OIL & GAS ACCIDENT INVESTIGATION REPORT – FAILURE TO REPAIR LEAKING VALVES – BLACK ELK ENERGY

OIL & GAS ACCIDENT INVESTIGATION REPORT – FAILURE TO REPAIR LEAKING VALVES – BLACK ELK ENERGY

OPERATOR: Black Elk Energy Offshore Operations

This was an incident during development/production (DOCD/POD).

On July 4, 2014 at 1300 hours, Construction Workers on the Main deck of the platform were preparing to resume hot work when they heard an unusual noise from the deck below (Cellar Deck). Stop Work Authority (SWA) was initiated and the Lead Operator and Contract Safety Representative went to the source of the noise which was the well bay area on the Cellar Deck. Natural Gas was observed to be leaking from the upstream flange of the Flow Safety Valve (FSV) on the FA-2 flow line segment on the B-001 well upstream of the production header. The construction crew was instructed to muster at the boat landing (+10) and board the stand-by boat. The Lead Operator and Contract Safety Representative remained on the facility to attempt to isolate the B-001 well which was unsuccessful. 

The Lead Operator bled pressure off the FA-2 flow line segment every two hours to mitigate natural gas leakage from the upstream flange of the FSV. It was determined that the Manual Master Valve and Surface Safety Valve on the Wellhead were leaking due to the B-001 well having a history of making traces of sand. Additionally, the Wing Valve on the FA-1 flow line segment was leaking therefore allowing the Shut in Tubing Pressure (SITP) of 3200 Pounds per Square Inch Gauge (PSIG) to be present up to the Out of Service production header causing a gasket failure on the upstream flange of the FSV. During the Investigation it was identified that the Management of Black Elk Energy failed to mitigate valve deficiencies that were previously identified on August 16, 2013. The FA-2 flow line segment was removed and blind flanges were installed on July 5, 2014

LIST THE PROBABLE CAUSE(S) OF ACCIDENT:

The Manual Master Valve, Surface Safety Valve and Wing Valve were leaking which allowed the Shut in Tubing Pressure of 3200 Pounds per Square Inch Gauge (PSIG) to be present up to the Out of Service production header causing a gasket failure on the FSV.

LIST THE CONTRIBUTING CAUSE(S) OF ACCIDENT:

The B-001 well had a history of making traces of sand.  Management failed to mitigate valve deficiencies that were previously identified on August 16, 2013.

The date of last production on the B-001 well was August 2013.  This unmanned facility and has been shut in since October 5, 2013.

SPECIFY VIOLATIONS DIRECTLY OR INDIRECTLY CONTRIBUTING. NARRATIVE:

G-110 'C' 30 CFR 250.107(a): Black Elk Energy failed to follow up and repair valves on the B-001 well that were known to be leaking since August 16, 2013.  Civil Penalty will be evaluated.

Oil Firm in Offshore Blast Faced Financial Pressures

Before last month's fatal explosion on one of its oil platforms off the Louisiana coast, Black Elk Energy Offshore Operations LLC was struggling to execute its strategy of wringing oil and gas from aging wells in shallow waters of the Gulf of Mexico, according to a Wall Street Journal review of its financial statements.

The company, controlled by New York hedge-fund manager Platinum Partners LP, was facing difficulties ranging from operating losses to management turmoil to safety violations. In September, Standard & Poor's Corp. downgraded Black Elk's notes to B-minus, citing the company's weak liquidity.

Federal regulators say they still are investigating the Nov. 16 fire and blast at the Black Elk oil platform, which killed three Filipino guest workers employed by a contractor and seriously hurt three others. It was the deadliest offshore accident since 11 workers died aboard the Deepwater Horizon drilling rig in 2010. The Black Elk platform, which was in about 52 feet of water, wasn't pumping oil at the time.

A rescue crew at the Black Elk oil platform after the fatal Nov. 16 blast. Reuters

"We grieve for those who were killed and injured, and we believe we owe it to them to find out exactly what happened in this case," Black Elk said in written replies to questions from the Journal. The company said it is cooperating fully with regulators and has started an independent investigation. It said the platform was operated "in a safe and compliant manner."

