Two years after moratorium lifted, many expect Gulf oil production to soon exceed pre-spill levels

10 24, 2012 by The Times-Picayune

Two years after the White House lifted a moratorium on deepwater drilling in the wake of the BP oil spill, federal regulators have issued the most permits for new wells since 2007, and many in the industry expect oil production in the Gulf of Mexico to soon exceed pre-spill levels.

So far this year, the U.S. Bureau of Safety and Environmental Enforcement, which regulates offshore drilling, has issued 90 permits for new wells in waters deeper than 500 feet, according to the agency's website. That's more than the last two years combined, and more than the number issued in either of the two years before the spill. The last year more permits were issued was 2007, when regulators approved 106 new deepwater wells.

Industry analysts and other experts say the resurgence is due to improved communication between oil companies and the government officials charged with keeping them in line.

As of this month, 46 companies were operating in the deepwater Gulf on efforts ranging from "small, low-risk prospects to giant targets in extreme conditions," according to Wood Mackenzie Ltd., a Houston energy consulting firm.

The firm estimates that more than $20 billion will be spent drilling development wells for deepwater projects through 2015.

Industry officials have taken note. "There's a better understanding of what regulators are looking for and there's a better understanding of what the operators and the industry can provide," said Randall Luthi, president of the National Ocean Industries Association, a trade association representing the offshore energy industry.

Though more permits are being approved, regulators say they haven't relaxed their oversight. Permits are only approved "when the applicant has fully complied with our rigorous safety and environmental requirements with the demonstrated ability to contain a subsea spill," BSEE spokeswoman Eileen Angelico said in a statement.

For six months after BP's Macondo well erupted, killing 11 rig workers and causing one of the worst environmental disasters in U.S. history, deepwater drilling was at a standstill. Some trade groups predicted tens of thousands of jobs would be lost throughout the region, and most expected the moratorium would stretch for more than a year.

Post-spill inquiries suggested there had been a lack of oversight at the Mineral Management Service, prompting President Barack Obama to revamp the offshore energy regulatory agency after the accident, including splitting it into separate leasing and permitting agencies.

The decision to halt drilling drew ire from many Gulf Coast leaders as well as the industry, who said it was an overreaction to shut down the industry and then put permitting in low gear.

The Obama administration said a more stringent standard for reviewing drilling permits was necessary, and that forcing oil companies to play by the new rules would take time. But opponents blamed the moratorium for rising prices at the pump, and imagined a doomsday scenario that would torpedo the local economy.

That ultimately didn't happen: The Obama administrated lifted the moratorium in October 2010, though it would be another four months before the first permit was approved to drill the kind of deepwater oil well that was banned after the BP disaster. That permit gave Houston-based Noble Energy the go-ahead to resume work on a well southeast of Venice that it had already drilled to more than 13,000 feet.

Since then, Louisiana's employment numbers have remained fairly steady. In August, unemployment in the state was at 7.4 percent, compared with 8.1 percent nationally. The rate is up slightly from a year ago, when it was at 7.3 percent, according to the U.S. Bureau of Labor Statistics.

The outlook is even better in the nexus of the offshore economy. In the Houma area, including Bayou Cane and Thibodaux, the preliminary unemployment rate in August was 4.9 percent, down from 5.3 percent a year ago.

In his 2012 economic outlook for the region, economist Loren Scott, a professor emeritus at Louisiana State University, predicts the area will add 6,000 jobs over the next two years as the pace of permitting continues to pick up steam.

In the report, Scott estimates that the Gulf will have 33 drilling ships operating by late next year, bringing it back to pre-spill levels.

"We're just seeing continued commitment from a variety of operators to that region," said Lauren Payne, a Wood Mackenzie analyst.

Payne expects investment in deepwater activity will increase annually over the next three years. "Drilling operators are really focused on boosting production from existing assets and bringing new projects on stream," she said.

Another positive sign of recovery: Gulf oil production from federal leases is also climbing. Nearly 1.3 million gallons of oil were produced per day in July, up from 1.2 million gallons the year before, according to the U.S. Energy Information Administration. That's still down from 1.7 million gallons in 2009, the year before the spill.

That number is projected to grow to 1.4 million gallons per day by the end of 2013, according to federal estimates.

Andy Radford, a senior policy analyst with the American Petroleum Institute, expects deepwater drilling will continue to pick up, as additional rigs become available and operators become accustomed to the regulations and resumed pace of permitting.

Many operators are now trying to build up a cache of permits so that when drilling rigs become available, they can make a move, Radford said, which shows that operators are bullish on the outlook of drilling in the Gulf.

"There's limited availability of the rigs, so if one becomes available and you have a permit that is in line with what the rig's capabilities are to drill that well," he said. "It just allows you a little more flexibility."

Oil and gas operators aren't the only ones who are looking to capitalize on the industry's local upswing.

Laborde Marine, which works with companies including BP and Shell, is considering constructing up to three deepwater platform supply vessels, which cost about $45 million each and take about 18 months to build, said Cliffe Laborde, a managing partner of the Morgan City boat builder.

The new vessels would be the company's first since the oil spill. Though he expressed concern that the market could become oversaturated, Laborde believes that it's more likely there will be a void of marine support equipment available.

"The marine energy service business is notorious for overbuilding in the good times, which then results in lower rates down the road," said Laborde, whose company currently operates five supply vessels and 20 large crew boats.

Edison Chouest Offshore in Cut Off has also announced plans to build an additional eight deepwater supply vessels. The vessels, which are slated to be finished over the next two years, are in addition to 25 new supply boats the company previously announced.

This year, Edison Chouest has delivered 15 ships, including the MV Aiviq, a 360-foot icebreaker that Shell Oil commissioned at a price tag of about $200 million, to begin exploratory drilling in the Arctic Ocean.

Still, Luthi, of the National Ocean Industries Association, believes that there's room for improvement.

"Hands down, the pace of permitting has greatly improved," Luthi said, but some permits have been arriving just in time to work under the operators' schedule.

"I think the real concern is that it won't be long until the industry capacity is more than the federal regulating capacity," he said.