Analysis: Independents Make 'Significant' Contribution to GOM E&P

The Macondo oil spill in the U.S. Gulf of Mexico has prompted lawmakers to propose legislation that would require oil and gas companies meet a threshold of financial capability in dealing with such an incident. However, concern has arisen that independent exploration and production (E&P) companies would essentially be banned from deepwater Gulf E&P as a result, and that major oil and gas companies would be the only players who could meet possible financial requirements.

In a recent study conducted by IHS Global Insight, U.S. independent E&P companies represent a significant and growing portion of economic value of the offshore oil and gas industry in the Gulf of Mexico and a large and growing portion of the deepwater segment of the industry.

The study, The Economic Impact of the Gulf of Mexico Offshore Oil and Natural Gas Industry and the Role of the Independents, found that offshore oil and gas development by independent companies in 2009 accounted for more than 200,000 jobs, $38 billion in economic benefit and $10 billion in state and federal tax revenues and royalty payments. This contribution accounted for about half of the 400,000 jobs, $70 billion in economic values and $20 billion in federal, state and local revenue generated by the industry last year.

The study forecasts that by 2020, an exclusion of the independents from the Gulf of Mexico would eliminate 300,000 jobs and result in a loss, over 10 years, of $147 billion in federal, state and local taxes from the Gulf region. The actual federal tax losses would be larger because the economic analysis only includes Louisiana, Texas, Mississippi and Alabama. And not the revenue impact on income earned elsewhere in the U.S. from manufacturing and investment activities related to the Gulf.

Gauging Impact of Independents

Samuel Gillespie, executive vice president of Cobalt International Energy, which commissioned the study to highlight independents' contribution to the Gulf states economies and Gulf oil and gas activity, said that the opinion has been expressed that the only companies that should be drilling in the deepwater Gulf are the majors with balance sheets so large they can self-insure. Legislation that has been proposed would also impact independents that are non-operating partners in Gulf of Mexico wells.

Given that independents collaborate extensively with majors on wells, not only as non-partners but sometimes as operators as well, proposed legislation that would limit independents' activity in the Gulf would create a "large vacuum in oil and gas production" which would be filled only marginally by the major oil companies, IHS said in its report.

"Typically, only about one in four exploration wells finds hydrocarbons in commercial volumes. The oil companies deal with these odds by spreading their capital over a large number of projects. The participation by other industry players, including a large number of independents, substantially increases the population of projects, and thus, means that companies diversify their portfolios of prospects."

Independent companies bring technological diversity to the Gulf and, in particular, to the analysis and interpretation of the vast amounts of geological and geophysical data that precede drilling. With this wider participation, companies can test their analysis against that of other companies, improving the understanding of the various opportunities, and thus, leading to more success and efficiency in exploration.

The participation of independents also increases the range of reserves that can be commercialized. "Because of the demands on the majors by institutional investors for reserve replacement, those companies need to find reservoirs of a certain size to meet their targets for reserve replacements. For independents, smaller reservoirs can be of commercial significance, which would not be the case for the majors.

"Given the loss of tax and royalty revenues and jobs, the impact of an exclusion of independents represent a much larger share of total activity than is generally recognized," IHS said.

Independents Stake in GOM Leases

Independents are the largest shareholder in 66 percent of the 7,521 leases in the entire Gulf and in 81 percent of producing leases. In the deepwater Gulf, independents are the largest shareholder in 52 percent of all leases and in 46 percent of producing leases. They operate over half of the developing and producing deepwater fields.

GRAPH: Independents, Major O&G Cos. Shareholder Positions in Gulf of Mexico

Independents have drilled 1,298 wells in the deepwater region since deepwater drilling began, and currently contribute over 900,000 BOE/d of total oil and gas production in the U.S. Gulf. During 2009, independents drilled 62 deepwater wells, while major oil and gas companies drilled 81 of the 143 deepwater wells drilled last year. Independents are anticipated to drill 102 of the 157 deepwater wells expected in 2015 and 114 wells of the 164 deepwater wells set for drilling in 2020.

GRAPH: Forecast Deepwater Drilling Without Exclusion of Independents from Gulf of Mexico

Independents have taken an average of 70 percent of the farmed-out acreage from the majors over the past 10 years. "This is acreage that the majors no longer wanted, and without the independents' willingness to pick it up, fewer wells would have been drilled and fewer new resources found. Almost 3 billion BOE in reserves that were originally found by the major are now operated by independents."

Independents fill a niche market by finding and developing smaller fields that the majors consider too small for their portfolio. As a result, more than 50 percent of the deepwater Gulf reserves found have been developed compared with less than 25 percent of reserves developed in Angola or Brazil's deepwater areas, making the deepwater Gulf one of the more efficient of deepwater regions of the world in terms of finding and developing the resources there.

The independents' contribution to drilling activity has steadily increased over the past 20 years. In 1988, independents drilled less than 15 percent of all wells (exploration and development) in deepwater GOM. For four of the past seven years, they have drilled more than 50 percent of all wells.

GRAPH: Forecast Shallow Water Drilling Without Exclusion of Independents from Gulf of Mexico

"While the growth in total drilling is impressive, the independents' role in exploration is even more so. Independents have drilled (as operators) over half of the total exploration wells in the deepwater GOM for the past decade. With a success rate of 29 percent, their skill in discovery is on a par with the majors' 32 percent deepwater GOM success rate," IHS said.


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JWG | Aug. 10, 2010
Good article and Obama & Dems want to bankrupt all of us it would appear!

Andrew | Jul. 28, 2010
Rather than "killing" the industry, it should look into the facilities. for example, after the Exxon Waldez spill, double hull came into force to minimize potential future similar incident. I would ask the question - why a modern semi-submersible drill rig would topple and sink only after two(2) days of fire fighting? If it has hang on longer, there is a better chance of controlling the fire and the disastrous oil spill may not have happened. Could it have been a huge gap open up on the deck from the explosion, thus, allowing the firewater to flood the ballast chamber, hence, toppled the rig? Or could it be inferior ballast water piping, drain piping used that burst as a result of the explosion allowing the firewater to flood the ballast chamber, hence, sinking the rig? Or the ballast chamber are not designed for such incident?


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