Analysis: U.S. offshore drilling delays may persist after ban

WASHINGTON Tue Sep 21, 2010 11:55am EDT

Unused oil rigs sit in the Gulf of Mexico near Port Fourchon, Louisiana August 11, 2010. REUTERS/Lee Celano

Unused oil rigs sit in the Gulf of Mexico near Port Fourchon, Louisiana August 11, 2010.

Credit: Reuters/Lee Celano

WASHINGTON (Reuters) - Before BP's record Macondo oil leak, U.S. regulators approved about a dozen permits a month to drill in the shallow waters off the Gulf. Since then, they've barely managed one a month, even though a six-month moratorium only affected wells in much deeper waters.

Now, with only two months or less until operators are able to resume drilling new wells in one of the most prospective oil frontiers in the world, many fear that the newly tightened reins of regulators may choke investment for months longer.

"The shallow-water story is a template for the way deepwater drilling can unfortunately go," said Jim Noe, a senior vice president at Hercules Offshore Inc and head of a coalition of shallow water drillers protesting the slow pace of permitting.

Most of the Gulf's major untapped reserves lie in waters deeper than 500 feet. So U.S. crude production and corporate profits for deepwater drillers would both be crimped if more rigorous approval standards -- and longer time frames -- are applied to new deepwater drilling permits.

Firms such as Chevron, Royal Dutch Shell and Noble Energy have already postponed projects in the wake of the drilling ban, imposed after the Deepwater Horizon rig ruptured an undersea well in April, sending millions of barrels of oil into the Gulf.

Noble does not expect to be able to restart its exploration program in the Gulf until late 2011, the company's chief executive said last week.

In turn, that is almost certain to slow development of new oilfields the government has been counting on to limit its reliance on foreign crude. This could hinder efforts to boost deepwater Gulf output to the government's forecast level of 1.68 million bpd in 2013 and 1.71 million bpd by 2020. Production was 1.23 million barrels per day in 2009.

SHALLOW WATERS, DEEP DELAYS

In first three months of 2010 prior to the oil spill, the department greenlighted 32 new shallow water wells, an average of about 11 a month.

Since the April 20 rig accident, the department has approved just six new wells, as the regulator with limited manpower seeks to ensure that tough new standards are strictly followed.

Interior has acknowledged that it is taking longer to approve permits under its new rules, which include a mandate that companies certify they have working blowout preventers.

Bromwich, head of the Interior's Bureau of Ocean Energy Management, stressed the agency would not "speed up for the sake of speeding up," however.

He would not speculate on how long it would take to approve the first new deepwater drilling permit after the moratorium is lifted, but said some companies may be more prepared to meet the new rules than others.

There's no shortage of equipment to get things moving quickly: So far, only four of 30 deepwater rigs are leaving or have abandoned the Gulf, including two rigs owned by Diamond Offshore Drilling Inc, and two owned by Transocean Ltd.

Officially, the moratorium is forecast to cut an average of 82,000 barrels per day in oil output from the Gulf next year, or just about 1.5 percent of total U.S. national production, according to the Energy Information Administration's latest outlook. (Graphic: link.reuters.com/neg24p )

Gulf production will most likely fall by more than that, since the estimate is based on the assumption that drilling will immediately resume at a normal pace after the moratorium, says Gary Long, a petroleum engineer with EIA.

"Based on the reality of the situation, you could probably triple those numbers, maybe even more," says Phil Flynn of PFGBest Research.

A year-long delay on new deepwater projects stemming from the Gulf of Mexico well rupture could cut world oil supply by 500,000 barrels per day between 2013 to 2017, according to Bernstein Research.

LONGER LEAD TIMES

Eventually companies will be able to factor longer permitting times into their planning, but in the near-term extended delays will be a drag on output, Long said.

"The problem is everything in the industry was geared to a much shorter time frame, so when all of a sudden that time frame gets extended...you've got rigs under contract and you don't have permits for them to actually drill the well," Long said.

Some groups believe the Obama Administration is right to be cautious, saying U.S. oversight of the energy sector has been lax for too long. Elgie Holstein, oil spill response coordinator for the Environmental Defense Fund, said there is a period of adjustment that follows implementation of any new regulatory regime.

"I think we're unlikely to see a return to the days when the Interior Department felt that it was under great pressure to approve permits as quickly as possible," said Holstein, who helped author a report for the Bipartisan Policy Center examining the usefulness of the moratorium.

"But I do think the department is interested in demonstrating that it is not about the business of trying to stop or seriously delay the return to work," he added.

(Graphic by Jasmin Melvin; Editing by David Gregorio)

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