that instance they would work for us.

Senator Peterson: Is the liability with your partners joint and several?

Mr. MacLeod: We have shared liability in that. I do not want to comment on the legal term. We are the operator; we would take the lead role on any spill response, but we have partners in the well, co-venturers, as I mentioned.

Senator Dickson: I want to come back to page 2 of your remarks and the second-last paragraph, which deals with the levels of environmental assessment, your health, environment and safety policies, your environmental protection plan, and so on. On the one side you have the technical, regulatory piece, and on the other side you have the corporate culture and how important the corporate culture of a large company is, right down through to the drill floor. Would you elaborate further on that? I think it is necessary for our audience, as well as for those around the table here, to get a firm understanding of the importance of that corporate culture. I have had a minimum amount of experience myself. Over and above what the stringent regulatory requirements may or may not be, it really fits into the new philosophy of regulation in the oil and gas industry being goal-oriented versus prescriptive. May I have your comments on that, please?

Mr. MacLeod: As you may recall at the beginning, I have been with Chevron for 30 years. We live by "the Chevron way." It really does guide everything we do, and it speaks to our corporate culture — our belief in safety. As Mr. MacInnis said, we start every meeting with a safety moment.

I have here cards that we observe individuals' behaviour, such as their posture at their desk. Here is one right here. We are expected to make an observation every month. Every individual in our company fills out one of these cards because we care about each other. It is a very powerful behavioural system. It could be just the way you are sitting at your desk.

It goes throughout our company. Our corporate culture focuses first and foremost on safety. I have felt it for 30 years, and I am very proud of our company corporate philosophy and approach to safety.

It pervades everything we do. We have policies such as "Do it safely or not at all," and "If you see it, you own it." If I see a trip hazard as I walk out the door, I own that hazard. I will not walk by it. That is part of the way we live and work at Chevron. I do not know whether that answers your question, senator, but it is engrained in all of us.

Senator Dickson: Yes, it does. It really touches the surface, but I have a great appreciation that multinational companies have tremendous health, safety and environment policies.

Mr. MacLeod: I will offer another anecdote. On the Stena Carron we believe in operating safely. If we see someone not operating safely, we call that person to task. A contractor was working on board the Stena Carron. He was observed practising some unsafe behaviour and was coached to operate safely. A day went by, and that individual was seen by the senior person on the rig, the offshore installation manager, walking down a stairwell not holding the handrail. He was put on the helicopter in the morning and told never to come back on the rig. That goes around the rig. Everyone knows that person is not invited simply because he did not hold the handrail.

Senator Dickson: My second line of questioning relates to something Senator Banks introduced, the liability provisions that affect the well you are drilling now. We had a presentation from Natural Resources Canada. They mentioned that the general practice is $30 million to $40 million for absolute liability; $70 million in a form that ensures the regulator will have access to funds via bonds or whatever support for the balance sheet; and $250 million to demonstrate financial capacity to cover liability by insurance, letter of credit.

What are the amounts and the conditions insofar as covering liability on the particular well that you are drilling in the Orphan Basin?

Mr. MacLeod: There are regulations for these financial instruments. They total $350 million. There is insurance, letters of credits and promissory notes. I believe it is $30 million in letters of credit, $70 million in promissory notes, and $250 million in insurance.

However, that does not imply that there is a cap in liability. If there were an incident, Chevron would be responsible for managing that incident and cleaning up the mess, which we certainly do not expect in our plan.

Senator Dickson: That is absolute liability. There does not have to be proof of negligence?

Mr. MacLeod: If oil is coming out of our operation, it is our responsibility.

The Chair: You have heard of a presumption, which is rebuttable, but there would be a strong res ipsa loquitur if the oil was coming out of their well.

Senator Massicotte: Thank you for being with us. Your argument is comforting and convincing that the Chevron way is such that there is minimal risk, that you operate differently from others and that we should not be concerned.

On a scientific basis, when you do your risk assessments, what is your probability rate? You say an oil spill will never occur in your case, but what is the probability of a spillage? Is it one in a million or one in 100 million?

Mr. MacLeod: I do not have the exact numbers at hand. We provided the board with the probability of a blowout, and I will provide that number to you.

Senator Massicotte: You also mentioned that in your scenario there was a lot of spillage, but nothing went offshore. Does that suggest there was no consequence environmentally from that spill?

Mr. MacLeod: What I said is that none of the oil, in all the scenarios, would reach land. A spill would be a disaster, no matter where it happened, whether it reached shore or not. I did not say there would be no environmental cost. I believe there would environmental consequences.

There are seabirds, obviously, in the region. We are in a deepwater area, so there are relatively few fish, but there surely would be environmental consequences. We would not take the situation lightly, and we would deal with the issue.

Senator Massicotte: Premier Danny Williams gave a description that if there were a spillage, given the temperature of the water, it would not be as serious. Can you describe what the consequences would be environmentally, and do you agree with Premier Williams' description of the consequences?

Mr. MacLeod: I cannot speak to Premier Williams' comments, although I have read his comments.

In the North Atlantic, the sea states are quite severe, typically, particularly in the winter. The high sea states would serve to disperse a lot of the oil, and a lot of the oil would evaporate.

I remind you that we have not yet found oil, so we do not know the type of oil we might find. In fact, we do not know whether we could find gas; we are not sure.

There are differences between gas and oil, as I think Stuart Pinks shared with you a couple of weeks ago. There is heavy oil and light oil. Light oil and gas evaporate into the atmosphere, whereas heavy oil is different.

We have not yet discovered oil there, and it is difficult to speculate on what would happen to the oil in that environment. We have modelled a range of scenarios, oil types, and sea states. I repeat that in all of those scenarios, the oil did not reach shore.

I want to reiterate that we are focused on prevention. With our equipment, our procedures, our people and our training, we do not believe we will ever encounter such an event.

Senator Massicotte: You make a solid argument that Chevron sets an example. However, when you start believing that, you also start believing that the other companies are not as sensitive or as careful as you are. Acknowledging that, what would you recommend that the government or the National Energy Board change to ensure the other companies' cultures and procedures are as cautious as yours?

Mr. MacLeod: With respect, I did not imply that others treat the issue of safety as less important than Chevron does. I believe the industry as a whole treats safety as their number one priority. However, I cannot speak for others. I can only speak for Chevron. Frankly, I cannot speak to regulatory policies or changes in regulations. I can say that if changes are made, Chevron will comply with those changes, anywhere we go, anywhere in the world.

The Chair: Senator Massicotte, for the committee, maybe we should each have one of those cards that says it is risky to put words in the witness's mouth that he did not say.

To be sure we have the facts, since you mentioned that you have operations in Hebron and Hibernia, from your general knowledge, are you able to tell us what drilling is going on today, on June 10, 2010, off the Atlantic shores?

Mr. MacLeod: Sure. First let me say that Hibernia is operated by Hibernia Management & Development Company Ltd., HMDC, not by Chevron, but I do know that today there is a well drilling at the Hibernia platform. Two other rigs, in addition to the Stena Carron, are currently in the general region of Newfoundland offshore. One is the Glomar Grand Banks and the other is the Henry Goodrich. I believe one of those is in the shipyard for repair and perhaps the other one is drilling. However, we are not operating that well. Another operator is. Then there is the Stena Carron, our operated well in the Orphan Basin.

I understand from Stuart Pinks' testimony of a couple of weeks ago that there are no wells currently being drilled in Nova Scotia or at the Sable project. The Hibernia; perhaps another well, the Glomar Grand Banks, I believe; and the Stena Carron are the three operating drilling units. These units are all different. Hibernia is a platform. The Glomar Grand Banks is a semi-submersible drill ship in moderate water depths of roughly 100 metres, and the Stena Carron is in 2,600 metres.

The Chair: That refers to drilling and exploration?

Mr. MacLeod: Yes.

The Chair: In addition to that, there are operations. Could you enumerate them? I gather from your earlier answer that there is always risk when you are dealing with oil, so those operations are relevant to our study as well.

Mr. MacLeod: There are currently three producing fields in Newfoundland: the Hibernia field, the Terra Nova field and the White Rose field. White Rose is operated by Husky; Terra Nova is operated by Suncor; and Hibernia is operated by HMDC. Hebron, which has been mentioned, is still on the drawing board. Oil was discovered decades ago at Hebron, but it is not under development; there are no drilling and no activities in the waters by Hebron.

