Bayou state feels the drilling ban blues

Russell McCulley
Tuesday, October 26, 2010

With a major service point for the deepwater Gulf of Mexico in Port Fourchon, Louisiana among all US states has the most at stake in the federal government's six-month deepwater drilling moratorium. The effects so far haven't been as bad as some feared, but long-term uncertainty remains, as Russell McCulley reports.

In September, Bureau of Ocean Energy Management, Regulation & Enforcement director Michael Bromwich wrapped up a series of factfinding forums in Lafayette, Louisiana. The meetings were scheduled after the Deepwater Horizon disaster to gather information and public opinion about safety reforms and spill response, which Bromwich said could determine modifications to the scope or duration of the moratorium, set to expire at the end of November.

For many in Louisiana, the end of the moratorium couldn't come soon enough. Despite bearing the brunt of the BP oil spill, most people in the state opposed the ban; the first US offshore well out of sight of land was drilled there, in 1947, and today the industry employs tens of thousands in the region and props up a large share of its economy.

'We're used to dealing with the oil & gas industry,' says Eric Smith, associate director of the Tulane Energy Institute in New Orleans. 'The Gulf Coast states, absent Florida, get along relatively well with the oil & gas industry. It's worked well for a very long time. There's been this sort of constant suspicion by the people who aren't in the area, or familiar with the industry, that the regulators and oil and gas companies have been too cozy, and are sometime scratching each others' backs. There's probably some argument to be made in that regard, but at the end of the day, the system has worked relatively well for a long period of time.'

Antipathy shift
With the leaking Mississippi Canyon block 252 well in 5000ft of water effectively shut in since early August and the miles of oil containment boom removed from Louisiana's shores, public antipathy toward BP had eased; for the industry, and many Louisiana residents, the new villain in the saga is the Department of the Interior, which oversees BOEM, and its secretary, Ken Salazar, who many accused of unnecessarily prolonging the ordeal with the moratorium.

'There has not been a lot of leadership on this issue, from a regulatory perspective,' says David Dismukes, associate executive director of the Center for Energy Studies at Louisiana State University. 'There hasn't been identification of what we know and what we don't know, what we're clear about and what we're not clear about. There's been no prioritization.'

Dismukes describes a 'fundamental frustration with the process. The moratorium could have some degree of acceptability if you knew you were working towards restarting activity at the end of the moratorium in a meaningful fashion: longer, shorter, whatever it is, you just have a roadmap ready. And it doesn't appear, on the surface, that there's anybody laying out the paper for that roadmap.'

The industry, he says, has managed to stay active during the lull with front-end engineering and design and other non-drilling work on projects already on the books. But he questions whether regulators will be ready to move on those projects when the ban expires. 'If it expires early, or on time, how long is it going to take to get the process going again, not only with the companies themselves but also with the regulators and their ability to process drilling permits?' he says. 'Is it going to be 90 days, 120 days? In effect, before we see drills turn again, we've got 60, 90, 120 days, as we wait for the permitting process to proceed.'

Although the drilling moratorium applies to wells in water depths greater than 500ft, all Gulf of Mexico drillers were required to resubmit to the permitting process and comply with new safety rules. But it was several weeks after the Deepwater Horizon incident before regulators spelled out what the new rules entailed; by mid-September, according to BOEM statistics, two new wells that had been applied for before 8 June had been approved and five permits were pending. Of the permit requests submitted after 8 June, the agency had issued permits for three new wells and three more applications were pending.

The delay was taking a toll on the region's shallow water drilling market. According to ODS-Petrodata, there were 82 jackup rigs in the US Gulf of Mexico as of 10 September, up from 80 in mid-April, just before the blowout. But utilization in September hovered around 40%, with only 37 jackups under contract and 32 of those actually working. The blowout and moratorium interrupted a 'gradual recovery' underway in the jackup market, says ODS-Petrodata US publisher Thomas Marsh. In April 2010, 42 jackups had contracts and 38 were working. What's more, the September rig count statistics include a number of well workover and other activities that don't require well permits or the need to use the full capabilities of the rig and third party service providers. 'That work can go on for only so long,' Marsh says. 'The government needs to get moving with the permit process.'

