Feds issue record number of deep-water drilling permits in October

Government permitting of offshore drilling projects soared in October, as federal regulators signed off on 13 deep-water wells during the month — the most since the administration lifted a moratorium on that offshore exploration a year ago.

The wells approved by the Interior Department’s Bureau of Safety and Environmental Enforcement included 10 new ones that were not already in progress before the five-month drilling ban last year. That compares to seven permitted wells in September and nine in August, the last spike. And it is higher than the monthly average from 2006 to 2009 when regulators issued roughly 7 permits for new deep-water wells.

The October stats should inspire new confidence in the rebound of the offshore drilling industry following last year’s Gulf spill, according to analysts at FBR Capital Markets. In a research note for clients, FBR analysts said the pace “should justifiably bolster bullishness about a return to normal in the U.S. Gulf of Mexico.”

But the data belies an interesting twist: The permits don’t necessarily translate to a big boost in drilling rigs operating in the Gulf of Mexico. According to FBR Capital Markets, just five drilling rigs are contracted to work on the newly permitted wells. In fact, nine of the 10 new permits were for just one rig.

Partly, that stems from operators’ desire to have several permits in hand before they lease or mobilize a rig to drill at a site, effectively lining up a batch of work for the contracted vessel, said FBR analyst Benjamin Salisbury.

“For a variety of reasons, they want to have a number of permits lined up to develop a field,” Salisbury said. “What we expect to see is operators looking for groups of permits, so they know that after they finish drilling Well A, they have . . . a next place to move that rig.”

Salisbury noted that oil and gas producers are adapting to post-spill safety regulations and permitting requirements by bundling similar drilling applications before submitting them to regulators and even developing consortia to share rigs with other operators.

That’s a change from the just-in-time contracting practice that was common before the 2010 Deepwater Horizon disaster, when operators could count on regulators swiftly signing off on their drilling permit applications.

It also marks an upending of the balance of power in the offshore drilling industry. In the heady days of 2008, when oil prices were soaring, rigs were in high demand and drilling companies were commanding top dollar for the vessels. Now, the leverage has shifted, with operators wielding more power to negotiate lower day rates or better contract terms.

In essence, the new permitting regime — and the way operators are adapting to it — may put the oil and gas producers in a good position but disadvantage rig owners and keep rig counts down in the Gulf.

At FBR Capital Markets, Salisbury has studied the historic relationship between the number of permits issued (but where drilling hasn’t finished) and the number of rigs working at any given time. Between 2006 and 2010, there typically was a backlog of three times as many permits issued (where work hasn’t finished) for every one deep-water rig working in the gulf.

A backlog of permits in hand before last year’s spill may have been enough to support 30 or more rigs in the Gulf of Mexico, Salisbury said, even with a pace of five to eight new wells authorized each month.

But the industry is still recovering from the five-month ban on most deep-water exploration, effectively starting from scratch in building a portfolio of permitted work in the wake of the spill, new safety requirements and the moratorium.

Salisbury said that if regulators kept up their October pace and approved 13 drilling permits for new wells (or those halted by the moratorium), his analysis shows that could support 19 to 21 rigs in the Gulf of Mexico.

Permitting may pick up further, even though BSEE Director Michael Bromwich has stressed that the government may never return to a pre-spill permitting level.

After all, Bromwich has noted that operators are submitting higher quality applications — reducing the number of times those files are returned to oil and gas companies for changes. Bromwich has signaled that the quality of those initial submissions is a major factor in how quickly the applications can be processed.

Although some industry leaders have complained about the pace, major oil and gas company CEOs, including Chevron’s John Watson, have recently applauded regulators’ work.

Watson has told two Washington, D.C. forums that regulators are not trying to “slow-walk permits” and are working hard to vet drilling applications, under tight resource constraints.

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