Oil Companies Launching Ambitious Plans for Gulf

Jim Brown
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Shell, Statoil and Chevron are planning to spend up to $20 billion to explore and develop wells in the Gulf of Mexico over the next five years. Of course that assumes they can get their permits approved by the Bureau of Ocean Energy Management.

Shell is preparing three permit requests for new deep-water wells and Statoil has already filed applications for two new wells.

All "known" permit applications since the moratorium was removed on Oct 12th have been returned to the applicants citing incomplete applications and a failure to adequately address the new rules for wells. To date no one has reported an application that was accepted. Instead of a moratorium we currently have a permitorium where you can apply but you won't be accepted. A total of 12 permit applications have been returned to the applicants.

Despite the delays and the requirements for reams of documentation the major oil companies do not have a choice. They have to spend the time and effort reworking their plans to fit the whims of the BOEM.

Many of these companies are paying a fortune in the range of $300,000 to $350,000 a day in standby lease payments for the deep-water rigs they have under contract. Once a permit is approved and the rig begins to drill those rates will jump to the mid $500,000 range but at least they will be doing something besides scrubbing barnacles and painting railings.

Shell had five rigs operating in the gulf when the disaster occurred. The moratorium has already cut Shell's production in the Gulf by 10,000 bpd. When companies can't continue drilling new wells the depletion from the old wells is highly visible.

Chevron has some major plans for its Gulf leases if it can get the permits approved. Chevron said on Thursday it was going to spend $4 billion to develop the Big Foot project. This lease is in 5,200 feet of water about 225 miles south of New Orleans. Chevron had hoped to begin production in 2014 but that target date is sipping fast. The company expects to produce 75,000 barrels of oil and 25 million cubic feet of gas per day when completed.

Chevron owns 60% of the lease with Statoil owning 27.5% and Marubeni Corp out of Japan the remaining 12.5%.

Chevron is also proceeding on developing the Jack and St Malo fields. Those are in 7,000 feet of water and 280 miles from New Orleans. Chevron will spend $7.5 billion to develop those sites. Chevron and Shell will build a 136-mile pipeline to carry tht oil from Jack and St. Malo to connect to an existing Shell pipeline closer to shore.

Last week the BOME released an updated set of guidelines on what would be required in any new applications. One area of conflict was the worst-case discharge estimates that operators are required to supply with the application. This is something that will allow the BOEM to comeback on the operators if there is another disaster.

Assume BP had said their worst case would have been 5,000 bpd in a blowout and 30 days to solve it for a total of 150,000 barrels of oil in the water. Instead the BP disaster released as much as five million barrels and took three months to shutdown. The BOEM is going to hold companies to their estimates and you can bet there will be hell to pay if another disaster greatly exceeds those estimates.

If you are Chevron and you are about to build a $7 billion platform with 40 offsetting wells in 7,000 feet of water how do you provide an estimate that is realistic? If you say worst-case is 20 million barrels you may not get the permits. If you claim two million and it turns into 10 million then the BOEM will crucify Chevron for tens of billions of dollars in the event of a spill.

Drillers also have to submit a containment plan in advance detailing how they would control a blowout to prevent a major spill. Two groups have launched into that area. A group composed of the five largest companies have created an entity that is constructing some containment devices like the ones used in the BP spill but even larger and more complex. The initial devices are expected to be completed in the spring. They will be held on standby in the Gulf in order to provide rapid response to any disaster.

Helix (Nyse:HLX) is also preparing a spill response system using three of the ships BP used during the Horizon spill. The Helix solution is not as comprehensive as the joint oil company plan but it will also not be as expensive.

We do not yet know if the BOEM will approve these containment systems or withhold permits until the systems are fully functional.

There have been over 55,000 wells drilled in the Gulf over the last 50 years and only two major blowouts. I would say the odds are good we could drill a few more without a mishap.

Jim Brown

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