Hercules Offshore Inc.'s CEO said Tuesday he's hopeful that the permitting logjam created after U.S. officials imposed a moratorium on offshore drilling soon will be expedited, leading to a "flurry" of offshore permits for shallow-water projects over the coming months.

CEO John T. Rynd spoke with financial analysts about the effect of the federal moratorium on his company, which concentrates on shallow-water projects in the Gulf of Mexico. A federal moratorium remains in effect for deepwater drilling. However, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM) has two directives now in place (NTL 5 and NTL 6) that allow shallow-water permits to be issued if the operators are in compliance with the stricter requirements (see Daily GPI, June 22; June 9).

"At the tail end of the second quarter and extending through today, our domestic offshore segment began feeling the impact of the slowdown in the drilling permit approvals," Rynd said. "Prior to the new regulatory requirements, there were a total of 99 permits approved between January through May of this year. Since then there's only been 19 new permits approved, of which 17 were compliant with NTL 5 and two issued with NTL 5 and NTL 6. This is based on information we gathered from the BOEM website."

Hercules' average days backlog for marketed rigs in July slipped to 54, compared with 108 in July 2009, when it had one less marketed rig, said Rynd. "As an industry, of the 48 marketed jackups in the Gulf of Mexico, there are currently 15 rigs uncontracted. Of the 33 contracted rigs, we estimate that nine are not working as the operators are waiting on permits. Furthermore, of the 33 rigs under contract, 19 have contracts set to expire by the end of September...

"We were hopeful that the pace of permits approval will improve in the near term, particularly given the fact that the number of permits issued has picked up in recent weeks. In the meantime we will continue to work diligently with customers to obtain permits."

There may be a "silver lining" to the permit backlog, said the CEO.

"As everyone involved in the permitting process gains a full understanding and comfort with the new requirements, we expect a healthy backlog of application for drilling permits to get through, which would feed demand for shallow-water drilling assets in the Gulf," he said. "Along these lines, we have commitments from operators on five of our rigs pending permit approvals."

Jim Noe, who is Hercules' general counsel, said the new NTL directives have caused delays all along the line for producers and oilfield service operators.

"Since the new safety and environmental rules have been announced, only two permits for new wells have been issued," said Noe of shallow-water drilling. "As of today, permits for eight wells have been submitted to BOEM and are awaiting approval. Issuance of workover, sidetrack completion and plug-in abandonment permits on existing wells have also slowed down significantly."

After "a lot of hard work" he said, "it now appears that the industry understands and is complying with the requirement of NTL 5; most of the permits issued by the BOEM to date are permits that only require compliance with NTL 5. It appears that the delay that we are now experiencing is being caused by the continuing attempts for the industry to obtain clarification and commitment from the regulators on the requirements of the second NTL [NTL 6], which requires additional environmental and oil spill information."

Both Noe and Rynd have met with Interior officials to "identify and resolve any remaining uncertainties on the new rules and requirement," said the general counsel. "We are hopeful that this constructive dialogue that we are having with the BOEM will free up the permitting logjam for our customers. However, we will also continue working with key members of Congress and state government officials to find ways to hold the regulators accountable for reviewing and issuing drilling permits on a timely basis."

Rynd said it was "tough to put a handicap" on when the shallow-water permitting process will be expedited. "Everyone's working flat out to get these through, get the template in place and get the 'secret sauce' in...We've come a long way from the full-stop moratorium...to get the shallow-water moratorium lifted and permits issued...The progress is frustratingly slow...

"When you look at where we started and where we are today, we've made good progress. I'm optimistic. It was slow at first, but from what we are seeing, from the backlog, is customers still want to drill. Gas prices are up about 80 cents from April. And when we get through this issue, I'm optimistic that we'll be drilling a lot of wells in shallow water. But it's tough to say whether it will be a third quarter or a fourth quarter event."

Hercules reported a net loss of $19 million (minus 17 cents/share)in 2Q2010, compared with a loss of $12 million (minus 14 cents) in the year-ago period. Average revenue per rig per day fell more than 30% to $35,345. Revenues in the latest quarter reached $165.9 million versus $183.7 million in the year-ago period.

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