Analysis: Oil firms hurt by Gulf spill welcome back drill rigs

04 10, 2012 by Reuters

Gulf of Mexico oil drillers will be busier this year than at any point since the BP oil spill in 2010 that upended their industry and soiled their reputation along with parts of the marshy Louisiana coast.

Eight more deepwater rigs are expected in the Gulf this year, based on what oil companies tell contractors including Transocean , Ensco and Seadrill . Such an influx would bring the active deepwater count to 29, just short of the level before the well blowout two years ago this month that killed 11 people and destroyed a Transocean rig.

The rebound cannot come soon enough for companies that rely on the drilling business. While the increasingly varied economy of southern Louisiana may be recovering, no sector pays like oil and gas. Energy has been part of the state's commercial fabric since the first offshore boom during the 1970s oil crisis, when crude was much cheaper than it is now.

More Gulf activity could help President Barack Obama, ahead of the November 6 election, as he tries to fend off charges from some Republicans and the industry that drilling has not recovered after the spill due to new rules and slow permitting.

The Obama administration imposed a four-and-a-half-month moratorium on deepwater drilling after the oil spill. That gave way to a longer spell when regulators grappled with stricter rules and allowed little drilling to take place - oil men deride that period as the "permitorium."

In New Orleans, a city already enlivened late last month by the NCAA college basketball championship at its colorfully lit and now Mercedes-sponsored Superdome, the mood at a big annual oil conference across town was notably brighter.

"Our customers still see the Gulf of Mexico as an attractive place to do business," said Steven Newman, head of Transocean, the world's largest rig contractor. "We view the Gulf of Mexico today as a net importer of rigs, rather than a net exporter."

The pace of permitting remains choppy. Business group Greater New Orleans Inc found that an average of three permits a month were approved in the November to January period, compared with nearly six a month in the year before the spill.


The aftermath of the oil spill has been a tough period to work through, even in an industry known for its cycles. A deepwater rig employs up to 400 people, from crew to cleaners to cooks, and the industry says each rig supports double that when indirect jobs are included.

Louisiana is home to 1,777 small oil and gas firms, with $4.2 billion in combined annual revenue, and a survey of about 100 found that half had to let people go in the past two years, while more than three-quarters ate away at cash reserves or owners' personal savings, according to Greater New Orleans Inc.

Lori Davis, president of family-owned oil services firm RIG-CHEM, said residents of Houma, southwest of New Orleans, stopped spending on the "extras" in life, from charitable donations to vacations.

"People were only doing what was necessary," she said, which compounded the woes of residents relying on fishing after the spill. "Many people had family that were in the seafood industry."

Davis felt lucky to have lost only a few employees, given the aggressive expansion of other companies before the spill.

"We were supposed to be in a boom - things were really in an upswing," she said. "We were able to put on the brakes. I'm sure there were a lot of people that weren't as fortunate."

Dotted around New Orleans are billboards promoting claims services for victims of the BP spill, though Davis noted that was only an option for individuals, not for businesses such as hers that suffered due to the shortage of permits.

But Elgie Holstein, who was oil spill response coordinator at the Environmental Defense Fund, said a serious review of drilling practices was vital given the lives lost in April 2010, even if not everyone was happy with the delay.

"As the complexity and challenges of drilling in deeper and deeper waters grew, the government's ability to supervise the industry waned," he said. "I don't think there can be any disagreement that we needed to fundamentally revisit what the rules of engagement are in some of these frontier areas."


The economy is now picking up in Houma, where the metropolitan unemployment rate fell to 5 percent in February - lowest in the state - from 5.7 percent a year ago, and 6 percent in mid-2010. House prices are up 3 percent in the past quarter, after bottoming out last year, according to

"Good activity in the Gulf of Mexico accrues to this region, so we'd certainly expect to see things at least holding their own or getting better here," David Williams, chief executive of drilling contractor Noble Corp , said on the sidelines of the Howard Weil Energy Conference in New Orleans.

Such optimism is bolstered by the eight rigs slated to begin work in the Gulf in 2012, starting with Noble's Globetrotter I this month, which will be the second Noble drillship to go to work for Royal Dutch Shell Plc here in as many months.

Cobalt International Energy Inc , the fourth-largest deepwater Gulf player, is drilling a well now and plans three more this year, even though the private-equity-backed start-up made headlines for its huge discovery in Angola.

Cobalt investor Riverstone along with Apollo Global Management are also backing a new company, Talos Energy, focused on shallow-water Gulf opportunities.

A Diamond Offshore rig, currently working for Cobalt off Angola, may even return to the Gulf in 2013. Diamond CEO Larry Dickerson believed the uptick in permitting had something to do with rising U.S. fuel prices in an election year.

"It's not perfect at this point in time, but we certainly see concentration with the new heads of the particular agencies," Dickerson said. "I think the high gasoline prices out there help them focus on that."

Obama wants to scrap billions of dollars in tax breaks for the biggest oil companies, yet pressure to open up drilling with oil prices so high makes cracking down on the industry a tough task. Last week the administration said it would automate applications for onshore drilling permits, which it expected to slash review times by up to 80 percent.

Of course, increased drilling will do little, if anything, to push down gasoline prices, which tend to rise in the summer.

Executives also caution against expecting a Gulf rebound to happen all at once. Ryan Hanemann, managing partner at Audobon Engineering, whose Petro Construction Management is based just outside New Orleans, sees a gradual "big wave" of work sweeping over the region as drilling leads to oil and gas production.

"That wave's got to cycle through the entire industry," Hanemann said. "Larger deepwater projects, which are the really big employers, that's a two-year cycle."


Like others, Hanemann's main worry is finding enough qualified people to put to work after the extended dry spell, given the sector is already short of petroleum engineers.

Audobon, with about 800 employees, has brought people out of retirement and plans to be aggressive with its college recruiting this summer. "Every time the industry recovers, we wind up in a situation where people are in very, very short supply, and it turns into a feeding frenzy for talent," he said.

This is not for lack of money. State figures show wages in the 'mining' sector, which captures oil and gas, are well over double the average in New Orleans, and two-thirds above average in Houma, where mining makes up a tenth of all wages paid.

Fitch, when it assigned a 'stable' outlook to its rating on Louisiana debt last month, said that while the economy, heavily linked to oil and gas production, had been diversified, a third of state output still comes from raw and intermediate goods.

Locals say the oil and gas rebound will be felt mostly in the "swamps," like Houma, where RIG-CHEM's Davis expresses only limited optimism. Even this is diluted by fears for the future, especially after a warm winter, which often means storms ahead.

"Most of the customers that we're talking to right now are either waiting on a permit, or they're waiting on a rig. Those things are kind of stalling," she said.

"All that being said, we haven't had a hurricane in a while. The odds are that possibility lurks," she added. "That would certainly create another issue that we don't want to have to deal with."