Deepwater drilling moratorium has created 'hidden victims,' study says

01 31, 2012 by The Times-Picayune

Small and medium-sized businesses that serve the Louisiana energy industry are cutting employee salaries, dipping into their cash reserves and moving business out of the Gulf of Mexico in an effort to stay afloat, according to a study released Monday by economic development agency Greater New Orleans Inc. that ties the dire results to the federal deepwater drilling moratorium. The study also found that some business owners are continuing to operate even as their companies fail to turn a profit and as they have to reach into their personal savings to remain in business.

The study calls the affected businesses "hidden victims" of the federal deepwater drilling moratorium because they have remained operational and largely avoided laying off workers, which makes their suffering more likely to go unnoticed, according to GNO Inc. board member Lizette Terral.

"You don't see how badly they are hurting because they are still operating," said Terral, New Orleans region president of JPMorgan Chase.

Terral urged the economic development agency to commission the study after meeting with struggling small and medium-sized oil-field businesses in her work at Chase.

The six-month moratorium on drilling was issued in May 2010, in the wake of the explosion of the Deepwater Horizon oil rig. The April 2010 accident killed 11 men and caused the largest oil spill in the nation's history. The restriction shut down new and existing deepwater drilling, suspended production and stopped the approval process for new drilling permits.

Although the moratorium has been lifted, permit issuance has been slower than in the years before the spill. In the past three months, two deepwater permits were issued per month on average, according to the Gulf Permit Index, released each month by GNO Inc. That is a 66 percent decrease from the monthly average in the year before the spill, and a 71 percent drop from the historical monthly average of seven new permits per month, according to the GNO Inc. data.

The slowdown has "grievously injured" the operation of small and medium-sized Louisiana companies in the energy industry, said Michael Hecht, president and chief executive officer of GNO Inc.

"A whole lot of hidden victims have been created by this moratorium," Hecht said.

The study findings will be used to lobby the federal government to create more favorable laws regarding permitting for the energy industry, Hecht said.

Parish presidents John Young of Jefferson, Billy Nungesser of Plaquemines and Charlotte Randolph of Lafourche, as well as Rep. Steve Scalise, used the release of the study to lambast the Obama administration, which they said is not processing permits fast enough.

"Our hands are tied," Nungesser said. "We've got to get this ridiculous bureaucracy changed."

According to the Louisiana Workforce Commission, 37,718 people were employed statewide in the mining industry in the first quarter of 2010, when the moratorium went into affect. One year later, in the first quarter of 2011, 39,437 people were working in the industry in Louisiana. In New Orleans, the industry employed 7,649 in the first quarter of 2010 and 7,270 in the same quarter a year later.

Slightly fewer than half of the study respondents said they had laid off employees. About 52 percent said they hadn't made any new hires. Some 39 percent said they cut staffing costs by trimming hours or salaries.

"At first blush, the overall Louisiana mining industry employment does not seem to be as impacted by the permit slow down as expected," according to the study, written by GNO In. research manager Emily Danielson. "Yet, despite the relatively limited employment losses reflected in public employment data, this study provides evidence that businesses are indeed laying off workers, reducing hours and salaries and limiting new hires as a result of the permit slowdown and insecurity about the future markets in the Gulf of Mexico."

The study also suggests that the job increase in the statewide comparison may have come from hiring for work on the Haynesville Shale in northern Louisiana.

About 100 business owners or company executives from fields associated with the oil and gas industry responded to the GNO Inc. survey. A majority of them had corporate headquarters in Louisiana, while all of them had some manner of operation in the state. More than half identified themselves as in "marine services" or as "ship owners and operators." Others were in oil well drilling, heavy construction, engineering services and other related fields.

The responses came largely from small and medium-sized businesses, reporting revenue of $10 to $15 million, Hecht said. Those businesses, according to the study, are less able to weather the challenges created by the permit slowdown.

"While small businesses provide critical services and support within the oil and gas industry, they sometimes face the challenges of limited experience, insufficient capital and location restraints," according to the study. "Large companies in the oil and gas industry may have access to greater capital, a specialized workforce and geographic diversity."

Respondents were asked to answer 17 mostly multiple-choice questions about their business operations before and after the federal deepwater drilling moratorium was enacted, including providing their annual revenue for the periods.

According to the study, there was an increase in the number of businesses reporting "low and medium revenues" of between $100,000 and $5 million post moratorium as compared with before the ban went into effect. There also was a decrease in the number of businesses that reported "large revenues" of $50 million $1 billion in the comparable periods. The result is that "nearly all businesses surveyed decreased or remained constant" following the moratorium, according to the study.

Almost 41 percent of respondents reported that they were not currently making a profit. And nearly 70 percent said they had dipped into their cash reserves.

Lori Davis, the owner and president of Rig-Chem, a specialty chemical manufacturer in Terrebonne Parish, said she has had to dip into her personal savings to keep her business going.

"The costs for us to continue to compete and do business are unbelievable," Davis said.

Seventy percent of the company's business is tied to deepwater drilling, Davis said. The company employs 14 people, but lost two employees in the past 15 months because they worried that the small business wouldn't be able to sustain itself. Davis, too, is worried.

"Companies that are small typically can adjust really quickly," Davis said. "But when you have no idea what the future is going to hold, it's hard to do."

Read the Report: "The Impact of Decreased and Delayed Drilling Permit Approvals on Gulf of Mexico Businesses"