OFFSHORE DRILLING:

Deepwater companies pull up stakes, and some may never return

Walter Oil & Gas Corp. executives were within 9,000 feet of finding out if they would hit oil under the Gulf of Mexico. Now, they don't know if they will ever find out.

The company and its contractors had drilled about 12,000 feet down from a seabed located about 1,200 feet from the surface of the Gulf of Mexico, in Ewing Bank Block 834. The oil they were looking for was supposed to be at 21,000 feet.

But now the company is pulling up stakes, under Obama administration orders to put a halt to most deepwater drilling in the Gulf, where a BP PLC well has been stubbornly billowing crude since late April despite repeated attempts to plug or divert it.

"We'd spent millions and millions of dollars, and we don't know if we will ever have the opportunity to get a return on our investment," said Ron Wilson, a Walter manager.

Walter got official notice last Friday from the Minerals Management Service to start shutting down its operation, which is about 64 miles offshore. Wilson said Monday that operations on the rig would be shut down in "a handful of days."

Walter's is one of the rigs being shut down as part of a federal moratorium on deepwater drilling, part of the administration's response to BP's Deepwater Horizon spill. Interior Secretary Ken Salazar has blocked new permits for six months and suspended 33 deepwater operations, including Walter's. Drilling in waters less than 500 feet deep will be allowed to continue, as will production activity in deep waters (E&ENews PM, May 27).

Walter executives aren't sure whether the well will get drilled when, and if, deepwater exploration is allowed to resume.

They aren't alone. Chevron Corp., Royal Dutch Shell PLC and BHP Billiton have all announced shutdowns in the Gulf. When the Deepwater Horizon incident occurred, Melbourne, Australia-based BHP was running five drilling rigs in the Gulf at a cost of about $1 million a day. Now, those five are sitting idle.

Rigs are typically owned and operated by a drilling company like Transocean Ltd., the company involved in the Deepwater Horizon incident, and rented out to exploration companies all over the world. Rig lease rates in the Gulf run at $250,000 to $500,000 a day, according to the Louisiana Mid-Continent Oil and Gas Association. That means rig operators could be losing between $8.3 million and $16.5 million a day.

And that figure doesn't include the $1 million or so a day in lost revenue for supply-boat operators, welders, divers, transportation companies and other support services.

"There are a lot of nervous people out here," one offshore drilling engineer said.

Pleas from industry, Jindal

The Louisiana Mid-Continent Oil and Gas Association estimates that the six-month halt would have a significant impact on energy security and federal revenue, as well.

The moratorium would defer 4 percent, or 80,000 barrels a day, of expected deepwater production in the Gulf in 2011 and would likely make seven current discoveries not economical to produce, putting $7.6 billion in future government revenues at risk.

"Considering that the deepwater regions generate 80 percent of the Gulf's oil production and 45 percent of its natural gas production, a six-month work stoppage will have severe and perhaps long-lasting impacts on our domestic energy supply and economic security," said Burt Adams, chairman of the National Ocean Industries Association.

"When you couple this no-less-than-six-month moratorium with the canceled Western Gulf lease sale, the potential for long-term job loss and economic hardship for the Gulf of Mexico looms even greater."

Twenty-two of those idled rigs sit offshore from Louisiana, and Louisiana's economic development department estimates that the current six-month drilling suspension could slash 10,000 jobs in the state. Gov. Bobby Jindal (R) says that's unacceptable.

"Already, Louisiana has suffered severe negative economic and ecological impacts from the BP oil spill," he said in a letter sent yesterday to President Obama and Salazar. "During one of the most challenging economic periods in decades, the last thing we need is to enact public policies that will certainly destroy thousands of existing jobs while preventing the creation of thousands more."

And while he said strict oversight of deepwater drilling is necessary, Jindal went on to ask that the federal government "move quickly to ensure that all deep-water drilling is in proper compliance with federal regulation and is conducted safely so that energy production and more importantly, thousands of jobs, are not in limbo."

As lost rig revenues mount for drilling companies like Transocean, Baker Hughes Inc., Halliburton Co. and Schlumberger Ltd., Jindal and industry insiders are worried the companies will move their equipment to other parts of the world.

"The announced moratorium of deep-water drilling activity creates a significant risk that many of these drilling platforms would be relocated to other countries," Jindal said in his letter.

The Offshore Marine Service Association says that if the rigs are moved to other parts of the world -- towing a rig to Brazil or western Africa takes only about a month -- it could be two to three years before they finish overseas commitments and come back.

The drilling companies are currently tied up in contracts with the exploration companies that have been forced to stop drilling operations, but force majeure provisions could allow them to be canceled if unforeseeable forces bear down on a business plan.

Cobalt International Energy Inc. invoked the force majeure provision in its contract with Diamond Offshore Co. for the Ocean Monarch drilling rig, which was ready to begin drilling at Cobalt's exploratory well in Garden Banks Block 959. The Houston-based company said it had already gathered all the necessary permits and insurance to start drilling when the administration announced the moratorium. It expects to spend about $15 million as a result of triggering force majeure.

But the company hasn't given up on working in the Gulf -- yet. The company says it's planning to hire another drilling rig at the end of this year and to start drilling in early 2011.

Analysts at Jefferies & Co. say that more operators are likely to follow Cobalt's lead and declare force majeure on their current contracts.

Liability

Even if the moratorium is lifted and companies are allowed back to work, some worry new policies could be on their way that could devastate offshore drilling in the Gulf.

Some in Congress want to raise the spill-liability limit for offshore drillers to $10 billion in economic damages. And some, as high up as Senate Majority Leader Harry Reid (D-Nev.), have said drillers should have unlimited liability (E&E Daily, May 19).

"That can't be covered," Walter's Wilson said. "There is not an insurance that will cover what we're reading about in the paper. Will there be one? I don't know. But it will be at such a cost, I don't know that companies like ours can afford to pay it."

Oil companies such as BP are legally on the hook for the full cost of containing and cleaning up a spill. But Congress capped companies' liability for economic damages -- people put out of work by the spill, fishermen who cannot fish, empty hotel rooms on the beach at high season -- at $75 million.

And if Walter doesn't drill it, Wilson suspects larger companies won't be interested in buying out Walter's lease. It's smaller companies like his, he said, not the "super-majors" like Exxon Mobil Corp. or Shell, that take those kinds of risks.

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