President Obama held a press conference on Thursday to discuss the problem in the gulf. At the conference he said he was extending the moratorium on drilling for six more months, canceling lease sales and halting drilling on 33 deepwater rigs in the gulf. Unfortunately the devil is always in the details.
In the OilSlick stock picks newsletter Thursday night I complained about the political inconsistencies in the presidents claims and the actual events. Since that earlier newsletter there have been some new developments.
The president said he was extending the moratorium on new drilling for six more months or until the Horizon disaster can be analyzed and the cause of the disaster corrected on other drilling rigs. Unfortunately you can't always legislate away stupidity.
Interior Secretary Ken Salazar was getting blasted in the press for letting the Minerals Management Service (MMS) approve permits as usual after the May 6th moratorium was announced. Nineteen permits have been issued despite the moratorium according to the MMS website.
Late news Thursday night from the Interior Dept claims that no new permits have been issued. The permits that were approved were changes to existing permits for operators that needed to change a previously filed drilling plan or modify the plans to account for obstacles or for safety reasons. Those changes show up as newly approved permits on the website.
Salazar has already said he was breaking up the MMS into three different divisions. There will be regulation, enforcement and revenue collection. That change will take a month to organize.
The president also said he was halting drilling on 33 deepwater rigs in the gulf. No details were available late Thursday but started filtering out overnight. The rigs were told to shutdown at the first safe opportunity and implement new safety measures before resuming. What those new safety measures will be is still unclear. The commission studying the disaster is planning on issuing new guidelines when it completes its investigation. Initially that was expected by May 30th but nothing ever occurs on time in a government program.
One detail that has surfaced requires that blow out preventers will need to be certified to be working and capable of actually halting a blowout at the well being drilled. How this certification is going to be performed and by whom is still unknown. There are some concerns that using the standard BOP at these extreme depths and pressures will not allow them to actually close the well. There are concerns that the new high strength drill pipe used to drill the new deeper wells is actually resistance to being sheared by the BOP. In other words the ten year old BOPs are not suited for drilling today's deepwater wells.
How that determination is going to be made is anybody's guess. Since the BOP on any existing drilling project is already on the seafloor with an open well below it the comprehensive testing is going to be a challenge.
Presumably once the BOPs are certified and new rules and regulation drawn up the rigs will be able to go back to work. I will not be holding my breath.
The problem with this blanket shutdown is the large number of workers that will be sent home until the process is completed. On any given day there are roughly 35,000 oil workers in the gulf. If the shutdown and moratorium on permits lasts for months it is going to put a serious crimp in worker finances.
Analysts predict the moratorium could cut 80,000 bpd from expected production in 2011 and a prolonged shutdown could remove 200,000 bpd by 2012. As existing wells deplete the new exploration replaces that old production with new production from new wells. Completing an oil well in the gulf can take many months or even years depending on the complexity of the well and the availability of infrastructure like pipelines.
The president also said he was canceling lease sales in the gulf, off the coast of Virginia and offshore Alaska. The halt to drilling in Alaskan waters will push project start dates off until June 2011 because the weather window will close before the moratorium is lifted. Shell had already been approved to begin drilling next month in an area that is thought to have several billion barrels of oil. That project has now been put off for a year.
Nobody knows what will happen to lease payments for rigs that are taken out of service until the moratorium has ended. Transocean (RIG) and Noble Corp (NE) would both take a major hit if those operators leasing the rigs all claimed force majeure and quit making payments until the moratorium was lifted.
Speculators will bet on anything. It may be a good bet to place an order for all the BOPs Cameron (CAM) has coming off the assembly line for the next year or so because the demand for new BOPs is going to skyrocket. Rig owners are going to be willing to pay anything required to get the newest models so they can go back to work with a new BOP. We are long CAM in the investment section of the newsletter.
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