Wednesday, January 2, 2013

More on various offshore rig related operations .....


Jackup on the wet tow :

Jackup moves to different well platform locations and are wet towed by tug vessels as shown below video clip. There are many different ways of towing the rig and they could comprises :

- Double tow – 2 tows each connected to the same tug with separate towlines. One towline is of sufficient length that the catenary to the second vessel is below that of the first.
- Tandem tow – 2 (or more) tows in series behind 1 tug, i.e. the second and following tows connected to stern of the previous one.
- Parallel tow – the method of towing 2 (or more) tows, using one tow wire, where the second (or subsequent) tow(s) is connected to a point on the tow wire ahead of the preceding tow, and with each subbsequent towing pennant passing beneath the preceding tow.
- Two tugs (in series) towing one tow – where there is only 1 towline connected to the tow and the leading tug is connected to the bow of the second tug.
- More than 1 tug (in parallel) towing one tow – each tug connected by its own towline, pennant or bridle to the tow.

Before start of any transit voyage, the main and emergency towing arrangements should be check to be in good working condition and ready for used. All anchor handling equipment, charts etc., required for the move should be ordered and the fixed rig equipment checked.

Prior to the commencement of and during, transit voyage weather forecasts with minimum 72 hours outlook must be obtained from two independent recognised weather service centre. The forecasts may be ordered from a company maintaining such service for the question. Weather forecasts and current charts must be studied carefully so that the best use is made of weather windows and favorable tides.

The Barge Engineer is responsible for preparing the unit prior to a rig move, as per specific chekclist. During transit, the vessel must follow rules and display lights and signals applicable to vessels. The unit shall be secured with all watertight doors/ hatches shut and dogged. Only essential access doors necessary for the operation should be used. The watertight integrity of all compartments must be ensured.
There will be a transportation route study to evaluate the design environmental criteria. This is normally carried out when a voyage-specific motion analysis has to be carried out. A stability study to demonstrate that the carrier vessel, in the case of a dry transport, or the hull of the transported vessel, in the case of a wet tow ( see video below ), meet the requirements of the IMO or the classification society. The analyses are normally carried out using the generic wind speeds of 100 knots for intact stability assessment and 70 knots for damaged stability. Lower wind speeds are sometimes considered on a case-by-case basis for restricted tows in sheltered waters.

Typically Motions and accelerations study and analyses are carried out with the voyage specific environmental criteria using diffraction or strip theories. In the absence of such meteorological data, deterministic motions are often used. A structural assessment taking into account the loads associated with the motions and accelerations.
For example, the most common deterministic motions criteria are those by Noble Denton for flat bottom cargo barges and other types of carrier vessels.

The criteria are:
20" roll angle in 10 s period & 0.2 g heave acceleration, 12.5" pitch angle in 10 s period & 0.2 g heave acceleration.

When deriving the voyage-specific environmental data for the transportation route, the 10-yr return environment is normally considered. Given the temporary nature of the transportation phase, the data is normally derived specifically for the departure month so as to take advantage of seasonal variations. The transportation route is normally split into several sectors within which the environment is assumed to be uniform, eg the route sector between korea and north sea. The duration of exposure within each of those sectors is calculated based on the vessel speed. Given that the exposure periods are normally less than 1 month, the environmental data may be reduced to allow for the shorter exposure periods.
Transportation routes are selected based on the economic. environmental and safety considerations. The following factors could be considered:

The environmental conditions along the transport route affect the motions of the vessel and the voyage speed. The weather conditions after the commencement of the transport operation often dictate local deviations from the planned route.

The existence of safe havens. As part of a contingency planning, particularly for long transports, safe havens have to be identified in case the conditions require the vessel to seek refuge in a port.
Vessel or cargo dimensions and hull draft which restrict passage below certain obstructions, such as bridges, or in shallow water or through locks and waterways. Costs of the passage through canals, such as the Suez Canal.




