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New Federal Regulations Said 'Constricting' Offshore Industry

If Gulf of Mexico (GOM) production is to reach its true potential, federal regulators must provide a "predictable review and approval process," according to a report issued by Southern Methodist University's Cox Maguire Energy Institute.

"Clearly the rules and programs governing offshore operations need to keep pace with ever-evolving offshore exploration and production techniques. However, regulations must be implemented efficiently to avoid constricting the very industry they govern. Today's federal offshore regulatory regime largely falls short of that threshold test," wrote Bernard L. Weinstein, associate director of the institute, in the report released Tuesday.

President Obama has embraced an "all-of-the-above" energy strategy for the nation, but "the administration has done little to make needed improvements to the regulatory governance of one of the nation's most important sources for fossil fuel production: the Gulf of Mexico," Weinstein said. Bringing "reasonable speed and transparency" to the permitting process for deepwater drilling is a "critical component of a meaningful all-of-the-above domestic energy strategy."

While the GOM accounts for about 28% of total U.S. energy production, the institute study noted that "it is governed by a regulatory regime that was largely retooled after the Macondo blowout of April 2010 (see Daily GPI, April 26, 2010), creating a complex system of oversight for offshore activity that regulators to this day struggle to implement in a transparent and predictable fashion."

This "retooled" regulatory regime -- resulting in tougher safety and environmental regulations in the offshore -- is why energy prices did not fall when the 2010 moratorium was lifted like they did when the 2008 drilling ban was removed, the report said (see Daily GPI, Oct. 13, 2010). "The lack of change [in prices] was due largely to the president's accompanying declaration of new safety rules (see Daily GPI, May 2).

"Though these new regulations were not detailed at the time, the market foresaw a drawn-out period of clarification and uneven implementation, with the potential to negatively impact Gulf of Mexico deepwater operations. The U.S. 'regulatory risk premium,' in other words, had become significant, reflecting a lack of confidence in the overall ability of regulators to allow drilling and production to return quickly to pre-Macondo level," Weinstein said.

"At first blush a number of indicators seem to suggest that exploration and production in the Gulf of Mexico is returning to pre-moratorium levels," but the report said closer inspection showed that there are fewer active rigs.

Prior to the moratorium in 2010, there was an average of 27 "active" rigs in the GOM that were actually engaged in drilling-related activities as opposed to maintenance, completions and workovers. As of May 1, Baker Hughes reported a total of 18 active rigs in the GOM.

Also the administration in March claimed to have approved permits for 94 unique wells requiring containment since the Macondo blowout. "However closer scrutiny reveals that only 32 of the 94 permits approved were for unique new wells specifically permitted to reach hydrocarbons. The other 62 permits applied either to pre-moratorium wells (meaning revised plans companies were required to submit to meet the changed regulatory requirements) or included permits that only allow shallow batch set depths," the institute report said.

"The outlook for oil and production in the Gulf of Mexico remains murky."

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