The six-month moratorium on deepwater drilling in the Gulf of Mexico (GOM) poses uncertainties that could impact offshore operators and the communities in the region for years, energy analysts said Monday.
President Obama late last month suspended drilling in the GOM and offshore Alaska and Virginia in response to the explosion and massive oil spill from the BP plc-operated Deepwater Horizon rig (see Daily GPI, May 28). Industry organizations last week joined Louisiana Sen. Mary Landrieu in urging the administration to rescind the blanket moratorium, calling it a “one-size-fits-all” answer that would lead to further job losses and economic problems in the Gulf Coast region, already devastated by the oil spill (see Daily GPI, June 14).
On Monday energy and financial analysts began weighing in on their estimates of the moratorium’s costs.
Steven Wood, a managing director at Moody’s Investors Service, said the credit ratings agency believes “it could take up to two years before producers, rig operators and service firms in the deepwater Gulf can resume activity to pre-spill levels.”
The accident could have an international impact as well, as other governments that oversee offshore production adopt these new, stricter U.S. standards, Moody’s said in a report issued on Monday.
The aftermath of the accident at the Macondo well could lead to several changes, Moody’s said. Among other things, Congress is considering a measure that would lift or remove liability caps for deepwater producers, “which could lead some companies in the Gulf to reevaluate whether to continue operating there.”
A new U.S. policy on deepwater drilling that could emerge in the wake of the accident also would slow the permitting process and make it more expensive, a particular risk for smaller producers, Moody’s noted.
“Overall, small producers that rely wholly or heavily on offshore drilling to replace declining reserves could face proportionally large declines in production, and could be the most at risk for negative rating actions,” Moody’s report stated. “The major offshore drillers are likely to have a more muted credit rating effect due to their ability to do business in different regions.”
Moody’s analysts said it is difficult to determine “when the market will regain its appetite for the risk involved in deepwater production.” In addition to insurance costs for companies in the region, which are likely to rise over time, “the U.S. government could exact stiffer levies on oil production in order to bolster its environmental clean-up fund.”
Analysts J. Marshall Adkins, Pavel Molchanov and Cory Garcia of Raymond James & Associates Inc. said the drilling moratorium will bring “significant negative unintended consequences” that could include:
The effects, noted the Raymond James trio, “will only get worse as time goes by.” The drilling ban possibly could last a year, but “our sense is that this period is more likely to be shortened than lengthened. The quicker the ban is lifted, the faster tens of thousands of Americans can go back to work and the fewer dollars we will send overseas.”
The “central message is that this moratorium cannot and will not be permanent,” said the Raymond James team. “From the standpoint of energy independence (remember that phrase?), trade deficits and jobs, it is clear that a prompt return to deepwater drilling is in the Gulf Coast’s and America’s national interest. The sooner the White House recognizes this salient fact, the better.”
To determine how many jobs may be at risk, the Raymond James analysts assumed that 250 people were directly employed by each rig at any given time (around 125 rotating on and off every two weeks). There also are support personnel associated with each rig, which include supply boat, helicopter, cementing, wireline, directional drilling and other crews that depend on a rig for work.
Adding eight onshore “support people” per “rig hand,” the analysts came up with a total of 1,500 workers “whose paycheck directly depends on that rig’s operations,” which is “broadly in line with the estimate of 1,400 from the National Ocean Industries Association…”
With 33 deepwater rigs operating in the GOM when the moratorium took effect, the total number of jobs at risk “is roughly 49,500. And these are permanent jobs, not census jobs.”
But the Raymond James estimate only covers direct job losses. Analysts pointed out that their figure doesn’t include any secondary and tertiary job losses, or losses arising from “broader economic dislocation.”
With “fewer breadwinners in Gulf Coast communities, this translates into less spending on other goods and services — shops, restaurants, etc. Just as the demise of auto plants and steel mills in the Upper Midwest devastated entire towns, an extended drilling ban could eventually have a similar effect in the Gulf Coast.”
Assuming each deepwater rig generates $1 million a day in economic activity, with half comprising the day rate paid by the operator to the contractor and the other half to support services, the shutdown of 33 rigs for 12 months — to June 2011 — “represents a GDP [gross domestic product] loss of $12 billion over the next year.”
When they meet before Congress this week, CEOs with ExxonMobil Corp., Chevron Corp. and ConocoPhillips are expected to ask lawmakers not to punish them for the damage caused by the BP well blowout.
ExxonMobil CEO Rex Tillerson, Chevron CEO John Watson and ConocoPhillips CEO Jim Mulva are scheduled to appear Tuesday before a House Energy and Commerce Committee panel. Also scheduled to appear are Lamar McKay, president of the U.S. unit of BP, and Marvin Odum, who helms the U.S. unit of Royal Dutch Shell plc.
The CEOs have been asked to testify about the spill’s effect on U.S. energy policy, said a spokesman for Rep. Edward Markey (D-MA). Markey chairs the subcommittee that is holding the hearing.
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