Offshore rig operation ( Article to be added )





Rig Punch through:

Three-legged offshore drilling jack-up rigs are commonly used for oil and gas explorations. Each leg is supported by a spudcan foundation with diameter between 10 m to 25 m. In sand overlying clay, the installation of spudcans is often subjected to a potential punch-through hazard. This occurs when the applied load exceeds the maximum bearing resistance of the upper sand layer causing the spudcan to plunge into the underlying clay. Such failures often result in a huge financial loss and cost millions of dollars to rectify. Punch through failure occurs when a strong soil layer of limited thickness overlies a weaker layer of soil. Pressure produced by the applied footing loads transmits in both downward and lateral direction thereby creating a less pressure in the weaker soil.

It is reasonable to assume an angle of 21 degree of load spread. While the tansmitted pressure in the weaker soil layer exceeds the bearing capacity of that layer, a punch-through of the footing would happen even though the bearing capacity of the overlying stronger layer is sufficient to sustain the load.

Normally a safety factor of 1.5 is applied to compare the bearing capacity of the weak layer to the pressure transmitted by the spud can and portion of the hard layer delimited by the angle of 21.degree of load spread.

The generally rapid penetration of one or more spud cans into the weaker layer will continue until:

- The soil offers enough adequate resistance. The soil bearing capacity increases with depth.
- If the drop is large, with the increasing buoyancy of the hull as it enters the water.

The sudden penetration of the leg causes sudden inclination of the rig and consequently large lateral deformations, even fracture of the leg. The importance of to follow strict preload procedures at the proper air gap is vital. If a punch through occurs during a storm in the drilling mode, the result is most probably catastrophic.

Sometimes It may happen that the rig operator decides to bring another JU back to the location where a previous JU left with old foot prints (the holes left by the leg and spud can) in the sea bottom. After the spud cans are extracted, the hole wall may partially collapse. The holes fill in with the time. That gives crater like depressions at the sea bottom. The soil in the pockmark is very disturbed and has very low shear strength. Therefore, if a spud can of a new JU locates too close to the old footprint, the soil below the spud can would fail laterally and lateral load is applied to the spud can creating leg bending. This failure can cause a rapid penetration, similar to a punch through and a leg fracture.

The “rule of thumb “of choosing a new JU to come back to the location is:
The edge-to-edge distance between the new spud can and the old foot print should be at least one half of the spud can diameter.


courtesy of maersk training


Offshore Rig well test flaring :

Well Testing Operations generally below but there could be more or less steps depending on different rig operator and their safety philosophies may varies :


The following preparations should be carried out on the rig in advance of the test:
1. The BOP stack should be tested.
2. An adequate volume of properly weighted mud should be available.
3. The OIM should schedule BOP, fire, and H2S drill prior to the testing.
4. Fire hoses should be laid out in the vicinity of the burners and surface testing equipment. Fire extinguishers should be placed close to the surface equipment.
5. Spare arrestor, remote shut down system, over-revving system and diesel leak automatic shut down system should be installed on the mobile air compressor, if used.
6. The OIM, Clients Representative and Testing Engineer should hold a pre‑test meeting attended by all parties concerned with the test to ensure that the expected course of events, responsibilities and contingency measures are fully understood.
7. The OIM should schedule a safety meeting with the whole crew prior to the test. All personnel should be made aware of test expectations and restrictions imposed during testing, i.e. welding radio use, helicopters, use of cranes over well test area etc.
8. Hazardous areas should be clearly marked off.
9. All required H2S equipment is to be onboard and tested.
10. Dispersion chemicals should be stored on standby boat.
11. The standby boat and helicopter base should be advised that the test is about to commence.
12. The OIM and Clients Representative should give notice that the test is commencing. 
Preparations In Advance Of The Test
1. All surface lines, the separator and flow-tank should be flushed with water.
2. The cooling sprays on the burners and rig should be checked and any plugged jets cleared.
3. Surface lines, separator with its relief valve, gas heater, choke manifold, lubricator valve, subsea test tree and surface test tree should be pressure tested. Relief valve will not have to be lifted if calibrated on shore just prior to job and witnessed by Certifying Authorities.
4. The wireline lubricator and its assembly on the surface test tree should be checked and pressure tested.
5. The activation of the surface test tree safety valve, subsea test tree valves and lubricator valve should be checked.
6. The burner ignition system should be checked.
7. The separator flowmeter should be calibrated by pumping water through them into the flowtank. The separator controls to be checked.
8. The lengths, OD, ID and threads of all downhole test tools should be checked and a tally of the test string made.
9. The packer should be checked to ensure that it is correctly made up for the size and weight of casing in which it is to be set.
10. The actuation of downhole valves should be checked.
11. The dimensions of the subsea test tree and slick joint should be checked to ensure that the tree will locate correctly in the wellhead and BOP.
12. Gauges, hangers and gauge dimensions should be checked to ensure that they will locate correctly in the carriers.
13. All electrical lights, outlets, switches shall be checked in the general area of the well test units.

