The Gulf of Mexico (GOM) deepwater drilling moratorium could impact natural gas supplies and prices more than oil, Bank of America Merrill Lynch (BofA) said in a new report. Separately some energy analysts last week also lamented the moratorium’s effect not only on energy supplies and related companies, but on the region as well.

The six-month moratorium, put into place May 28, will affect U.S. oil supplies, analysts noted. However, gas production in the GOM could decline by around 100 MMcf/d by 4Q2010, and in an “extreme” scenario, could be down by as much as 600 MMcf/d at the end of the year.

“For natural gas, we have penciled in lower production of 100 MMcf/d in 4Q2010 in our base case scenario. For both oil and gas, BofA expects slightly lower supply additions from new projects whose wells were not completed before the moratorium and from the heightened decline rate in the region given the suspension of new well drilling.”

Although “environmentally catastrophic, the amounts of oil involved are too small to materially alter global supply/demand balances in the near-term…At 1.7 million b/d, the Gulf of Mexico makes up just 1.9% of total global oil production at 86 million b/d,” BofA analysts said.

Related stocks of oil majors, exploration and production companies, and oil service companies have taken solid hits since the oil spill began, but West Texas Intermediate crude oil initially “displayed little impact and then fell on macro concerns over the European crisis.” Assuming the moratorium did not extend to other parts of the world, BofA’s base case scenario sees an average reduction in 4Q2010 GOM oil production of 55,000 b/d, “a rather small amount” compared with global output.

Most offshore oil production “takes place elsewhere in places like the Mexican GOM, the North Sea, the Persian Gulf, Brazil and China. Furthermore, in terms of reserves, the U.S. represents a smaller share of world’s holdings, with about 1% contribution of global offshore reserves and 5% of global deepwater reserves.”

However, the GOM accounts for 6.7 Bcf/d — or 10% of Lower 48 state gas production, “of which 45% is considered deepwater or ultra-deepwater.” With GOM decline rates at about 28%, volumes from offshore should decline through the rest of the year, lending support to New York Mercantile Exchange natural gas prices.

Of the 33 deepwater GOM drill sites now suspended, only a few are related to projects scheduled to come online over the next few years. The wells affected by the moratorium are “considerably smaller,” noted BofA.

The Great White discovery,which represents 80% of the offshore Perdido platform’s total production, began producing in early April, “while at Cascade-Chinook two of the three planned production wells were completed before the suspension was put in place. The other two projects affected by the drilling ban are considerably smaller — the start-up of the 30 MMcf/d Appaloosa project and start-up of Santa Cruz, with peak capacity of 15,000 b/d and 35 MMcf/d are now likely to be deferred.

Another major GOM deepwater project scheduled to ramp up this year, Droshky, also is not affected by the moratorium because construction was completed in early May, noted analysts. “Furthermore, with only three projects scheduled to come online next year representing a total of 75,000 b/d of capacity, any delays should not dramatically impact U.S. supply.”

Output in the GOM “will not immediately decline over the next three months due to the ongoing pipeline of projects as well as the potential for increased workover activity to mitigate decline rates,” said analysts. “Moreover, the consultancy believes the global oil supply and demand balance is loose enough to absorb the shock of lower, not to mention slower, GOM oil production in the next months.” The “medium to long term impact of the moratorium is unpredictable,” said analysts. “On top of that, there is also uncertainty around timing and juggling of rig contracts and also the likelihood that costs associated with expected regulations may deem some projects uneconomical.

“Further confusing the long-term picture, about half of the projects affected by the drilling moratorium are exploratory rather than for development drilling and, even without the suspension, would not have impacted volumes for another three to five years. Additionally, more than half the exploratory wells are in water depths greater than 5,000 feet, suggesting even longer leads times and more uncertainty in terms of potential productive capacity.”

If the drilling ban stretches beyond six months, “supply growth could be severely constrained and costs would almost certainly move up. Combined with current predictions for a heavy hurricane season. which could disrupt clean-up efforts and hot weather in parts of the U.S., bullish sentiment may grow.”

There is “no doubt,” said analysts, that if “other countries follow the U.S. lead or if much stricter regulations are set in place, the long-term impact on hydrocarbons output could be substantial. For both oil and natural gas, deep offshore reserves are a large portion of the remaining hydrocarbons in the Gulf of Mexico.”

Separately energy analysts last week said the drilling moratorium poses uncertainties that could impact offshore operators and communities in the region for years.

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.

“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. The major offshore drillers are likely to have a more muted credit rating effect due to their ability to do business in different regions.”

Meanwhile, analysts J. Marshall Adkins, Pavel Molchanov and Cory Garcia of Raymond James & Associates Inc. said the drilling moratorium would 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.”

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.”

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.”

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