This opinion piece presents the opinions of the author.
Ever since the spring of 2010 and the Deepwater Horizon disaster and Macondo well blowout, the offshore industry in the Gulf of Mexico has struggled to recover. After suffering through the government imposed drilling moratoriums that were successfully challenged in the courts and overturned, the industry then suffered from the "permitorium" in which the new government procedures for reviewing and approving offshore drilling and development permits needed to be deciphered and implemented delaying the issuance of new permits. Besides fathoming the new permitting rules and procedures, offshore drilling equipment needed to be inspected and modified to meet new rules.
The cessation of offshore activity in the Gulf of Mexico had an impact on the worldwide offshore drilling rig fleet. As shown in Exhibit 3, the worldwide offshore drilling industry in early 2010 was recovering following the financial crisis of 2008-9 at the time the Deepwater Horizon disaster struck. As the Gulf of Mexico activity shut down following the accident, the worldwide offshore rig utilization rate fell from roughly 79% to 72% by the end of 2010. That was the point when the Gulf began to recover. Since then, higher world oil prices helped stimulate offshore drilling in international markets that complemented the Gulf recovery and boosted the overall fleet utilization rate into the low 80s%.
To understand the role of Gulf of Mexico rig activity on the overall worldwide rig fleet merely look at the chart in Exhibit 4 and notice the much sharper upward move in the Gulf's utilization rate than the world rate (Exhibit 3). From the Gulf's fleet utilization rate of roughly 45% at the end of 2010, the rate has moved up into the upper 60% range now. Remember these utilization rates include a number of rigs that are inactive and may be candidates for retirement. Regardless, the Gulf of Mexico rig count is on the upswing and will be aided by additional rigs targeted to come to this market to work between now and the end of 2013.
The Gulf of Mexico market for jackup rigs has also strengthened in a sawtooth pattern since the bottom following the financial crisis. The most recent slight dip in the jackup fleet activity reflects the impact of weak natural gas prices on shallow water jackups.
As we head into the winter heating season, the recent firming in natural gas prices will likely support some additional shallow-water drilling, but possibly a more important driver is the shift in shallow-water acreage from traditional players to new, often private-equity backed companies. As they have only recently acquired those properties, the lag in getting organized will probably not extend much into 2013, so we look for a further upturn in shallow-water drilling next year.
The Gulf of Mexico semisubmersible drilling rig fleet, targeting deepwater prospects, was at nearly 100% utilization when Macondo happened. Due to the drilling moratorium, a number of the very deepwater-capable semis elected to leave the Gulf for work elsewhere. This left a smaller fleet in the Gulf with a disproportionately higher number of older, less capable rigs. The recovery in deepwater semi drilling is continuing as the upward sloping line would suggest. Deepwater is the category of rigs in the Gulf expected to grow over the next 18 months as newbuild semis arrive. We expect to see that upward slope of the rig fleet utilization to continue until the industry gets back to around 90% utilization.
One of the great challenges for the offshore industry in the Gulf of Mexico is getting permitting back to a pace ensuring that drilling rigs working here are fully utilized. The Greater New Orleans, Inc. (GNO) regional economic development alliance of the 10-parish region of Southeast Louisiana has begun to publish an index of Gulf of Mexico approved permits based on government data. In its report, GNO includes three charts showing how the Gulf of Mexico permitting activity is tracking versus the average for the last year and last three years. Two of the charts show the number of permits approved monthly since January 2010 for deep water and shallow water. The GNO's latest report shows the permitting activity through the end of July. In the deepwater market, most months this year show that permits approved have matched or exceeded the latest three-year and one-year averages.
That is not the case for shallow water permits, which for 2012 are well below the last three-year average and for about half the time, have matched or fallen short of the latest one-year average. A lack of sufficient shallow water permits is a likely reason why the jackup drilling rig fleet utilization rate still lags behind where it should be otherwise.
What these charts don't convey is the number of permit filings the industry has made. That issue is partially addressed by the third chart prepared by GNO.
It shows in days the average approval time for a permit. In the chart, they calculated the five-year average time required for permit approval prior to the Deepwater Horizon accident. While in the past the government needed an average of about 61 days to approve a permit application, it now routinely requires in excess of 100 days. As the chart in Exhibit 9 shows for the month of July, there was a 50 day gap between the five-year average and the actual monthly average, or 82% more time.
The offshore industry is obviously much happier today than it was in late 2010. Demonstrative progress in improving the offshore permitting process has been made. Further progress needs to be made for the industry to ensure it has a sufficient backlog of permits to keep the offshore contractors and service companies fully employed in the future. Hopefully, the longer the industry and government work together on this process, the faster it will get. We recognize, however, that the new requirements for permits have added time to the prior process so it is unlikely we will ever return to the pre-Macondo average permitting time. That doesn't mean reducing the time required to secure a drilling permit shouldn't be a goal.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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