The Gulf of Mexico (GOM) officially may be open to deepwater drillers but the offshore production industry is leery about returning to a region that has been forever changed, a Deloitte LLP executive said Thursday.

Deloitte's Gary Adams, vice chairman of the oil and gas sector in the firm's energy and resources group, was keynote speaker at the 2010 Deloitte Oil & Gas Conference: The Road Ahead for Energy, which was held in Houston. Adams authored the firm's new white paper about GOM drilling and presented the results of a survey of drilling executives.

"The new environment for risk means that managers of most companies are betting the entire company on every well, regardless of the likelihood of another disaster like the Deepwater Horizon," Adams told the audience.

Many oil and gas companies simply aren't ready to commit to the "new realities" of doing business and continuing operations offshore, he said. Some companies already have begun to exit the region and others are holding back on long-term commitments, he said.

For instance, just days ago deepwater driller Newfield Exploration Co., which produces more than 10% of total output from the GOM, said it would defer $70 million of planned 2011 offshore spending to develop a new leasehold in the Marcellus Shale (see Daily GPI, Nov. 17).

However, the GOM remains a "crucial area of exploration, and despite the challenges with heightened safety and permitting requirements, there is every reason to think the region will play a critical role in energy production," said Adams. Going forward, "energy companies, contractors, regulators and policymakers will need to establish a way for energy to be extracted safely and efficiently from the Gulf."

Before the Deepwater Horizon tragedy occurred last April, the region attracted investments from around the world. Even with new regulatory restrictions, "the area is too rich in potential energy to ignore," said Adams.

Since the oil spill, the industry has responded to the responded " with unprecedented investment into efforts," and "invested to prevent this type of accident from happening again." Secretary of the Interior Ken Salazar declared the GOM "open for business," and now the industry must face "new realities...and determine their path forward."

Deloitte's survey asked questions of 201 oil and gas professionals from Nov. 1-8. All participants have worked in the industry for at least five years and earn at least $100,000/year. Among the findings:

According to Adams' research, costs to continue GOM operations may increase as much as 20% over the lifecycle of each well because of "permitting delays, new regulations, higher insurance costs and increased taxes and contributions into the oil spill liability fund," which was established after the Exxon Valdez spill in Alaska.

"An even more dramatic impact lies in the new price of risk, which is by far the most critical barrier facing operators and joint venture partners," Adams said. "After the Deepwater Horizon incident, the liability cap of $75 million was waived -- and the total costs to cover cleanup, claims, and related matters could eventually reach or exceed $30 billion.

"As a result, companies operating in the Gulf must now consider a potential risk exposure of $30 billion when determining whether to continue their operations there, as opposed to the previous $75 million."

Deloitte estimated that of the roughly 300 companies operating in the GOM "only 10 international and national oil and gas companies have a market capitalization above $30 billion and a balance sheet that could possibly withstand that same dollar amount of liability. In contrast, more than 40% of the companies operating in the Gulf have a market capitalization of $5 billion or under -- well below the possible level of risk exposure."

The GOM, he said, "could become a game for only the biggest companies."

Reestablishing a favorable business environment between the federal government and industry is critical, Adams said.

"The Deepwater Horizon accident was a tragedy that will be felt for years to come," said Adams. "But the oil and gas industry and government have also learned great lessons, and are finding a new and balanced approach to building future operations that will benefit the United States...The Gulf is open for business, now we just have to find a sensible common ground."

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