· Check that well test equipment layout conforms to plan submitted and approved by certifying authority.
· Lay out, measure and drift testing string (Ref. Test Programme and Well Test Supervisor on board for items/procedures required). Tally same and prepare running order.
· Check all handling equipment required: elevators, slips, safety clamps, lift subs, crossovers etc. Ensure fishing equipment available for fishing test tools and tubing used. Ensure that correct crossovers are available on the rig floor to enable stab-in valve to be used for well control.
· Well test equipment to be tested as per Well Test Programme and Well Testing Company Procedures to satisfy requirements of Certifying Authority. All pressure testing to be carried out as per the Company pressure testing safety procedures. Test all remote shutdown systems ensure that responsible personnel are briefed on operation of these.
· Ensure well test area deluge systems (where fitted) have been tested. Check all remote control stations (where fitted).
· Rig up and test all rigside cooling systems for use during flaring of hydrocarbons. Ensure that hoses are spotted where additional cooling might be required.
· Check that subsea test tree and slick joint dimensions are correct for wellhead/BOP space-out. This may be confirmed using a “Dummy Run” (Ref. Well Test Programme).
· Meeting to be held with OIM, Senior Toolpusher, Operator’s Drilling Supervisor, Well Test Supervisor and all parties concerned with the testing to discuss, draft and implement any specific procedures required.
· In areas where there may be H2S at surface during flow periods, then ensure that equipment and contingency procedure are ready. Carry out training and drills to ensure proper response by emergency teams and non essential personnel mustering.





Rig and ships lauching at yard without dry dock :

There are few principal methods of conveying a new rig or vessel from a construction yard to the water, only two of which are called "launching". The most familiar, and most widely used is the end-on launch, in which the vessel slides, usually stern first, down an inclined slipway. As for triangular hull shape rig, it can go aft or forward into the water as shown. The side launch, whereby the vessel enters the water broadside, came into old conventional method use on inland waters and was more widely adopted in old days where yards do not have dry docking facility.. The third method is float-out, used for rigs or ships that are built in basins or dry docks and then floated by admitting water into the dock. 

A floating dry dock
Some yards adopt floating dry dock method and this involves investment cost to build such dock facility. A floating drydock is a type of pontoon for dry docking ships, possessing floodable buoyancy chambers and a "U"-shaped cross-section. The walls are used to give the drydock stability when the floor or deck is below the surface of the water. When valves are opened, the chambers fill with water, causing the drydock to float lower in the water. The deck becomes submerged and this allows a ship to be moved into position inside. When the water is pumped out of the chambers, the drydock rises and the ship is lifted out of the water on the rising deck, allowing work to proceed on the ship's hull.  A typical floating drydock involves multiple rectangular sections. These sections can be combined to handle ships of various lengths, and the sections themselves can come in different dimensions. Each section contains its own equipment for emptying the ballast and to provide the required services, and the addition of a bow section can facilitate the towing of the drydock once assembled. For smaller boats, one-piece floating drydocks can be constructed, potentially coming with their own bow and steering mechanism.








Rig Leg rackphase differential (RPD) monitoring  :

One of the current issues affecting jack- up drilling units, especially those with  the newer leg designs, is the effect of leg cord Rack Phasing, which causes damage to individual leg members, commonly referred to as Rack Phase Differential (RPD). This effect arises under 3 general situations:

Jacking up on uneven bottoms causes each leg cord on 1 or more legs to experience differing bearing loads .
During elevated operations, scour conditions under the spud can result in unbalanced leg cord loading ..