Scattergun approach
The halt in permitting and ensuing backlog of applications have created what many are calling a 'de facto' drilling moratorium in the shallow water Gulf. 'The shallow water is getting caught in the scattergun approach the government is taking,' says Smith. The business had been hurting well before the BP event, as gas E&P companies redirected efforts toward shale plays onshore. 'The economics of drilling shallow water gas are possibly not as good as shale gas onshore. There would be some attrition in any case,' Smith says. 'There were a lot of parked jackups before the blowout, a lot of departing jackups before and after this event. But you can't deny that if you don't have permits, the probability of having more of them stacked is high, because people don't pay rent for rigs that they don't use.'

To help shelter the shallow water gulf from what could be harsh legislative and regulatory responses to the Deepwater Horizon tragedy, a group of companies with extensive operations in Louisiana - Hercules Offshore, Seahawk Drilling, the Rowan Companies, Ensco, Energy XXI, Delta Towing and Dynamic Offshore Resources - this summer formed the Shallow Water Energy Security Coalition.

'Those are the guys that are hurting,' Smith says. 'Semis are on standby, but people are still getting paid. The big service companies are reassigning people to get them out of the fray and put them to work elsewhere. The guys hurting the most are Gulf of Mexico-centric.'

The 'poster child for bad spots', he says, could be Louisiana-based Hornbeck Offshore Services, whose chairman, president and CEO, Todd Hornbeck, is leading an ongoing legal effort to overturn the drilling ban. 'He's got all these supply boats that are specifically designed to run between Port Fourchon and deepwater platforms - DP2, modern boats, lots of bells and whistles,' Smith says. 'And they aren't working because the rigs aren't working. You have a much higher supply boat density when you're going out to a drilling rig that's drilling than when you're going out to production platforms. [Hornbeck Offshore] doesn't have much of an international presence, so they're feeling it much more than, say, Tidewater, which has maybe 10% of its equipment in the US Gulf.'

And yet, by the end of this summer, Louisiana had not seen the massive layoffs many feared would result from the drilling ban. Many Gulf of Mexico companies stayed busy with Macondo cleanup and response work. But with the well finally plugged in September, it is uncertain how things will play out in coming months.

Mitigating factors
'A lot of mitigating factors have kept a lot of negative consequences from occurring,' says Dismukes. 'We haven't seen the layoffs in the thousands or tens of thousands that many feared.' Companies have used the time to conduct other work, retrain employees and catch up on backlogs, he says. And a tight skilled labor market, especially among younger workers, has made companies reluctant to let people go in large numbers.

'All those things have kept the doomsday scenario from playing itself out,' he says. 'That's not to suggest that it's not important, that those jobs aren't impacted or touched by those events, the rigs that have been idled as a result of the moratorium. It just means that people haven't got pink slips as a consequence. But how long can that last? And how much risk are people willing to bear on a foregoing basis because of the permitting process?'

The moratorium has slowed business at some offshore service companies, says Peter Ricchiuti, assistant dean at Tulane's Freeman School of Business and director of Burkenroad Reports. 'But they don't want to lay people off because it's so hard to get the skilled labor back,' he says. 'They're carrying too many people, but they really don't have any choice.'

The post-Macondo focus on safety could be a boon for P&A and decommissioning specialists in Louisiana, which has a considerable backlog of idle or underutilized offshore structures. 'That could become a very interesting business,' Ricchiuti says.

Last month, Interior secretary Salazar and BOEM director Bromwich announced that they would require permanent plugs in nearly 3500 nonproducing Gulf of Mexico wells currently completed with subsurface safety valves and the dismantling of some 650 oil & gas platforms no longer in use. The notice to lessees covers wells not used for exploration or production in five years, as well as associated pipelines and platforms, and takes effect 15 October. Companies will have 120 days to submit a decommissioning plan for all such installations, which could further slow the permitting process at the agency, formerly known as the Minerals Management Service.

Meanwhile, the Louisiana industry, which has an outsized influence on the state's wider economy, waits for a sign that they can return to business as usual.

'What service companies are saying is, if there's just an end date, everything is going to change,' Ricchiuti says. 'It's just this uncertainty of not knowing if the moratorium is going to go on long enough to push those rigs off to Nigeria and Angola. It wouldn't take much' to allay those fears, he says: 'just a little bit of certainty.' OE

Categories: Deepwater North America Gulf of Mexico Regulations

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