Industry professionals see lasting damage from Deepwater Horizon

22 November 2010 20:34  [Source: ICIS news]

HOUSTON (ICIS)--Government regulations in the wake of the Deepwater Horizon oil spill in the Gulf of Mexico threaten to permanently drive energy companies out of US waters, an industry analyst said on Monday.

"Post-spill regulations will have a dramatic impact on the future of production in the Gulf - not only could misdirected regulations decrease interest in offshore drilling in US waters, but they could also to drive interest in oil development overseas, such as in deepwater Africa and Brazil," said Gary Adams, vice chairman of the Oil and Gas sector at Deloitte.

According to a survey by Deloitte of more than 200 oil and gas professionals, a majority believe that any improvements in drilling safety would come from the industry, rather than from external regulations, discoveries or requirements.

“The once-favourable regulatory treatment, attracted companies and capital investments from around the world," said Adams.

According to a survey by Deloitte of more than 200 oil and gas professionals, a majority believe that any improvements in drilling safety would come from the industry, rather than from external regulations, discoveries or requirements.

The 20 April explosion on the Deepwater Horizon oil well about 50 miles (80km) off the Louisiana coast killed 11 workers. About 5m bbl of oil were spilled into the Gulf of Mexico, making it the largest spill in Gulf history.

Following the spill, a six-month moratorium was put in place on all offshore drilling in the Gulf to allow for multiple investigations of the accident.

The US Department of Interior has introduced safety regulations for offshore operators. These include new operations and procedures, certifications, back-up control systems, new designs and material, and demonstration of back-up blowout containment resources. In addition, chief executive officers (CEOs) must certify in writing that their companies are compliant with the new requirements. The new requirements have created a significant lag time before companies can restart drilling.

“Largely, the industry doesn’t have access [to US offshore drilling],” said John Felmy, chief economist with the American Petroleum Institute (API). “So the access situation is one that is getting fairly dire for companies to get out there and get oil supplies flowing again.”

The industry, on the other hand, has invested to prevent a repeat accident of the magnitude of Deepwater Horizon. One example is a new consortium of energy companies, called the Marine Well Containment Company, along with a $1bn (€730m) investment, for building and deploying a rapid response system to capture and contain oil in the event of a future well blowout in deepwater.

Survey participants said their companies are more likely to review and update their health and safety policies in the wake of the oil spill.

The consideration for costs of risk in deepwater drilling has changed strategies for drilling and could drive independent oil and gas companies out of the Gulf coast completely. The liability cap of $75m was waived for the Deepwater Horizon incident. The total costs for cleanup, and related matters, could eventually reach or exceed $30bn, according to Deloitte.

Of the roughly 300 companies operating in the Gulf, only about 10 international and national oil and gas companies have market capitalisation of more than $30bn and a balance sheet that could possibly withstand the same amount of liability. Furthermore, 40% of the companies in the Gulf have a market capitalisation of $5bn of under.

“Companies are betting the entire company on every well,” said Adams. “Many companies are limiting their investment there, while others have announced their exit altogether.”

Finally, the new regulations and costs would likely drive the price of oil higher during the next few years. A majority of oil and gas professionals do not expect the price of crude oil to exceed $80-$100/bbl range in 2011. Crude closed on Monday at $81.74/bbl.

“Professionals overwhelmingly agree that potential post-spill regulations would have a negative impact on the oil and gas industry, with 40% saying the impact would be very harmful to the industry,” the survey said.

The survey continued, saying 75% agree the initial regulatory changes have further delayed the review and approval process for drilling in the Gulf. Most see increased drilling costs and more difficult planning and forecasting that will have major impacts.

This all led to the conclusion, agreed on by two-thirds of professionals, that further post-spill regulations would increase oil prices in both the near and medium terms.

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By: Sheena Martin
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