Permitting Delays Keep Lid off Offshore Service Co Optimism

The de facto moratorium in the U.S. Gulf of Mexico following the Macondo oil spill has delayed permits for all Gulf oil and gas activity, not just for deepwater drilling, and while some projects are moving forward, offshore service company officials say they anticipate seeing a gap of more than a year before work begins to pick up in the Gulf.

Optimism and drilling activity had begun picking up early 2010 among Gulf of Mexico companies in the aftermath of the global financial crisis restricted access to capital, resulting in cancelled drilling programs, layoffs and cold stacked rigs during 2009.

Houston-based drilling company Hercules Offshore had laid off 2,000 people during the economic recession, and had just started rehiring workers as drilling activity picked up. Instead, the Macondo oil spill and resulting moratorium made 2010 a difficult year for offshore service companies, particularly those mainly focused on the Gulf. Seahawk Drilling became "the canary in the mine" when it filed for bankruptcy, said James Noe, senior vice president, general counsel, and chief compliance officer with Hercules. The company's jackups have been acquired by Hercules.

"We have some faith in the Gulf, but we're treading water right now, trying to maintain workers and maintain operations," said Noe during the panel discussion at the CERAWeek Conference in Houston on Tuesday. The regulatory uncertainty has already added to the expense of operating in the Gulf, which already includes costs associated with hurricane risks, corporate taxes, Jones Act and labor costs.

The government's tone towards the oil and gas industry in light of the Macondo spill is one Noe has never seen before, with the government treating the industry like criminals. Instead, government needs to calm the rhetoric down and work with the oil and gas industry to find a solution to the "broken" permitting regime. "Obama wants to import more oil and tap the U.S. strategic oil reserves. These aren't solutions," said Noe.

Joe Dunbar, business unit manager with Parker Hannifin Corporation, contrasted the Obama administration's response to Macondo of finger pointing and threats of prosecution to the UK government's response to the Piper Alpha incident in 1998. "The UK government said, 'we're not looking to prosecute anyone, we just want to discuss what happened and what needs to be changed.'"

As a result of the permitting delays, Jim Johnson, executive director with Hunting Energy Services Inc., is seeing customers refocusing efforts on onshore U.S. shale gas or international operations. "With Wall Street high on shale plays right now, companies are focused elsewhere, and the Gulf of Mexico shelf has become a dead man zone," said Jim Johnson. Luckily, the company's businesses in Brazil, Australia and Angola have flourished, picking up for the slack in the Gulf.

John Nesser, executive vice president and chief operating officer with J. Ray McDermott International has seen its Morgan City, Louisiana fabrication facilities underutilized, while its business in Asia-Pacific and the Middle East are flourishing. However, the company's derrick barge DB 16 has been cold stacked until opportunities arise for it in the Gulf.

The de facto moratorium in the Gulf means that companies that have vessels or rigs in the Gulf face millions in costs in mobilizing these assets to other markets. Jones Act vessels, which are manufactured in the U.S. and cost significantly more than vessels built elsewhere, have difficulty competing with cheaper-built vessels in other markets, Nesser said. "It would cost millions for us to send the DB16 to Brazil and back."

Dunbar, who works mainly with independent oil and gas companies in the U.S. Gulf, has seen three of its clients stop drilling operations. He doesn't see a light at the end of tunnel for Gulf of Mexico activity, as uncertainty over future permitting and the existing permitting regime in the U.S. Gulf will deter future investment.

Permitting delays will likely result in sales of Gulf of Mexico assets by companies seeking to focus on shale plays or operations in the Middle East and Asia; however, there are more sellers than buyers right now, said Noe.

The Gulf will likely see a different mix of operators when activity resumes, likely limited to four or five major oil companies; it will be years before independent companies return. "They will return, because there are some plays that aren't economic for the majors to drill, but it will be a slower comeback," said Johnson.

Offshore Logjam Breaking

An IHS Herold Special Update on the Oil Field Services Sector issued this month indicates a healthier growth outlook for the industry in 2011 now that the U.S. Gulf of Mexico drilling moratorium that was enacted in 2010 has been lifted and offshore service companies can get back to work in the deep waters of the Gulf. According to the update, a general recovery is being driven by continued strong oil prices and rising worldwide exploration and production (E&P) budgets, despite the negative impact of the drilling moratorium that constrained what would have been a strong rebound for the sector.

The update, which compared key oil company financial performance for the entire 2010 calendar year against sector performance for 2009, included multi-service companies such as Baker Hughes, Halliburton and Schlumberger as well as offshore drillers Transocean and Diamond Offshore among others.

"As we mentioned in our preliminary report issued last December, many of the service companies, and, in particular the offshore drilling companies, took a financial beating following the Gulf drilling moratorium. That negative impact constrained what was otherwise a substantial recovery for the sector compared to 2009 results," said John B. Parry, principal energy analyst at IHS and author of the IHS Herold Update on the Oil Field Services Sector.


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