New Scrutiny Slams Near-Shore Exploration

(Dow Jones Newswires), Jan. 3, 2011

Heightened regulatory scrutiny brought on by the Gulf of Mexico oil spill is taking a toll on companies that drill much closer to shore than the deep-sea depths where BP's Macondo well blew out.

Shallow-water drillers, which operate in less than 500 feet of water and drill mostly for natural gas, have lurched back to activity after work briefly halted in the aftermath of April's BP well disaster. But they rely on short-term, 30- to 60-day contracts with energy companies, making their revenue stream more vulnerable to disruption than deep-water rig owners that sign multi-year contracts.

These companies say they shouldn't have to pay the price for a mistake made by their deep-water brethren. But industry critics contend that the Gulf oil spill has brought about needed scrutiny to all offshore drilling.

Of the 83 shallow-water rigs in the Gulf, only 29 were leased as of Dec. 20, many at discounted rates, compared with 39 on April 20, according to data from rig-tracking service RigLogix. Rig owners are losing millions of dollars a month in revenue and costs to maintain idle rigs.

Among the hardest hit are Hercules Offshore Inc. and Seahawk Drilling Inc. The two Houston-based companies own a combined 68% of the shallow-water rigs stationed in the Gulf, of which barely one third are leased. Both have posted losses so far this year.

In the first nine months of 2010, Seahawk's sales were $66 million -- $191 million less than the same period in 2009. Hercules reported sales of $485 million -- $81 million less than the same period last year.

By contrast, Transocean Ltd., which specializes in deep-water projects, reported a $378 million profit in its latest quarter. Twelve of its 13 deep-water rigs in the Gulf as of late December were leased, according to RigLogix.

The number of shallow-water rigs working in the Gulf has steadily declined over the past decade, according to industry-tracking firm ODS-Petrodata. The slump in natural gas demand pushed Hercules to lay off nearly 2,000 workers in the past 18 months -- all before the oil spill. "We were on our knees when Macondo hit," said Jim Noe, senior vice president and general counsel for Hercules.

Since June, federal regulators have approved 26 permits for shallow-water wells from 35 applications, with the pace picking up in the past two months. But operators say the process takes longer than before the moratorium, and some are unwilling to lease a rig until they get a green light to drill.

Getting a permit first requires an approved drilling plan. Plan approvals had taken about a week before the new regulations kicked in, said Craig Castille, a deep-water drilling engineer for Stone Energy Corp., an oil and gas company. Recently, it took Stone 97 days to get a plan approved that was submitted May 28. And it took several more weeks to get a permit for the project.

A significant speed bump for operators is a new drill-plan requirement to calculate the worst-case discharge of oil and provide a strategy for killing a blown-out well. Federal regulators returned 101 plans requesting modification in 2010 -- including 77 since June -- compared with 59 such requests in 2009, and just 31 in 2008.

For Stone, of Lafayette, La., the longer processing time meant more man-hours to achieve an approval and deferred production, Mr. Castille said. But he said rig owners have it worse. "When a rig goes off hire, they have no income," Mr. Castille said. Producers still draw revenue from existing production.

Companies that operate in shallow water say it is safer than deep water, since the industry has more shallow-water experience, and when something does go wrong, a fix doesn't require remote-controlled submarines.

But environmental groups believe that drilling in shallow water is as risky as in deep. Regan Nelson of the Natural Resources Defense Council pointed to shallow-water blowouts off the coast of Australia in 2009 and Mexico in 1979 that spurted massive amounts of oil into the sea.

"Shallow-water drilling should be under the same amount of scrutiny" as deep-water drilling, Ms. Nelson said.

Copyright (c) 2010 Dow Jones & Company, Inc.


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