• Extracting the chock system and loading the rig back onto the jacking pinions can cause RPD as well in the event individual system torque cannot be determined or set properly.

RPD occurs most often on locations with a disturbed or uneven seabed, resulting in eccentric bearing support of the leg’s spud can and causing the can to move horizontally. RPD is most likely in situations with (1) pre-existing spud can holes, (2) sloping seabed, (3) uneven sea-bed, (4) uneven seabed due to scour, (5) leg splay, or (6) rapid penetration.

All jackup rig designs experience RPD, but only certain classes (primarily units with low cross-sectional leg members) experience RPD to the point of leg damage. It was understood that rig design such as the F&G L-780 can sustain up to 3 in. (76 mm) of RPD before leg member failure occurs. The Mod-V B class may sustain up to 4 to 5 inches of RPD. According to web report, the new JU-2000E is designed to sustain up to 8 in. of RPD (203 mm) before leg member failure.

Location evaluation prior to rig arrival on-site is the most critical factor for reducing RPD effects. A complete location evaluation can be performed by doing bottom surveys, geo hazard surveys and soil analysis. The second most critical stage for monitoring RPD occurs when the rig is set up on location. Early detection of RPD helps prevent the operation from continuing into damage-producing stresses.

Soil properties have a critical impact on the process. In typical locations with a hard seabed and minimal penetration, there is very limited potential for manipulating the seabed while elevated. When the seabed is hard, RPD is typically eliminated by reseating the spud can. If RPD is monitored before full bearing pressure is achieved, there can be limited ability to manipulate the seabed (referred to as “stomping” or “pre-forming”).

Operators have found that manipulation of the seabed in later stages of the setup process is more likely to successfully reduce RPD when softer, more pliable soils are present. For all soil types, the best opportunities for managing RPD are during the initial stages of setting up on location.

Basic techniques employed to counter RPD after it is observed includes reseating, changing chord loads by releasing brakes & independent chord jacking, intentionally imposing reverse RPD, and tilting the rig.

According to web article, the JU-2000E jacking system has the ability to monitor gear unit torque from the Jacking Console and set the torque individually for each gear unit. In addition, the jacking system includes a Rack Phase Display and Alarm System to monitor differential as it occurs. This enables the jacking operator to stop jacking operations to evaluate any effects of RPD and to institute appropriate mitigation procedures.

Typical RPD DISPLAY

The typical common RPD display may shows relative differences in displacement of the 3 chords for each leg. Displacement of each chord is measured by a Leg Height Detector fitted at each chord on top of the jacking structure. The detector consists of an idle pinion that meshes with the rack and rotates only during the vertical displacement of the chord . This pinion drives 2 pulse counters that deliver signals to the MCC, which processes these signals and display the RPD values on the central jacking console for each leg.

The RPD display does not automatically stop the jacking operations. However, it does deliver an audible warning if RPD exceeds . Values of chord relative displacement are displayed for the jacking operator, who then decides when and which correction is necessary.

The jacking system includes a central jacking console and 9 local consoles (1 for each chord). The local consoles interface with the Rack Chock System engagement. Length of the leg deployed below the hull is displayed on the same screen as the Pinion Load Monitoring System screen, located on the Jacking Central Console .


Courtesy of Monitor Systems Scotland Ltd


Rig safety induction :

Training, according to the requirements set out for work onboard MOU, MODU,etc by IMO, and to SOLAS requirements and recommendations, is carried out continuously and documented on the “First Visit (crew member)” and “Self-assessment (crew members)” check-lists. Training according to the requirements are also carried out continuously and documented additional to the Training Register for completed Onboard Safety Training.

Safety training and induction onboard is normally part of the Safety Officers' duties. If no SFO is employed the Second Officer is normally appointed Safety Officer. Recognized qualifications shall be utilized when appropriate.
All crew members are required to complete a check-list to document that they have received proper safety induction on their first arrival as well as have been given time and opportunity for familiarization onboard.