The Chair: Thank you. That is helpful.

Senator Mitchell: That was my question. It was well asked.

Senator Lang: I want to go back to the blowout preventers and Senator Frum's line of questioning. First, I would like to get something clear in my mind: Under regulation by the regulatory body, the Newfoundland regulatory body in this case, is there a minimum requirement of the type of blowout preventer that you must use, or is it up to you as a company to determine what that blowout preventer will be and how you use it?

Mr. MacLeod: We are right in the middle of a shift from a prescriptive regulatory regime to a goal-based regime. I am unaware of whether there are a required number of redundancies, rams or what have you in the new regime.

I can tell you that Chevron will meet and in many cases exceed the regulatory requirements. It is my understanding that the blowout preventer we are using at the Stena Carron, has an additional redundancy built in that is not required by regulations. I enumerated four backup systems or methods to actuate the BOP. It is my understanding that two are required. We have four in total.

Senator Lang: I am thinking more globally, because whether the catastrophe Senator Seidman spoke about is off our shores or off Greenland, it seems to me there should be general standards across the industry where those types of requirements are dictated by regulations. That would ensure they are committed to not just by your company but also by other companies. Perhaps you might want to comment on that.

Mr. MacLeod: I can once again reiterate that Chevron will meet or exceed regulations wherever we work. I do know, and Mr. Ruelokke spoke to it, that regulatory agencies meet and compare notes, methods and standards by which the industry is regulated. I know that regulatory bodies, including the Canada-Newfoundland and Labrador Offshore Petroleum Board, meet with the U.S. Minerals Management Service, the Norwegian Petroleum Directorate and other regulatory bodies to talk about best practices. I believe a lot of best-practice sharing is already going on.

Senator Lang: In conclusion, I want to say that we all appreciate your very concise and informative presentation. We know there is risk, but it is very valuable to know what we are experiencing off the coast, in view of your safety culture and the fact you have successfully drilled a well fairly close by and are now aware of the pressures. That is probably very valuable information for yourselves and your contractors. It gives us some comfort that, as it is proceeding, you are doing the best you can with what you have.

Mr. MacLeod: Thank you.

The Chair: I have made a note of your disclosure that Senator Lang owns no shares of Chevron whatsoever. Senator Neufeld has a supplementary.

Senator Neufeld: It is about the blowout preventers. You have a lot of experience in deepwater drilling around the world. Would the blowout preventers be the same for the North Sea, in the same depth of water, as for the Gulf of Mexico or off the coast of South America? Would you use the same type of equipment, or would you change your equipment? I know this is hypothetical, but I want you to think about the same conditions, same depth of water and the same things that you find drilling off the East Coast now.

Mr. MacLeod: I am not a BOP expert, but it is my understanding the blowout preventers have to be rated for certain pressures in water depths. With knowledge of that, the appropriate BOP would be selected. We would refer to our in-house BOP specialist team in selecting the equipment that is right for the job. As I said in my opening remarks, they apply their standards around the world regarding which type of BOP we should be using.

Senator Neufeld: I think that is a good answer. It says that not every country has to have the same regulations, but you internally have a minimum standard depending on the pressures you drill in and those kinds of things, and you often go with a standard that is a bit better.

Mr. MacLeod: Right.

Senator Mitchell: The discussion has generally focused on the exploration risks. You have explained very clearly and well what Chevron has done to reduce, diminish and almost nullify that risk. For example, the Stena Carron has at least four levels of redundancies, and you have described the confidence Canadians and others can have in that.

However, there are the three stages: There is exploration; there is development, which as you said might be minimal risk because they are not trying to get anything out of the field at that point; but then there is production. Production would be different from what we have been discussing.

Are the risks different? Do you have the same levels of redundancy if there is a blowout during the production phase? This is relevant, because BP was at the production stage when the event occurred, was it not? Are there differences? You do not have the Stena Carron at that point.

Mr. MacLeod: It is very complex to give you a short answer on risk on a producing facility. Producing facilities are all different. Hibernia is a concrete platform resting on the seabed with topsides. The Terra Nova and White Rose fields have ships. We have very different operations around the world.

