Have offshore drilling operations in the Gulf of Mexico rebounded after the Deepwater Horizon spill and the economic downturn? During today's OnPoint, James Noe, senior vice president, general counsel and chief compliance officer at Hercules Offshore, discusses the state of the offshore drilling industry in the Gulf. He explains why his company has seen a 27 percent jump in stock price in the last quarter and talks about future growth as the industry moves toward more deepwater operations.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Jim Noe, senior vice president, general counsel, and chief compliance officer at Hercules Offshore and executive director of Shallow Water Energy Security Coalition. Jim, thanks for coming on the show.
James Noe: Happy to be here.
Monica Trauzzi: Jim, all eyes are on the industry and the Keystone decision that the Obama administration just made not to move forward with the project. From your perspective as a contractor, what do you read in the tea leaves about this decision and the Obama administration's overall view of drilling here at home and using home-grown energy sources of oil?
James Noe: I think the major lesson learned from the Keystone situation is that regardless of what environmentalists feel or what the Obama administration may do to prevent bringing fossil fuel to market, market conditions will prevail. Certainly, over the short term politics may prevail, as it prevailed with the Keystone decision that President Obama made yesterday, but ultimately this is about supply and demand and market forces. There's a demand for fossil fuels here in the United States of America and elsewhere. And what I think the lesson is, is that the Keystone pipeline perhaps may not move south across the Canadian border, it may move west and supply China and the Asian markets, but what that tells us is demand will ultimately preempt politics. Politics has won the day. They won't win the war. We're seeing the same thing offshore in our business. What used to be a predominantly natural gas province, you know, a year or two ago we were drilling 80 to 90 percent gas wells and today it's only 70 to 80 percent oil wells and liquid wells, natural gas liquid wells. And why is that? It's supply and demand. There is a demand for oil in the United States and elsewhere and we're going to drill for oil when the market demands it. And likewise, the Keystone pipeline really is just a lesson that, at the end of the day, market will rule politics.
Monica Trauzzi: But if the government doesn't want something to happen, they can stop it through certain regulations, which we have been seeing. They've been perhaps making it a little more difficult for you guys to do business with certain safety regulations. So, politics does play into this.
James Noe: Certainly politics plays into this and I don't think anyone would disagree that there was politics on both sides of the Keystone story. And there's politics in our business. There's politics surrounding oil and gas. But my point is, is that whether we drill for oil and gas here in the Gulf of Mexico and whether we deliver Canadian tar sands through the Keystone pipeline to the Gulf of Mexico, that is a political decision. But what is beyond the control of President Obama and beyond the control of the environmentalists is that, at the end of the day, we will drill for oil and gas because there is a demand for it. The Canadian tar sands will be produced because there's a demand for it. The question that the politicians have to answer is whether that demand -- whether that production will meet U.S. demand or whether that production will meet Asian or Chinese demand. And I think the Keystone, you could take away from the Keystone answer, at least now, is that the tar sands are going to meet Chinese demand.
Monica Trauzzi: Let's talk a bit about the state of the industry. Hercules stock is up 27 percent in the last three months. How do you account for that? What changes have been made?
James Noe: We're seeing demand for drilling services offshore, despite the challenges we have with the bureaucratic process of getting permits. We're seeing demand for our services that we haven't seen since pre-Lehman day, pre-global economic crisis. It's been three years since we had so much demand for our services. And really, that's being driven, again, by the shift in the shallow water from these natural gas wells with natural gas at $2.50 or so and oil prices well over $100, hovering around $100. We're seeing demand for drilling services to meet that oil demand. So we haven't seen this demand, like I said, since 2008. We saw a low. We had three operating drilling rigs at one point, in the low point in 2010. Today, sitting here today, we have 18 rigs working. During that same time period, the total shallow water industry saw a low point of 19 operating drilling rigs. We have 42 today. And of those 42 rigs that are working offshore today, there's only 42 available drilling rigs in all of the Gulf of Mexico. So we're seeing an absolute boom in activity offshore. But what that underscores, it does underscore to your point that there is demand for those services. There is demand for oil. There is demand for drilling in the Gulf of Mexico and now it really goes to the administration to ensure that we have an efficient and effective regulatory framework in order to meet that demand. And I think that's really what the Obama administration's job council was saying when they released earlier this week that we need to have an all-in approach. We have to look at our energy demand realistically, not of where we want to be in a decade or two from now with more of a mixed portfolio with wind and other renewables, but how are we going to meet our energy demand now, today? And I could tell you that our activity at Hercules Offshore is telling you that there is a demand for oil drilling in the Gulf of Mexico.
Monica Trauzzi: But does this growth also show that a devastating incident like the Deepwater Horizon doesn't really have much of an impact a year or two later?
James Noe: Well, I would disagree with that. We have significant challenges with the regulatory regime. We have bureaucratic bottlenecks at almost every point in the permitting process. In fact, that's why I'm in Washington. I met with Admiral Watson yesterday, who is the new director of -- the regulator that issues drilling permits. And, frankly, I'm very encouraged by that meeting. Admiral Watson is an engineer by training, Coast Guard, and I'm encouraged that we have somebody that has the skill set, even though he doesn't come from the industry, as an engineer he has the skill set to understand the industry that he's regulating. And, frankly, we haven't had that in two years.
Monica Trauzzi: The trend seems to be moving more towards deepwater operations. Does that hurt your business and do you plan to shift your focus at all?
James Noe: No, we have no plans on moving into the deepwater, because we see it, like I said, increasing demand for our services in the shallow water. The Gulf of Mexico is not a dead basin, no matter what you hear. You know, last year the Gulf of Mexico production was 28 percent of nationwide production of oil, up from 14 percent just a few years ago in 2005. So, what that tells you is the Gulf of Mexico is an important basin, whether it's shallow or deep. Particularly now with the onset of the shale gas, its glut that we've seen in driving down gas prices. What our customers are doing are shifting their focus to finding oil and natural gas liquids in the shallow waters. And that's what's pushing demand, that's what's pushing our stock. That's what's allowing us to move day rates for our services and, really, we see a very robust drilling activity for all of 2012.
Monica Trauzzi: So there's no hesitation in your company or in the industry to invest in the gulf because of some of these safety standards that we're seeing imposed by Interior?
James Noe: No. We really supported a lot of the safety standards that were imposed by the Department of Interior. A lot of the rules and regulations were a very good idea that we very much support and we have a common interest to ensure that our operations are done safely. There's no doubt about that from the industry. And so we're not discouraged by new rules and regulations. Now, we're discouraged by an opaque regulatory process with respect to getting permits, but we're very comfortable with investing capital in the Gulf of Mexico despite some of those challenges.
Monica Trauzzi: All right, we're going to end it right there. Thank you for coming on the show. Nice to see you.
James Noe: Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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