Detailed information is contained in rig or vessel controlled documentation such as

• Safety Handbook
• Safety Manual
• Safety Plan
• Emergency Plan
• Emergency Response Manual
• Rig Operations Manual

All employees and personnel coming onboard for the first time are required to attend a Safety Induction Meeting, which may include the requirement to view a safety video. This meeting is normally conducted by the Safety Officer, but may on some locations be conducted by a specific person appointed for this purpose by the client. Such arrangement however does not relieve the Master / OIM from his responsibility to ensure every new arrival receives appropriate safety induction and other relevant information.  All drills and musters onboard to be in accordance with legislation requirements, international conventions and industry as well as Company standards.

The Master/OIM is responsible for drills and musters being carried out as stipulated in Company standards and to the requirements of the Flag state authority.

The Master/OIM is also responsible for the documentation of drills and musters, as well as to ensure debriefing and evaluation of procedures and results is part of the exercise.

Courtesy


Helicopter landing on rig  :

Many of these units will have helidecks where the design and construction of such helidecks (particularly on some vessels) tend to be less prescriptive than for fixed installations; the ship’s main functional purpose will sometimes inhibit helideck design.
• Floating Production and Storage Systems

• Mobile Offshore Drilling Units
• Accommodation Vessels (Floatels)
• Jack-ups on-the move and
• Specialist Vessels.

However, they are required to meet the standards set out in the relevant regulations, codes and guidance in order to undertake helicopter operations routinely.  Invariably a MODU (a semi-submersible, jack-up on the move, or drill ship) will initially be specified using the IMO MODU Code [Ref: 70] as the basis for design.

Operating Environments :

Semi-submersibles

The marine operating environment for a semi-submersible is similar to a fixed installation insofar as the helideck heading is generally fixed as a result of the anchoring arrangement or, if fitted, a dynamic positioning (DP) system.

However, it differs from a fixed installation in that the helideck has a dynamic movement in roll and pitch axes, heave, surge and sway due to the vessels dynamic characteristics.

In addition to wind speed and direction, helideck movement (velocity and accelerations as well as heave amplitude) induced by the floating structure should be fully taken into account during helideck and system design and helicopter operations.  The helideck is typically located at one corner of the main deck (forward or aft) directly above one of the buoyancy columns and adjacent to the bridge / accommodation. In this location, the windlasses and winches for controlling the anchoring system will be directly below the helideck.

It is therefore important to ensure there is sufficient cantilever of the helideck structure over the column and windlasses to avoid infringing the 5:1 falling gradient below the helideck surface. It is also essential to provide sufficient air gap below the helideck structure and above the winches and housings to avoid unfavourable aerodynamic effects over the helideck.

Jack-ups

The marine operating environment for a jack-up on station is the same as a fixed installation. However when under tow, the helideck conditions are similar to a vessel under way.

Helidecks on jack-ups, when on location, do not need special consideration for vessel movements because they are in effect fixed structures. However, when under tow they are effectively a vessel, and helicopters landing on the helideck (routinely or in an emergency) will require the same design considerations and operational aids as a mobile unit. Normally it is very seldom to land a helicopter during rig tow as we understood from rig operators.
In particular when under tow, the legs will be elevated to their maximum height and, as a result, they will be the dominant obstructions. This should be taken fully into account during helideck design.


Vessels

The marine operating environment for a drilling vessel ‘on station’ is similar to a semi-submersible insofar as the helideck heading is generally fixed as a result of the anchoring arrangement or, if fitted, the dynamic positioning (DP) system.  Similarly, the helideck has a dynamic movement in roll and pitch axes, heave, surge and sway due to the vessels dynamic characteristics.






Tuesday, January 1, 2013

What some chiefs say about 2013 outlook.....



