Policymakers should avoid making regulatory decisions only to satisfy the public’s appetite for swift retribution following the Deepwater Horizon well blow-out in the Gulf of Mexico (GOM) because “excessively stringent” rules could result in costs increasing to the point that it becomes uneconomical to drill in deep waters, according to a new study.

“Eliminating or significantly reducing Gulf production would increase U.S. reliance on foreign oil and leave the U.S. even more dependent” on foreign fuel supplies, said the authors of a white paper by advisory firm Grant Thornton LLP. The authors outlined the ramifications for exploration and production (E&P businesses following the well blow-out and analyzed how tougher environmental regulations, enhanced safety and inspection procedures, and consolidation may impact U.S. drilling going forward.

“While the consequences of the Deepwater Horizon oil spill have yet to be fully revealed, the implications for E&P companies are expected to spread well beyond the Gulf of Mexico,” the authors said. “E&P companies will be under greater financial pressure as capital providers and insurers demand a higher risk premium for deepwater exploration activities and increase borrowing and insurance costs in light of this summer’s oil spill.”

The authors noted that for instance, Moody’s Investors Service has estimated that premiums for offshore drilling platforms are “likely to mushroom as much as 50%, threatening the survival of exploration businesses without adequate capital resources.” Because of the higher costs, several analysts expect “larger and more well-established” operators to gain the upper hand in the GOM.

“As all of the costs associated with operating in the Gulf continue to rise, deepwater drilling will increasingly become the province of only the largest, most well-capitalized companies,” said Grant Thornton’s Rob Moore, who co-authored the study. “We’ll also likely see a wave of mergers and acquisition activity across the E&P industry that will leave deepwater Gulf drilling concentrated among a handful of large energy companies as smaller players get absorbed through strategic purchases or wind down their operations.

“Additionally, asset divestitures by businesses under financial duress will create new transaction opportunities for both strategic and financial acquirers interested in capitalizing on acquisition opportunities.”

According to the authors, several factors will influence the future of GOM deepwater drilling:

“Policymakers need a balanced outlook; they should consider a number of factors when making long-term regulatory changes affecting the oil and gas industry,” said co-author Loretta Cross, a Grant Thornton managing partner.

The white paper is available at www.GrantThornton.com/oilspill.

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