WASHINGTON — Oil industry leaders and their allies in Congress blame the government for a major shallow-water drilling slowdown that has forced some companies to sell rigs and lay off workers.
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.”