Courtesy from Straits Times


Last night our nation rang in the 2013 year ( chinese astrology termed it the year of water snake ) with spectacular fireworks displayed across the marina bay skyline. The fireworks, which illuminated the sky, also provided a backdrop for the hundreds of white spheres bobbing in the bay, each containing different wishes for 2013 penned by revellers. Watched by tens of thousands of attendees at the Bay countdown party, the atmosphere was electric as the crowd counted down the seconds in unison. The drizzle earlier in the day did not deter or drench down the spirits of the crowd.
As for the coming year businesses will be facing with probably some downsizing, relocation of or closure as a last resort.  The tightening of foreign labour will surely have great impact to businesses here especially like our shipyards depending on big pool of semi and skilled foreign labour.
Asia will continue to be the growth engine for the private banking industry. Significant amounts of new wealth continue to be created in the region and in China, Indonesia, Taiwan and the Philippines.
Most businessmen expressed mild optimism about their prospects for the coming 12 months. 
Yesterday, Prime Minister Lee Hsien Loong said that growth for this year would come in at 1 per cent to 3 per cent. All eyes will be on the global economy for further signs of recovery in the United States and a reversal of fortunes for crisis-hit Europe.
Courtesy from Straits Times
Our chief, Keppel Corp Mr Choo Chiau Beng said: "It depends on the world economy. If it's benign, then we'll be doing quite good. If it's tough again, we'll have to struggle with the slowdown in property sales."
At least politically, there is stability ahead, with the US presidential election and the China leadership transition completed.
The giant US economy is tipped to turn around and that could benefit businesses here. 
Courtesy from Straits Times
Singapore Exchange (SGX) CEO Magnus Bocker said: "Asia will continue to be the heart of economic growth, even with a more measured pace."
The SGX is also upbeat, tipping that low interest rates will act as a further spark for interest in stocks to grow.
Mr Bocker said: "The SGX continues to serve as the access point for global investors managing Asian equities. We are also seeing a returning interest from retail investors to the stock market."  
The robust regional economy is expected to boost local firms in the logistics and supply chain sector.
Private bankers are also bullish about the industry's prospects, albeit in a more moderate tone.
UBS' Mr Koh said: "We've seen significant growth in Singapore, Hong Kong, Indonesia and Thailand. While all the Asean markets are growing, I see tremendous opportunities in Laos, Vietnam, Myanmar and Cambodia."
One of the more upbeat industries in Singapore is construction, given the strong pipeline of government projects. "The outlook will remain positive but competitive," said OKP Holdings managing director Or Toh Wat.
"Based on expected expenditures announced, at least $55 billion worth of transport infrastructure is being built or will be built by 2021 in Singapore."
He is optimistic about his firm's prospects, noting that OKP is "well positioned to benefit from the public spending on transport infrastructure".
 How is the Global Economic Outlook for 2013  
The global economy has yet to shake off the fallout from the crisis of 2008-2009. Global growth dropped to almost 3 percent in 2012, which indicates that about a half a percentage point has been shaved off the long-term trend since the crisis emerged. This slowing trend will likely continue. Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013. Uncertainty across the regions – from the post-election ‘fiscal cliff’ question in the U.S. to the Chinese leadership transition and reforms in the Euro Area – will continue to have global impacts in sluggish trade and tepid foreign direct investment.
- Across the advanced economies, the Outlook predicts 1.3 percent growth in 2013, compared to 1.2 percent in 2012. The slight uptick is largely due to the Euro Area, which is expected to return to very slow growth of 0.2 percent after the -0.6 percent contraction in 2012. U.S. growth is expected to fall from 2.1 percent in 2012 to 1.8 percent in 2013.
- In the medium-term, the outlook expects the U.S. and other advanced economies to go some ways toward closing large output gaps – that is, the difference between current output and the level of output an economy can produce in a noninflationary way, given the size of its labor force and its potential to invest in and create technological progress. The current output gap is a result of weak demand due to the 2008-2009 crisis. This development should allow the U.S. to average 2.3 percent annual growth during 2013-2018 before falling to 2.0 percent in 2019-2025. In the same two periods, Japan is expected to grow at 1.1 percent and 0.9 percent, respectively.
        
- A more significant slowdown is expected for less mature economies over the next year – and beyond. Overall, growth in developing and emerging economies is projected to drop from 5.5 percent in 2012 to 4.7 percent in 2013, with growth falling in China from 7.8 to 6.9 percent and in India from 5.5 to 4.7 percent. From 2019-2025 emerging and developing countries are projected to grow at 3.3 percent.
The IMF’s forecast for China in 2013 is reasonable at nine percent inflation-adjusted growth. That forecast, however, assumes no collapse in Europe, which is a pretty big assumption. Companies doing business with China, as well as companies doing business with other companies that do business in China, should understand both the upside and downside potential for that country’s economic outlook.  China’s economic growth has been very good for quite some years. The consensus forecast now is that 2012 growth will be right in line with the country’s long-term growth potential of about nine percent per year. However, there are still five key sensitive issues to consider and which may turnaround the situation should there be any swing in circumstances :
  • Inflation fighting
  • Housing bubble
  • Export markets
  • Cronyism
  • Value of the Yuan

Sunday, December 30, 2012

What is a fiscal cliff ?


