DRILLING & PRODUCTION

Eldon Ball • Houston

Macondo fallout – a look ahead

Whatever else may emerge from the Macondo blowout, one thing is sure: the cost of drilling in the Gulf of Mexico is going to increase.

At press time, US Interior Secretary Henry Salazar had issued another moratorium (now referred to as a suspension) to prohibit deepwater drilling in the GoM. Although worded differently to escape court challenge, it has the same effect as the first – to stop all deepwater drilling in the GoM.

Meanwhile, a de factor moratorium is developing through a Minerals Management Service slowdown in permit approvals. Operators report that gaining approval for a deepwater exploratory well is evolving into a several-month wait. As a result, deepwater rigs are leaving the GoM – Diamond Offshore is moving two – theOcean Endeavour has left for Egypt and the Ocean Confidence has accepted a contract to work offshore Congo. More will follow.

At the same time, government response has taken a political turn, not a technological one, resulting in decisions that will add delays and obstructions. Operators can expect a tangle of new regulations and restrictions, more inspections, increased reporting requirements, new equipment specifications, and more.

A good example is HR5626, referred to as the Blowout Prevention Act of 2010. It’s much too long to quote at length here, but I draw your attention to the punishment phase and I quote:

“CRIMINAL PENALTIES.—Any person who knowingly and willfully —

(1) violates any provision of this Act, or any regulation or order issued under the authority of this Act, designed to protect the public health and safety or the environment;

(2) makes any false statement, representation, or certification in any application, record, report, or other document filed or required to be maintained under this Act; or

(3) falsifies, tampers with, or renders inaccurate any monitoring device or method of record required to be maintained under this Act, shall, upon conviction, be punished by a fine of not more than $10,000,000, or by imprisonment for not more than 10 years, or both. Each day that a violation of paragraph (1) continues, or each day that any monitoring device or data recorder remains inoperative or inaccurate because of any activity described in paragraph (3), shall constitute a separate violation.”

Clearly, this will never make it into law, but I draw it to your attention as an indication of what may lie ahead in some similar form.

All is not quite as dismal as it sounds – at least for the long run. The GoM is still adjacent to the largest crude oil market in the world and under a politically stable government. There are just too many good prospects for the industry to turn its back on the Gulf.

For example, some things to remember about oil and gas operations in the GoM, as reported by IHS:

• GoM deepwater projects are driving higher US oil production. According to IHS data, US GoM production accounted for 30% of US crude oil production in 2009 — 1.6 MM b/d out of 5.3 MMb/d. This 1.6 MMb/d of Gulf supply was the result of a 33%, or 399,000 b/d, increase in output from 2008. Most of the production increase was due to new production from five deepwater fields: Tahiti, Dorado, King South, Thunder Hawk, and Atlantis North Flank. Total US oil production recorded year-on-year growth in 2009 for the first time since 1991
• US GoM production contributes to the drop in US oil imports. The incremental growth last year in the GoM offset about 4% of average daily imports
• Natural gas production in the Gulf represented 10% of total US gas production in 2009. Offshore GoM natural gas production recorded a 3% increase in 2009 over 2008. This was the first increase after seven years of substantial declines and due to the start-up of Independence Hub (in the ultra deepwater at 8,000 ft [2,438 m]) with its 1 bcf/d of natural gas capacity.

On the negative side, a sustained moratorium or suspension will exacerbate job losses for US workers, who are already facing a 9.5% unemployment rate; and will do no favors for a struggling economy.

Oilfield demand

On a brighter side, US demand for drilling products and services is forecast to grow 8.1% annually to $44.4 billion in 2014, according to a study by The Freedonia Group, an industry research firm. Much of this will be for onshore activity, but the forecasters factor in the GoM situation in their predictions.

The company forecasts a recovery in domestic oil and gas drilling activity as oil prices stabilize at a relatively high level, and the US aims to reduce its reliance on foreign sources of energy.

These and other trends are presented inDrilling Products & Services, a new study from The Freedonia Group, Inc., a Cleveland-based industry market research firm.

The Gulf of Mexico accounted for more than $5 billion in drilling product and service revenues in 2009. As Freedonia sees it, the April 2010 Macondo disaster in the Gulf of Mexico – which is expected to bring about significant legislative activity – may restrict short-term demand for offshore drilling products and services. However, the drilling products and services market is expected to benefit over the longer term, based on the implementation of more stringent safety standards, which will likely promote demand for new equipment, Freedonia says.

Through 2014, they project drilling equipment demand to slow from the pace of the 2004-2009 period, restricted by the cyclical drilling rigs segment, as spending on new rigs declines in the wake of a purchasing boom that took place between 2006 and 2009. Despite the glut of new rigs on the market, however, expanding drilling activity and the large pool of aged rigs approaching retirement will ensure a sizable ongoing market for new drilling rigs through 2014, the company says.

Drilling services are projected to account for more than 80% of overall demand gains in the US drilling market through 2014. Market expansion will be driven by the high cost of drilling marginal wells. A major driver for such costs is the increasing reliance on technology when drilling to optimize production from poorer hydrocarbon resources. Techniques such as horizontal and directional drilling, measurement-while-drilling to ensure accurate drill string placement, and drilling deeper wells in more difficult conditions all tend to raise the cost of drilling wells, Freedonia says.

Offshore worker distribution

Offshore rig workers live throughout the US, not only along the Gulf Coast, a new study conducted by the International Association of Drilling Contractors demonstrates. The study illustrates that job losses and dislocations caused by the ongoing deepwater drilling moratorium and the de facto shallow-water moratorium have a national economic impact.

The data on residences of 11,875 offshore employees showed that these workers call 68% of all US Congressional districts home.

The study drew data from nine offshore drilling contractors and one boat company supporting the offshore industry. Residences of these workers are spread across 296 Congressional Districts. There are 435 Congressional Districts in the US.

This study does not include the thousands of workers at oilfield service companies, large and small; equipment manufacturers, whether “mom and pop” operations or publicly traded firms, nor oil-producing companies.

“Each direct rig job is supported by four to five support personnel, whether working offshore or on the beach,” says IADC President Dr. Lee Hunt. “Beyond that, as this study shows, communities across the US depend on the wages of offshore workers. The economic trauma that this deepwater moratorium is causing spans the entire US,” Hunt warned. “Offshore workers call all of America home.”