OFFSHORE DRILLING

Obama exploration plan hits an industry slowed by pricing uncertainty

The East Coast could become home to a booming offshore energy industry -- but only if the price of crude oil recovers substantially.

Yesterday, the Obama administration reissued its proposal to open up the Atlantic shoreline of the United States to offshore drilling. The zone it proposes to allow drilling in covers federal coastal waters off Virginia, North Carolina, South Carolina and Georgia. A similar idea was shelved in 2010 after the Deepwater Horizon drilling rig explosion and oil spill in the Gulf of Mexico.

The Interior Department, in its proposed five-year leasing plan, also moved to restrict drilling activity off the shores of the Arctic National Wildlife Refuge (ANWR), waters that could contain an abundance of hydrocarbon reserves.

Though offshore oil and gas exploration is a long-term prospect, most offshore experts say that crude prices need to show stability above at least $50 per barrel for the industry to consider major new projects. West Texas Intermediate oil prices closed at just below $46 per barrel in trading yesterday.

The crude price drop already has had an impact on the booming Gulf of Mexico offshore industry.

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Officials at Kiewit Offshore Services told EnergyWire that they've sent most of their subcontractors home from projects underway at their fabrication yard in Ingleside, Texas, and are now finishing ongoing work with their core staff. New offshore platforms will be installed over the next couple of years, but the slowdown indicates that major oil companies are sitting on future plans until they have a better sense of what future oil prices will be.

Arctic questions

Alaska's future as a hub of Arctic drilling is also in doubt.

If lower oil pricing persists and the industry is discouraged from further investment in the Gulf of Mexico's oil-rich waters, then it is unlikely that major spending on Alaskan offshore exploration will move forward, whether the industry is allowed to drill near ANWR or not. At the same time, an oversupply of offshore drilling rigs combined with the low oil price environment will make Arctic drilling cheaper than it ever has been, and companies that have already spent millions moving visions forward may press ahead.

Rig owners and operators have overinvested in new vessels, weakening demand for older but still operational equipment, and a rush of new vessels entering the offshore market this year is expected to drag rig day rates down sharply (EnergyWire, Nov. 5, 2014).

"Upstream companies have gradually pulled back their offshore spending since mid-2013 -- initially to boost returns, but more recently to preserve capital amid falling oil prices," analysts at Moody's cautioned in a January industry assessment. "Consequently, waning demand compounds the offshore rig industry's overcapacity problem."

Last week, Norwegian energy company Statoil celebrated new exploration licenses on Norway's outer continental shelf, including in the frigid Barents Sea. "We see exciting opportunities in the area, particularly in some of the more underexplored plays," a Statoil representative said of its Barents Sea acreage acquisition.

Royal Dutch Shell PLC has already spent hundreds of millions of dollars on an ambitious drilling program in Alaska's Chukchi Sea. Shell was preparing to resume a stalled drilling campaign this summer, but those plans were formalized before international oil prices slid by nearly 50 percent.

Multiple factors have seen offshore drilling dreams abandoned or put on hold in Canada, Greenland and Russia. Shell's Arctic ambitions may fall victim to the combination of low oil prices and regulatory skittishness toward Arctic offshore exploration (EnergyWire, Jan. 27).

There also have been signs from Canada that suggest the eastern U.S. coast may miss out on the energy boom that has lifted that region's economy.

In November, the Canada-Newfoundland and Labrador Offshore Development Board announced that a call for bids for offshore acreage had failed. An invitation from the governments to drill off the coast of Labrador, a region of harsh sub-Arctic ocean conditions, received no interest from the oil and gas industry.

Officials at Shell will host a call with analysts and media tomorrow and may clarify their Alaska Arctic 2015 drilling plans.

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