Drilling delays not all about permits

But the bottleneck isn’t just at the government’s permitting phase.

Instead, in the wake of the Deepwater Horizon disaster, the entire process is crawling – from companies applying for drilling permits to actually launching work.

The delays are caused by a perfect storm of shifting government regulations, low natural gas prices and a still-struggling economy.

“All of these things have really come together and are making it challenging for offshore operators,” said Dan Naatz, vice president of the Independent Petroleum Association of America. “All of this uncertainty – coming at a point when the economy has been so sluggish and demand has been relatively flat – conspires to make it very difficult for operators to get out there.”

Shallow-water operators say they were just beginning to rebound from the economic downturn this April when BP’s Macondo well blew out 5,000 feet below the surface of the Gulf of Mexico, causing a lethal explosion on the Deepwater Horizon rig, unleashing the nation’s worst oil spill and changing the course of offshore drilling in the U.S.

The Obama administration responded by imposing a moratorium that effectively barred deep-water drilling. Although the government lifted the ban in October, it hasn’t yet issued any permits for projects that would have been blocked by the ban.

The moratorium never covered shallow-water drilling typically conducted from jack-up rigs with legs on the seafloor. But the Bureau of Ocean Energy Management, Regulation and Enforcement established new requirements in response to the spill that applied to all offshore drilling operations, and it’s taken time for energy companies and the regulatory agency to clarify the mandates.

Some companies have stayed on the sidelines because they are wary of pursuing new projects amid what Obama administration officials have called a “dynamic” regulatory environment.

Combine the regulatory changes with the weak economy, and the result is 37 idle jack-up rigs in the Gulf – six more than this time last year and almost triple the number in 2008, according to ODS-Petrodata.

For shallow-water drillers, it’s a double whammy. It costs thousands a day in to maintain even idle equipment. And when rigs are working, energy companies are paying far less to use them.

In 2008, when oil and natural gas prices surged, jack-up rigs were fetching about $100,000 per day; now it’s about $64,000, ODS-Petrodata says.

Slowed by low prices

Matt Beebe, an analyst with Global Hunter Securities, noted that shallow-water industry growth is constrained by natural gas prices hovering around $4.40 per million British thermal units. It was twice that in 2008.

While it is generally easier to win approval for gas wells because they don’t require an oil spill response plan, Beebe said, low prices make those projects less attractive.

Since imposing new safety and environmental requirements in June, the ocean energy bureau has approved 21 new shallow-water wells, about 3.2 per month, and five applications were pending as of Friday. The pace picked up to six permits in November but still lags behind historical approval rates. The government approved an average of 15 wells per month from June through November in 2008 and 5.6 each month in 2009.

But the slowdown starts before regulators even get involved. The flow of applications for shallow-water drilling permits has been falling. Companies filed 22 proposals in the June-November period this year, compared with 35 last year and 92 in 2008.

‘Throwing up their hands’

Jim Noe, executive director of the Shallow Water Energy Security Coalition, said some companies are “throwing up their hands” and choosing not to seek permits.

“Even before you get into the bureaucratic snake pit, you have operators deciding whether or not they want to go into the hassle,” Noe said.

Some operators have tangled with regulators over higher estimates for the “worst case discharge” from wells – a calculation tied to requirements for insurance and spill response capability.

“Lots of small things – none of which are fatal in and of themselves – are adding up to a slow and painful demise,” Noe said. “It is not one particular spot in the bureaucratic process that is killing everybody. It is the fact that every little spot is a problem.”

Michael Bromwich, director of the ocean energy bureau, told an industry conference last week that the agency is working diligently to vet drilling applications but won’t cut corners in the name of speed.

“My staff is working hard to process permit applications,” he said. “We are not slow-walking them in any way or for any reason.”

Bromwich said regulators have met frequently with industry leaders and have issued guidance documents designed to clear up confusion.

Even when projects are approved, it’s taking longer for companies to start drilling – about 25 days now compared to 13 days last year.

There were similar lag times in 2008, but then, the problem was too much work – and a resulting run on rigs that created a wait for equipment of over three months.

Historically, companies have been able to prepare for anticipated drilling projects at the same time regulators vetted proposed wells. And rig owners could line up a stream of contracts to drill already-permitted projects.

“They could get the permits while they were mobilizing,” said Son Vann, director of investor relations and finance for Houston-based Hercules Offshore. “And that’s just not the case these days.”

