March 21, 2011 12:18 am
When US regulators approved in February the first deepwater drilling permit since BP’s Macondo disaster last April, the industry dismissed it as a political gesture aimed at quieting calls from Congress to resume drilling. Unrest in north Africa and the Middle East was pushing up oil prices. And the public was already seeing higher prices at the petrol pump.
However, Michael Bromwich, head of the Bureau of Ocean Energy Management Regulation and Enforcement, said politics had not been a factor. Noble Energy had simply met all the requirements for a permit.
Yet the reality was that Noble did not have to do everything now being required by regulators to get a new permit; it had been drilling when Macondo happened and only needed clearance to finish its job. No permits for new projects have been issued.
“The deepwater drilling moratorium has been lifted in name only,” said John Hess, chairman and chief executive of Hess.
And the industry does not see rising oil prices changing that.
Andy Steinhubl, partner in the Houston office of Bain & Company, the consultancy, notes pressure on regulators to permit new deepwater drilling has been high for some time because of the economic downtown, high unemployment and growing financial pressure on drilling companies from lost work. Seahawk Drilling has already filed for bankruptcy, citing the drilling ban.
“The administration has been sticking to their principles. They’re not stalling. There was a lot to work through and they’re working through it,” Mr Steinhubl said. “I don’t see this [north Africa/Middle East] crisis as accelerating that timetable.”
Yet the industry is impatient. Companies such as Chevron had been counting on new projects in the gulf to increase production in coming years. And while they are still hopeful, with most companies on standby, oil companies believe they are being held to a much higher standard than any other industry. The constant refrain is that when there is an aircraft crash, the US does not ground all aircraft.
Yet the reality is that regulators have come under so much criticism for being what Mr Bromwich calls a “permitting mill” before Macondo, that they are going to do everything to change that reputation.
Companies complain that permit applications are repeatedly kicked back by regulators, who are asking for more information, and that they need a clear template for what is needed. Regulators have yet to come up with one.
Mr Bromwich says regulators were working on a number of improvements to strengthen oversight, given that they had simply failed to keep pace with the transformation of the offshore drilling industry as it moved into deeper water.
He points out these things take time, noting that UK activity dropped off substantially for two years after the Piper Alpha accident there and almost came to a standstill. “We have a new normal; it’s going to take more time than in the past,” he says.
Kurt Hallead, co-head of global energy research at RBC Capital Markets, is among those who sees the Noble permit as a positive sign.
“We’re going from a standstill to some movement,” he said. And, despite all the threats to leave the region if the deepwater drilling ban went on too long, the majors remain keen to get back out there. He adds: “The major oil companies view the Gulf of Mexico as a world-class oil-producing region. They have every intent to continue to invest there.”
John Parry, principal energy analyst at consultancy IHS, says he expects offshore contract drillers to see increased demand for their newer, more technologically advanced rigs.
And competition between operators will surely drop, as smaller companies move to leave the gulf, given the liability of operating there demonstrated by Macondo.
These are both attractive reasons for those with deep enough pockets to wait patiently on the sidelines for permit granting to resume.
“The US cannot afford to shut down one of its key sources of energy supply,” said Rodolfo Guzman, director at Arthur D Little, the consultancy. “Once the dust settles, and the rules become clear again, most deepwater players will go back.” However, the region will never again see business as usual.
Many companies insist that least some of the changes afoot in the US – such as the requirement of adequate spill response systems – should be duplicated around the world the better to safeguard deepwater drilling from Africa to Brazil.
Bob Dudley, BP’s chief executive, says it is working to spread the lessons learnt from the disaster. “We believe we have a responsibility to share our learning with those who can benefit from it – including our competitors, partners, governments, regulators,” he says.
He adds: “Indeed, we have been asked by people around the world to explain what we have learnt. BP executives have travelled to Angola, Russia, Australia, Brazil and elsewhere in recent months, bringing our learnings to stakeholders, industry partners, academic and governments.”
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