While repercussions such as the bankruptcy filing of Seahawk Drilling Inc. are already being felt from the months-long de facto moratorium on Gulf of Mexico oil and natural gas drilling, the shockwaves from the U.S. government action are likely to reverberate for many years to come, even after the permitting flowrate gets back up to speed, according to a panel of drilling and well service veterans speaking at CERAWeek 2011 in Houston.
Following last April's blowout of the Macondo well and the sinking of the Deepwater Horizon rig in the deepwater Gulf of Mexico (GOM), which killed 11 men, operations in the GOM for oil and gas drillers has been far from routine (see Daily GPI, April 22, 2010). Seahawk Drilling, the second largest GOM shallow water driller, cited the moratorium in its bankruptcy filing in February (see Daily GPI, Feb. 15). While the official moratorium on deepwater drilling was lifted four months ago, industry claims that a government-imposed de facto moratorium remains in place on most drilling in the Gulf.
"2010 was a year I'd very much like to forget," said James Noe, senior vice president, general counsel and chief compliance officer for Hercules Offshore.
"We are just now experiencing the early stages of what we will be experiencing for years to come," said Noe. "It is a slow degradation in many respects. The drilling contractors, like Hercules and Seahawk, are really the canary in the mine, and we might fall over first, but the negative economic impacts will be felt for years to come."
Noe told the CERAWeek audience that the Obama administration's de facto moratorium in the Gulf impacts every aspect of the offshore drilling industry. "We focus a lot on drilling permits, but it impacts [businesses down the line]," he said. "There is no regular flow of permits at all of any sort. Deep, shallow, pipeline, installation, removal, plug and abandonment, it is across the spectrum."
Noe noted that while Hercules began to see an increase in permit flow late in 2010, that flow has once again backed off. While the deepwater moratorium remained in place, Noe said no one was offering answers as to why shallow water permitting was also restricted. "There was a dramatic change in the industry, and no one doubts that the change will be years in the making in the offshore space. But also there was, and remains, a change in the tone between the regulators and the regulated... We have a tone in Washington that I've never seen. A tone from even the highest levels, including the President looking for someone's ass to kick. And [Bureau of Ocean Energy Management, Regulation and Enforcement] Director [Michael] Bromwich, who is after all a prosecutor at heart, launching investigations, treating the industry frankly like criminals. We haven't really broken through that angry adversarial tone."
Joe Dunbar, business unit manager for Parker Hannifin Corp., which owns Cabot Subsea, told the audience that with so much uncertainty surrounding Gulf development, companies are turning their focus to other plays.
"I don't see any light at the end of the tunnel, not in the Gulf of Mexico," Dunbar said. "The people that have capital -- and most of the companies do -- are refocusing in the shale plays and internationally. For my part, in looking ahead to fiscal 2012, the only thing we have there are a couple of large international projects. Our client base here in the Gulf of Mexico is looking elsewhere...and they have to. Many of them rely on private equity...so they are having to go to the people that support them and say, 'We are going to go here, where we have an environment where we know what the rules are. We can no longer play [in the Gulf], where there are no rules to the game.' I find very little optimism for the Gulf of Mexico right now with any of my clients. The worst part of this is yet to come. These drilling rigs remain idle and every industry related to the oil and gas business on the Gulf Coast is going to suffer, and suffer greatly."
Dunbar reiterated that uncertainty is making it nearly impossible to operate in the Gulf right now. "One of our clients has a 28-mile long umbilical that we manufactured for them that they paid for a long time ago," he said. "They have been endeavoring to get permits to deploy for about six-and-a-half months, but they haven't been able to get them. The unknown part of this, which is killing everyone, they have to then try to negotiate with an installation contractor...to go out and deploy that. Well the contractor has schedules, and when you don't know when you're going to get permits, how do you tell the man that is going to install it for you, 'Well, they said I'll have my permits [on this date].'"
Energy consultant IHS Herold this week said it sees offshore service companies rebounding next year as the logjam of work in the GOM opens up (see related story).
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