Gulf of Mexico drilling activity improves slowly

07 02, 2012 by The Advocate

Since oil leak, rigs return to work but few new wells being drilled

In June, the number of drilling rigs operating in the federal waters off Louisiana’s coast climbed to its highest level in three years, although industry members say most of that activity is taking place in water depths of less than 500 feet.

“The trend in the Gulf as a whole is positive. The rigs are returning. The rigs that left the Gulf are returning. Companies are rehiring people that they had to let go,” said Nicolette Nye, a spokeswoman for the National Ocean Industries Association.

In mid-June, figures from the Louisiana Department of Natural Resources showed 46 rigs were operating in federal waters off the state’s coast. Nineteen of those rigs were working in water at least 500 feet deep.

There were 33 deepwater rigs working in the Gulf of Mexico in the months before the BP Macondo disaster, the biggest oil spill in U.S. history. A federal ban on deepwater drilling followed.

A report released May 30 by the Gulf Economic Survival Team, which the state formed after the moratorium, said the increase in rig counts is misleading.

Although the rig count would seem to indicate drilling activity is returning to pre-moratorium levels, only a third of the 18 rigs operating in May were drilling new wells, the report says. The rest were working on existing wells and doing maintenance.

Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University and author of the report, said the purpose of the study wasn’t to say that things are bad in the Gulf.

“Things are a lot better than they were a year ago and a hell of a lot better than they were two years ago,” Weinstein said. “But we do know that production is still sub-optimal.”

In 2010, the Gulf produced an average of 1.55 million barrels per day, according to the federal Energy Information Administration. In 2011, that number fell to 1.32 million barrels per day, and production is expected to fall to 1.23 million barrels per day this year.

Before the moratorium, the agency’s 2012 forecast called for Gulf production of 1.76 million barrels per day. Weinstein said even the Energy Information Administration thinks production will not return to pre-Macondo levels until the end of 2013 at the earliest.

Weinstein’s report said the uncertainty about the cost to obtain a permit and the length of time for approval is hampering efforts to develop deepwater projects.

Lori LeBlanc, executive director of the Gulf Economic Survival Team, said companies want to invest in the Gulf faster than regulators can process the permits.

“If you don’t have a regulatory system that matches industry’s ability to invest in the Gulf, then we fear that that capital will shift to other parts of the world,” LeBlanc said.

Still, the federal government’s June 20 auction of Gulf leases brought in $1.74 billion for 454 tracts. It was the largest sale since the BP disaster in 2010. In a conference call with media members, Interior Department Secretary Ken Salazar said the auction results show the Gulf is back.

But industry members said the sale would have drawn even more bidders — 48 versus 77 in 2010 — if there were more certainty regarding regulations.

Gifford Briggs, vice president of the Louisiana Oil and Gas Association, said exploration and production in the Gulf has fallen steadily.

In 2001, there were 148 rigs working in the Gulf, roughly 100 more than now, Briggs said.

“The decline in activity in the Gulf of Mexico is not because of Macondo,” Briggs said. “It’s because the Gulf of Mexico is the most expensive place to drill for oil in the world, and a major part of that is because of the regulations and the permits.”

The regulations have become so expensive that companies are going elsewhere, he said.

Celena Rousse, president of Larose-based Offshore Towing Inc., said there is no comparison between deepwater activity now and activity in early 2010.

Most of the company’s work is moving rigs into deepwater.

During the moratorium, hourly rates for offshore towing operators dropped from $2,200 to as little as $600, Rousse said.

Offshore Towing was lucky because its vessel owners are solid financially and had the money to keep the company going, Rousse said. Otherwise, the company would have been in trouble.

“The market has gotten really bad, and I hate to think Obama being president for another term,” Rousse said. “I’m really worried about that. All in all, things have really declined.”

There are some bright spots. Despite the cost and the regulations, the shallow-water areas of the Gulf are seeing more drilling activity.

“They’re starting to come back now, not because they’re getting anything for dry gas,” Weinstein said. “But now they’re selling their natural gas liquids, which are in very high demand.”

Still, industry members say they are a long way from pre-Macondo business levels.

J.C. Gallet, president of Oil Country Tubular Corp. in Lafayette, said some of his customers have seen contracts cancelled.

“There’s heightened activity but not to that extent,” Gallet said.

Some of his customers have seen projects cancelled, he said.

There are also some signs that deepwater activity will be picking up. Energy industry analysts expect 40 deepwater rigs will be in the Gulf this year.

Weinstein said he is pleased that there are more rigs in the Gulf.

“One assumes that if more rigs are coming to the Gulf, a number of them will be involved in new drilling, which will lead to more production,” Weinstein said.

And more deepwater rigs means more jobs.

Deepwater projects have a larger economic impact, employing more people and generating more jobs to support the workers and the rigs. A deepwater rig might employ anywhere from 180 to 280 people, while a shallow-water rig needs 75 to 85 workers, according to the Louisiana Mid-Continent Oil & Gas Association.

Port Fourchon Executive Director Chett Chiasson said there has been a huge increase in investment and preparations by deepwater companies for activity expected this year and next.

Interest is “through the roof” in port properties, Chiasson said.

Guidry Bros. Inc. is investing $15 million to $25 million in a new facility, Chiasson said. Chouest Shorebase Services is developing an existing 71-acre lease.

The Greater Lafourche Port Commission, which operates the port, has begun a 400-acre expansion at Fourchon, Chiasson said. The expansion includes a 7,000-foot slip that will create around 15,000 feet of waterfront when fully developed.

Chiasson said there are a couple of reasons for the increased activity.

Companies have a number of projects that are large enough to require the additional space, he said.

And the huge levels of oil in these new discoveries mean that energy companies are going to have to explore and drill those leases.

LeBlanc said the state’s work with federal regulators has helped give energy industry members a clearer understanding of regulatory issues and how better to meet regulators’ requirements.

The governor and Natural Resources Secretary Scott Angelle had more than 50 conference calls with industry and federal regulators and met more than 30 times with regulators, LeBlanc said. The result is that things are better now than they were two years ago or even last year, but there is definitely room for improvement in the regulatory process.

Weinstein said the complex regulatory system enacted after the Macondo explosion is still hampering the industry’s efforts to restore production in the Gulf.

Before the Macondo disaster, it took an average of 50 days for a drilling and exploration plan to win approval, according to Weinstein’s report. Since then the average has risen to 207 days.

Nye also said that communications with regulators have improved.

As a result, Nye said, the industry has a little more certainty about what’s going to happen — the Bureau of Ocean Energy Management is now finalizing a five-year lease plan — as regulations and plans go through the draft process and are then released.

“For a while there, pretty much all communication had stopped,” Nye said.