More important issues?

Environmental advocates say the industry makes doomsday predictions and unreasonably expects work to return quickly to what it was before the oil spill.

Brendan Cummings, senior counsel for the Tucson, Ariz.-based Center for Biological Diversity, which advocates more federal scrutiny of drilling proposals, said the industry’s complaints about permitting obscure more important concerns.

“Rather than the issue being abysmal oversight and safety practices that led to the disaster and abysmal preparation by industry and the Department of Interior to respond,” he said, “it has boiled down to complaints that the bureaucracy is taking too long.”

jennifer.dlouhy@chron.com

Photo: Hermes/Flickr

13 Comments

  1. Trail Trash

    It will be another 1-2 years before the Gulf drilling industry can get back to where it was. It will be another 3-5 years before the real impact of the loss of production will be felt. The Obaman administration had no idea as to the long lasting economic impact their moratorium would have. All they were concerned about was their political image.

    #1
  2. Geo

    This is a lot of bull the main issues are still Government???

    DC continues to have no clue how to get the economy back on track.

    Unemployment around 20 per cent that is the real number not 10 per cent.

    Obama and Soros plan to kill the United States economy so they can take over!!!!

    #2
  3. chiefdecoy

    Although the government lifted the ban in October, it hasn’t yet issued any permits for projects that would have been blocked by the ban.
    ===
    Duh!!!
    I have been babysitting idle equipment for several months, with equipment stacked all around me, watching suitcase parades fairly regularly of laid off workers leaving rigs, boats, etc….

    —————————————————————-

    The flow of applications for shallow-water drilling permits has been falling.
    ====
    Translation: Companies are looking into overseas contracts, or have already restructured as to eliminate certain equipment…..

    #3
  4. Art Vandeley

    The drilling ban is NOT over. That infamous handshake photo of Chavez and Obama was sealing a pact that the US would drill less domestically and import more from Venesuela. The dictator Chavez thanks you President Hussein Obama for holding up your end of the bargin.

    #4
  5. Jackalope

    Obama wants us to all be “green”, so what better way to do so than by sitting on permits and lease sales? This is in addition to closing off huge reserves offshore and in Alaska. This will cause oil and gas prices to increase. What’s been holding prices back is our economy and weakening dollar.

    #5
  6. KB

    That’s ok…Al Gore is bringing his Occidental Petroleum, the largest Onshore company, into Texas to pick up the “shortage” during the just now extended moratorium.

    How convenient.

    #6
  7. FloLake

    Just follow the reams of ‘red tape…’

    #7
  8. Robert

    Obama and the Dems are wanting the US to be come part of the new world order. The game plan is too make it so that no one has a job and we owe everyone else in the world a whole bunch of money. No telling where we will be in two more years. We need to impeach him. I can’t belive that his wife is more important than you or your jobs. How can you be a leader and run away from your problems by calling in Bill? Obama is a losser. He can speak but beyond that what has he done for this country? Run it into the gound by wanting too much change to quick.

    #8
  9. Old_Army

    No matter how much of a smoke screen you throw up, the problems with the drilling (oil & gas) industry today is directly attributable to the Obama administration’s power grab following the BP disaster. Instead of working to support the industry and try to encourage the re-building of one of our most important economic cornerstones, the leftist regime in Washington saw an opportunity to take control of the industry and milk it for permit fees and other “taxes” to help pay for the Obamanistas’ bloated government spending that is threatening to drive our country into bankruptcy. We can only hope that conservatives can do their part to stem Obama’s power-grabbing agenda and ultimately get our country back on a road to recovery.

    #9
  10. KB

    “But the Bureau of Ocean Energy Management, Regulation and Enforcement established new requirements in response to the spill that applied to all offshore drilling operations”
    —————
    That’s because they don’t know anything about the science of drilling, or the entire business for that matter.

    #10
  11. REM

    It’s a plot by China, or Hugo Chavez. You decide.

    #11
  12. TXSFRED

    Robert is right. whether it is a Soros/Obama plot or just the unqualifiedness of Obama , the result may be the same. Now We CAN impeach President Obama AND Vice President Biden and get to a Republican after the 3Nov results for the first time since 2004.

    #12
  13. WTF!

    Someday, somewhere, someone will say “What the heck were they thinking” when they look back on the U.S. today. Sheeeeesh!

    #13