Analysis: U.S. drill ban casts shadow over Gulf prospects

By Anna Driver

HOUSTON (BestGrowthStock) – Oil and gas drilling in the Gulf of Mexico will be curtailed far beyond the end of November, when the U.S. moratorium on drilling is set to end, putting dozens of planned energy projects at risk.

Drillers are beginning to make good on their threat to move equipment and people out of the Gulf to work at overseas projects, even though they will receive lower rates at those jobs.

That could also have long-lasting impact on output from the Gulf, which contributes 30 percent of U.S. oil production and 11 percent of natural gas output.

“The biggest risk to the industry is rigs moving out,” said Phil Weiss, an oil analyst at Argus Research. “If a rig goes, it’s not a short-term decision, and it can put projects behind.”

Since the moratorium was first announced on May 27, Diamond Offshore Drilling Inc said it would move two rigs out of the Gulf — one to Egypt and one to the Republic of Congo — and the company is contemplating moving a third. About 200 jobs have also been cut, company spokesman Les Van Dyke said on Tuesday.

On Thursday, Canada’s Nexen Inc said it might subcontract outside the Gulf two deepwater rigs that were booked for later this year.

The movements of rigs because of the moratorium, along with new safety regulations currently being formulated by the U.S. government and a greater wariness by the industry, are likely to push deepwater drilling back much further than six months.

“Industry activity is likely to remain significantly reduced relative to previous, pre-Deepwater Horizon levels, for years not months,” analysts at the Eurasia Group said in a report.

LEGAL MUDDLE

The government’s six-month ban on drilling was issued after a rupture at BP Plc’s Macondo well caused the Deepwater Horizon rig owned by Transocean to explode and sink on April 20.

That moratorium was put on hold by a federal court, but the U.S. Interior Department issued a new order on July 12 in a bid to skirt legal challenges.

The uncertainty about the moratorium and scope of the new regulations required to win permits to drill is expected to keep rigs idled at least until early next year, analysts said.

The government’s original drilling ban shut down 21 rigs and those same rigs will not be able to operate under the revised moratorium.

“When deepwater rigs resume drilling again operators will face longer lead times for permitting and higher costs,” Barclays Capital analyst James Crandell said in a note to clients on Monday. “We thus project that deepwater drilling in the U.S. Gulf will return to only half to two-thirds of its former level over the next 12-18 months.”

That in turn is pushing companies to move their rigs to areas where they may face less oversight but will earn lower rates for operating them. It generally takes about 60 days to move a rig, depending on the size of the operation.

“Firms with the ability will go develop properties that aren’t regulated by the United States,” said Michael Cuggino, chief executive of Pacific Heights Asset Management in San Francisco.

Currently, more than 30 exploration projects have been stalled in the Gulf because of the government’s ban, affecting companies including Exxon Mobil, Anadarko Petroleum Corp and Marathon Oil Corp.

GOODBYE GULF?

Deepwater rigs typically sign multi-year contracts for amounts that have run as high as $650,000 per day for the most advanced vessels.

Those prices have slumped by an estimated 40 percent in the last several months, largely because of the Gulf drilling pause, James Tisch, chairman of Diamond Offshore, told Reuters on Wednesday.

Other rigs that may be moved to foreign waters include Noble Corp’s Paul Romano deepwater rig, which is listed as available in the company’s latest fleet status report. Pride International Inc has two new drillships that were due to go into contract for BP in the Gulf, but the ban also threw the location of that work into question.

“The contracts do not say they must work in the Gulf of Mexico,” said Kate Perez, Pride’s director of investor relations.

Angie Sedita, an analyst with UBS who has cut earnings forecasts for most drillers, said in a note to clients this week that Transocean is in “advanced contract discussions” with Italy’s Eni to move its Transocean Marianas rig to West Africa from the Gulf.

A spokesman for Transocean declined to comment. So far Transocean, the world’s largest drilling rig contractor, has not moved any rigs from the Gulf.

Chad Deaton, chief executive of oilfield services firm Baker Hughes, said last week that his company had already begun moving skilled workers out of the Gulf to other locations.

(Additional reporting by Braden Reddall in San Francisco, editing by Matthew Lewis)

Analysis: U.S. drill ban casts shadow over Gulf prospects