“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, a rollback of the "Bush tax cuts" from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron's, over 1,000 government programs - including the defense budget and Medicare are in line for "deep, automatic cuts."
In dealing with the fiscal cliff, lawmakers have a choice among three options, none of which are particularly attractive:
  • They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit would fall significantly.
  • They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
  • They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Can a Compromise be Reached?
The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had over a year to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. In general, Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. Currently, it appears that a meaningful deal won't be reached until after the December 31 deadline.
The most likely outcome is another set of stop-gap measures that would delay a more permanent policy change. Still, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.


Fiscal Cliff


Possible Effects of the Fiscal Cliff
If the current laws slated for 2013 went into effect permanently, the impact on the economy would be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO also estimates that the policy would reduce gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs.
A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.
The Term "Cliff" maybe misleading
It's important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, this isn't a binary (two-outcome) event that will end in either a full solution or a total failure on December 31. There are two important reasons why this is the case:
1) If all of the laws went into effect as scheduled and stayed in effect, the result would undoubtedly be a return to recession. However, Congress continues to work toward a deal that will alleviate the effects in some form. The chances that such a deal won't be reached at some point are slim.
2) Even if the deal does not occur before December 31, as appears likely, Congress can - and almost certainly will - act to change the scheduled laws retroactively to January 1 after the deadline.
At the same time, even a "solution" isn't necessarily positive, since a compromise will likely involve higher taxes or reduced spending in some form - both of which would help reduce the debt, but would be negative for economic growth.
With this as background, it's important to keep in mind that the concept of "going over the cliff" is largely a media creation, since even a failure to reach a deal by December 31 doesn't mean that a recession and financial market crash will occur.

Fiscal Cliff2

Unfortunately, the fiscal cliff isn't the only problem facing the United States right now. At some point in the first quarter, the country will again hit the "debt ceiling" - the same issue that roiled the markets in the summer of 2011 and prompted the automatic spending cuts that make up a portion of the fiscal cliff.

Finally, 3rd January 2013, President Barack Obama has signed with an autopen a bill that boosts taxes on the wealthiest Americans, while preserving tax cuts for most American households. The bill, which averts a looming fiscal cliff that had threatened to plunge the nation back into recession, also extends expiring jobless benefits, prevents cuts in Medicare reimbursements to doctors and delays for two months billions of dollars in across-the-board spending cuts in defence and domestic programmes.

The Republican-run House approved the measure by a 257-167 vote late on Tuesday, nearly 24 hours after the Democratic-led Senate passed it 89-8.  Mr Obama, who is vacationing in Hawaii, signed the bill using an autopen, a mechanical device that copies his signature. The US leader also signed a US$633 billion (S$772.5 billion) defence bill for next year that tightens penalties on Iran and bolsters security at diplomatic missions worldwide after the deadly attack in Benghazi, Libya.

Mr Obama had threatened to veto the measure because of a number of concerns, including limits on his authority to transfer terrorist suspects from the US military prison at Guantanamo Bay, Cuba, for one year.  US actions to avoid the fiscal cliff did not go far enough to address the country's long-term fiscal deficit and debt problems, the International Monetary Fund (IMF) said in a reaction to the the political deal.  "In the absence of congressional action the economic recovery would have been derailed," IMF spokesman Gerry Rice said.

China has a strong interest in a healthy US economy. It sits on the world's biggest pile of foreign exchange reserves, worth US$3.3 trillion (S$4 trillion), and as much as 70 per cent of the holdings are invested in US dollar assets, including US Treasuries, according to analysts.

Noting that the US will grapple with the debt ceiling next month, after which the "austerity time-bomb" will begin ticking again, Germany's Der Spiegel said: "We are... witnessing a superpower losing its way in a maze of details, propelled forward by grandstanding politicians".