The company also denied it was under financial stress at the time of the blast, and said it doesn't comment on credit-rating firms' decisions.

Black Elk was founded in late 2007 by Chief Executive John Hoffman, who had served long stints at Amoco Corp. and BP PLC. Itis one of several small companies that have been buying assets in the Gulf's shallow waters from bigger energy producers, many of which are seeking fatter profits by drilling farther offshore.

The company has expanded rapidly, acquiring 98 platforms in the Gulf and increasing its revenues to $339 million in 2011 from $18 million two years earlier. Its business model involves reworking old wells to make them more productive while plugging those that are no longer economic.

"We are engaged in a continual effort to monitor and reduce operating expenses by finding opportunities to safely increase efficiencies related to staffing, transportation and operational procedures," it said in regulatory filings as recently as Nov. 13.

In 2009, Black Elk secured funds from Platinum Partners, which has lent it money at interest rates up to 20% and last year paid it $30 million for preferred stock with an annual dividend of 24%, payable in preferred shares, according to filings with the Securities and Exchange Commission.

Platinum, which controls the company's management, didn't respond to e-mailed questions from the Journal. In a statement, it praised Mr. Hoffman and said it shares "his grief and concern for all parties affected by the recent tragedy in the Gulf."

Platinum was founded in 2003 by Mark Nordlicht, who got his start in commodities trading and had made previous energy investments. The firm manages more than $1 billion in assets, according to its website.

By the end of September, Black Elk's credit lines were almost fully drawn, and it had fallen out of compliance with a debt covenant, according to a Nov. 13 filing. It got a waiver in November from its lenders, and permission not to count Platinum's preferred shares as debt. In November its lenders boosted Black Elk's borrowing limit for some purposes to $200 million.

In the third quarter, Black Elk's oil and gas production fell about 13%, its revenues plunged 60%, and its operating loss topped $25 million. The company cut costs related to drilling wells and maintaining platforms during the quarter. In its Nov. 13 SEC filing it cited initiatives that helped lower operating expenses by 7% from a year earlier.

Three days later fire broke out on the Black Elk platform, which was built in 1963 and about 20 miles off the Louisiana coast.

Black Elk said its cost reductions had no bearing on the Nov. 16 accident.

Days after the explosion, S&P said it might downgrade Black Elk's credit rating further, saying the company had "little capacity to absorb" unexpected expenses or liabilities.

Black Elk has had recurring safety problems, with federal citations for 315 serious violations since 2010. Black Elk challenged a $307,000 fine for failing to test a valve that was found to be leaking natural gas in 2010, but lost an appeal and paid the penalty in September. The company met with the Bureau of Safety and Environmental Enforcement to discuss a $140,000 fine for an incident last year at an offshore platform, seeking to mitigate the penalty, according to the Nov. 13 filing.

Though regulators had warned Black Elk in April that it needed to improve its compliance or risk losing its ability to operate in the Gulf, it was cited for 45 violations in October alone.

"We cannot yet say there was any linkage between what we knew in advance about their compliance issues and the incident" on Nov. 16, said James Watson, director of regulatory agency, adding that the probe is continuing.

The months before the blast were also marked by changes in the company's executive ranks.

Energy producer Blacksands Pacific Group Inc. had made an offer for Black Elk in June, but withdrew it in late September, according to Mike Kelly, senior vice president for acquisitions at Blacksands. Mr. Kelly wouldn't say why Blacksands withdrew its bid, which coincided with the departure of two senior Black Elk executives.

Black Elk said James Hagemeier, its chief financial officer, retired and that Carl Hammond, its chief well officer, "is no longer with the company."

Mr. Hagemeier said in a Nov. 20 deposition in an investor lawsuit filed against the company that he was terminated, partly in connection with the failed deal. He said Mr. Hammond was also terminated. Mr. Hagemeier couldn't be reached for comment; a lawyer representing him in the lawsuit didn't respond to a request for comment. Mr. Hammond didn't return phone calls seeking comment.