We are a partner; we do not operate the Hibernia platform. Hibernia has an excellent safety record, I must say. We monitor it and talk about it at management committees all the time. Looking at the safety and spill performance of that particular facility is always the first order of business. I would ask, though, that the question of that facility be directed to the operator, HMDC.

As a partner in that facility, we are very proud of the operator's performance from a safety and spill perspective. It is excellent.

I am sorry, what was the follow-up question to that?

Senator Mitchell: I think that is it. Can you give us some general ideas about what technology in a production facility would prevent or cap a blowout? Is it similar to what you have on the Stena Carron?

Mr. MacLeod: It is similar in concept. However, on a production facility like the Hibernia platform, the blowout preventers are on the platform. You can touch them. You can feel them. You can intervene more easily than you could in deepwater.

Again, I am speaking more generally about platforms like Hibernia. I cannot speak to Hibernia, specifically. We have asked the operator to speak to that. The blowout preventer is on the seabed, like they are in these shallow water facilities.

Senator Mitchell: Thank you.

Senator Banks: This was Senator Mitchell's question: Were the four levels of redundancy in the means of activating the blowout preventer?

Mr. MacLeod: Correct.

Senator Banks: It is not that there are four levels of blowout preventer redundancies; there are not four blowout preventers.

Mr. MacLeod: No. There are a number of rams, as I mentioned.

Senator Banks: With four means of turning it on.

Mr. MacLeod: Five means — the primary way and the four alternates.

Senator Banks: I will ask you the question that Senator Seidman sort of referred to pertaining to mitigation. You are likely noticing a bit of doubt in our questions. I will paint the scenario: Some of us are sitting around a room like this in Louisiana on April 19 and BP is telling us that they have never had a major blowout, that their safety record is perfect and that they do not anticipate any problems because they have everything covered. I suspect that could be true, because there had not been anything like it before, which leads to many of these questions.

I ask you to comment on the mitigation and how to deal with it if, God forbid, it should happen. I put the question in the context of Louisiana and Florida. The people who live there and have been affected by this disaster had nothing to do with it and do not care that BP has a lot of resources, is standing behind this and is legally responsible. That simply does not make any difference to them. Would you tell us a little more about the mitigation aspects? You said the models showed that no oil from a potential accident in the well you are drilling today would ever hit a shore, but I am sure that is not true of every deepwater well that is drilled.

We do not seem to have the means to contain, suck up and stop a leak of the magnitude of the one in the Gulf of Mexico. I hope that someone is looking at what to do in that unhappy event? Humanity could reasonably contain the Exxon Valdez spill and sop it up with chemicals and dispersants, but those techniques have not worked in the current event. Could you comment on that?

Mr. MacLeod: Yes. Certainly the event in the Gulf of Mexico is tragic and unprecedented. BP is faced with a huge challenge. We are assisting in that. We are proud of our assistance, both direct and indirect. We lead one of the U.S. government panels on blowout preventers and recommendations for possible changes to blowout preventers. We are very proud of that.

In terms of mitigation, our spill response plan is a tiered approach. The first of three tiers is that in the event of a small spill, we would activate resources on board the Stena Carron and the supply vessel standing by. A certain amount of boom and equipment and absorbent equipment would be brought to bear. The next tier is to activate equipment in St. John's at the Eastern Canada Response Corporation, ECRC, with whom we have a contract to help respond. In the event of an incident in the magnitude of the current one in the Gulf of Mexico, we would go to the third tier, which our corporation has only gone to once. That was during Hurricane Katrina, when there were a number of small spills. In the third tier, we have a worldwide emergency response team. We could immediately mobilize 200 or more people to help us to manage that spill, and we would call in resources from around the world. That is our mitigation plan.

Senator Banks: Thank you.

The Chair: The Eastern Canada Response Corporation will appear before the committee next Tuesday evening with the its president, Mr. James Carson. We will be able to look into that aspect further.

We are grateful to you, Mr. MacInnis and Mr. MacLeod. You have given us a very clear picture. It is palpable how proud you are of your company and your culture, which is refreshing to see. We hope it has reassured our viewers and Canadians about your operation.

Are there last comments?

Mr. MacInnis: I have taken away several undertakings, and I want to reassure Ms. Gordon that we will respond to them within the next week.

The Chair: Thank you. I declare the meeting adjourned.

(The committee adjourned.)