After the fiscal deal signed by President Barack Obama, there is a "feel good" effect - most Americans can breathe easier now that they will not have to pay higher income tax and that a recession seen as inevitable has been avoided. But economists were less reassured, warning that it was still going to hurt, with slower growth and fewer jobs.
Most Americans will see no change in their income tax rates after the deal which included tax increases on the country's wealthiest 2 per cent and higher pay cheque deductions for all workers.

The biggest impact, say economists, will be from an increase in how much employees see deducted from their pay cheques for social security: After having been cut to stimulate growth in recent years, the rate goes back to 6.2 per cent from 4.2 per cent.

Mr Gregory Daco of IHS Global Insight estimated that will pull US$113 billion (S$138 billion) out of the economy - money that mostly would have otherwise been spent on goods and services.

"That is the measure that is going to hit the most people," he said - by itself cutting 0.4 per cent from potential growth.

An increase in tax rates for Americans earning more than US$400,000, to 39.6 per cent from 35 per cent, will not have as large an impact, he said: "A dollar for them is not the same as a dollar for someone earning US$50,000."

Moreover, politicians still face a battle over cutting federal spending - put off for two months in the wrangling over the cliff deal finally passed on Tuesday - that could further crunch the economy this year. That means more tepid expansion of gross domestic product (GDP) this year, with equally slow job creation as in 2012, by most estimates.

Economist Mark Zandi of Moody's Analytics said the tax increases and spending cuts still to be agreed will take about one percentage point from what growth could have been, had the 2012 tax rates and spending plans stayed in place.

"The result is that the US economy will grow just over 2 per cent in 2013, about the same as in 2012," Mr Zandi said.

In addition, he added, it will hold back job creation, "with 700,000 fewer net new jobs created and an unemployment rate about half a percentage point higher than it would have been if last year's policy had simply been extended".

Though the deal significantly raises taxes on the rich, with no expiration date. It extends tax credits for the poor and middle class. It provides more jobless benefits. Largely overlooked, it extends an alternative-energy tax credit that has helped create a clean-energy boom. And it includes almost no spending cuts.

For President Barack Obama and his Democratic allies in Congress, the fiscal deal reached this week is full of small victories that further their largest policy aims.

Above all, it takes another step towards Mr Obama's goal of orienting federal policy more towards the middle class and poor, at the expense of the rich. Yet the deal also represents a substantial risk for the president.Throughout the negotiations of the past two months, Mr Obama pushed for a larger agreement, one that would have cancelled other looming budget deadlines, starting with one on the debt ceiling.

He and his aides saw the so-called fiscal cliff, with its trillions of dollars in scheduled tax increases that Republicans abhorred, as leverage to start fresh in a second term and avoid more deadline-driven partisan fights.

When House Republicans made it clear that they opposed a big deal, however, Mr Obama decided to take the smaller deal, bank a series of victories and wait to fight another day. The alternative - debated inside the White House, but not ultimately a close call - would have been to go over the cliff in the hope of forcing Republicans into a larger deal.

Without that larger agreement, Mr Obama will be left to find solutions to future budget deadlines without the leverage that came with the prospect of automatic tax increases.

"The best world would have been a bigger agreement," an administration official acknowledged. "This is a big win in a second-best world."

As part of this week's deal, Mr Obama did make several major compromises. He accepted much less in overall tax revenue than the government would have received without any deal. He allowed a payroll tax cut, which applied to most households, to expire.

And he yielded both on aspects of the estate tax and on the level at which the top marginal income-tax rate would start, moving it to US$450,000 (S$550,000) for couples, from US$250,000.

Still, using inequality as a yardstick, he won much of what he had wanted. By holding firm to a top rate of 39.6 per cent - up from 35 per cent - he locked in a substantial tax increase for the very richest, who have received the biggest pre-tax raises in recent years.

The question that hangs over the deal for Democrats is whether they will have to play defence on the budget for the rest of Mr Obama's presidency.

But some of Mr Obama's allies wonder if he should have taken the risk of a confrontation now. A stalemate next time will bring no threat of higher taxes, and Republicans may stand firmer, demanding cuts that undo Mr Obama's recent gains.