Analysts offered a range of estimates for the impact of the Obama administration's freeze on deepwater drilling in the Gulf of Mexico (GOM), depending on whether it extends beyond the announced six months and what the new rules will be going forward.

The Interior Department alerted operators and oil and gas lessees last month that it was extending its moratorium on permits to drill for new deepwater wells until a presidential commission investigating the BP oil spill has completed its six-month review; and suspending action on 33 deepwater exploratory wells currently being drilled in the GOM (see NGI, May 31). The pause also would include existing wells in the deepwater, but shallow-water wells (500 feet and below) would be excluded (see related story).

"The near-term impact of Deepwater Horizon (Macondo well) on natural gas production appears likely to be small," said Ron Denhardt, vice president of marketing for Lippman Consulting Inc., who prepared a report on the potential impact. But he added that "the rules have not been established" yet. If the moratorium continues unabated, more than half of the natural gas from deepwater development could be lost by 2014, the report said. This production halt would result in a severe economic drain to a region that is already suffering.

In its report, El Paso, TX-based Lippman "estimated what would happen if no additional wells are completed." For example, Denhardt projected that the lost gas production from the ban on deepwater wells could be 100 MMcf/d this year.

And if the drilling freeze in the deepwater continues, he sees the lost output climbing to 450 MMcf/d in 2011; 910 MMcf/d in 2012; 1.26 Bcf/d in 2013 and 1.45 Bcf/d in 2014. Current natural gas production in the GOM deepwater is 2.6 Bcf/d.

Although the Obama administration said it would allow drilling in the shallow waters of the GOM, the report said problems with Interior's Minerals Management Service could slow permitting in that area. And drilling in the shallow water could be further hamstrung by Interior's requirement that producers comply with new safety and environmental standards before moving forward with new drilling.

Raymond James (RJ) analysts said the deepwater GOM will likely become a higher cost basin, and marginal projects could be shelved or shut down entirely.

"Everyone wants to know what the investment ramifications will be from the BP oil spill...But the reality is that this is an evolving situation and the long-term implications remain largely unknown. In the short term, the recently announced six-month moratorium on deepwater drilling will have significant effects on the entire industry. For offshore drilling in particular, existing contracts could now be in jeopardy, and deepwater rigs may have to migrate internationally to secure work, which could further pressure deepwater dayrates," said the RJ analysts.

"Longer term, the deepwater market clearly has more risk, as the Gulf of Mexico represents 15% of global floater activity and 25% of global deep/ultra-deep activity, and costs in the region could rise significantly."

For each platform idled by the work stoppage, up to 1,400 jobs are at risk, and lost wages could reach $10 million per platform per month and up to $330 million per month for all 33 platforms, preliminary estimates from the Louisiana Mid-Continent Oil and Gas Association show.

"Considering that the deepwater regions generate 80% of the Gulf's oil production and 45% of its natural gas production, a six-month work stoppage will have severe and perhaps long-lasting impacts on our domestic energy and economic supply," said Burt Adams, chairman of the National Ocean Industries Association.

"When you couple this 'no less than six-month' moratorium with the canceled western Gulf lease sale, the potential for long-term job loss and economic hardship for the Gulf of Mexico looms even greater," he said.

©Copyright 2010 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.