Drillers Going Back to Work

Jim Brown
Printer Friendly Version

In a sudden burst of unexpected sanity the Obama administration announced on Monday that 13 companies could resume deepwater drilling in the Gulf of Mexico.

There was a catch. The only ones allowed to resume drilling were those who were working on pre approved projects when the Horizon disaster began. To date only two deepwater permits have been issued since the Horizon disaster and both of those were for operations not restricted by the moratorium.

The companies in the middle of projects when the suspension order came down from on high will now be allowed to return to those projects as long as the new drilling rules are followed with the new requirements for upgraded blow out preventers.

Some of the companies are Chevron, Shell, Hess, Kerr-McGee, BHP Billiton, Anadarko and some independents. They will be allowed to restart drilling on the 16 wells that were underway back in April. Most regarded the announcement as damage control and a public relations ploy after the Wall Street Journal ran a front page article over the weekend detailing the slowdown in deepwater drilling. An industry official said it was a pattern the administration had used before. When it is under fire they make announcements like canceling the moratorium but then failed to follow through by approving permits. The analyst was skeptical companies would actually be allowed to begin drilling again. He believes the actual approvals to begin operations may not appear for several weeks. Time will tell.

Senator Mary Landrieu, a democrat from Louisiana, expressed her doubts the announcement would lead to actual drilling. She said "We welcome in principle the administrations stated intent to put the 13 companies back to work. However, we need to know more about the actual conditions attached to the new permits and make sure they don't undermine the intent." She is at war with the president over this issue so I am sure she is expecting a surprise from the BOEM.

One analyst claimed the BOEM was letting rigs return to work to hide the fact that new permits may not be issued until 2012. Many industry experts already believe it will be late in 2011 before permits are approved and they fear it could even be 2012 since the Obama administration has a lot to lose if there was another accident. It would sink his 2012 reelection hopes. That makes it a topic they would rather avoid and stretch it out for as long as possible. Most liberal democrats are against offshore oil drilling and he riled them when he approved drilling in expanded areas in 2009. He is trying to regain those votes by being tough on the oil sector.

In the shallow water Gulf there have been permits approved. Some permits that would normally take weeks are now taking up to five months to process.

The Dept of Energy is now predicting Gulf oil production to fall -13% in 2010 and rise only +6% in 2011. That was their prediction last month and after another month of exploration on hold those estimates are probably going to fall again. The expected decline from prior estimates is 220,000 bpd in 2011. That is a lot of oil to lose because it means we have to buy it from overseas. That is one VLCC crude tanker per week from the Middle East.

The delays in permits are forcing companies to move rigs out of the Gulf. BP recently said it would move a brand new rig it was leasing from Pride to Libya. That rig is the Deep Ocean Ascension.

ATP Oil and Gas is one of the smallest deep-water operators and shares have declined -27% since the disaster. The ATP chairman said they are looking for projects in other countries. In a letter to Obama last month the chairman pleaded for a drilling permit.

Of the 83 shallow water rigs in the gulf in April, 39 were leased then and only 29 were leased on Dec-20th. Rig stacking is increasing because of the delays in permits. Hercules Offshore and Seahawk Drilling have 68% of the shallow water rigs in the gulf with only one third leased.

Seahawk saw earnings drop -$191 million to $66 million for the last nine months. Hercules posted earnings of $485 million, -$81 million from the same period in 2009 due to the slowdown. Hercules was forced to layoff over 2,000 workers before the spill due to the slump in gas drilling. Now the permit problem has crushed their remaining business.

Since June regulators have approved 26 permits out of 35 applications. Operators claim companies are being more cautious and will not lease a rig until the permit is granted. Stone Energy said permits that previously took a week were taking 60-90 days today.

Transocean said 12 of its 13 deepwater rigs in the Gulf were leased. However, most are on "standby rates" that are much lower than the previously contract rates.

If the administration is serious about letting the 13 companies go back to work it would be a major change in outlook for the Gulf. It still does not mean they are going to issue new permits but at least allows work to continue while that permit process is ironed out.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions