SMU Report: Permitting delays & new regs stifling offshore drilling

The offshore drilling industry is still rebounding from a five-month moratorium and new regulations after the 2010 Gulf oil spill, with consumers paying the price at the pump, according to a new report being released today.

The findings buck the conventional wisdom about a recent resurgence in offshore drilling that has caused a spike in demand for workers and a run on rigs to drill new wells.

Drilling contractors, including Diamond Offshore Drilling Inc., Noble Corp., and Rowan Cos., say they are seeing strong demand for their rigs. Energy analysts predict 10 more will float into the Gulf this year. And the number of active offshore rigs in the United States was higher at the end of April 2012 than the average total in 2009, the year before the spill (the economic decline had driven down demand that year).

But according to the new analysis, conducted by the Southern Methodist University Cox Maguire Energy Institute, high rig counts, the numbers of federal permits to drill new wells and other positive stats mask problems that could mean suppressed oil and gas production for years to come.

The study was commissioned by the Gulf Economic Survival Team, which has been lobbying for swifter permitting of offshore projects.

“If Gulf production is to reach levels that equal its true potential in the months, years, and decades to come, the regulatory sphere must deliver on its obligation to provide a predictable review and approval process,” said the report’s author, Bernard Weinstein. “If the U.S. is to generate the optimal level of energy production from this critical basin, the regulatory regime must provide an accommodating climate for investment in safe and environmentally sound operations rather than hinder the operators’ ability to bring these highly sophisticated, capital-intensive, multi-year projects to fruition.”

The report links higher oil prices with declines in Gulf production and evolving regulations governing drilling in the region. Weinstein argues that the combination of the post-spill moratorium on most deep-water drilling, along with the threat of changing and new regulations governing the activity has imposed a “regulatory risk premium” that is suppressing production and propping up oil prices.

“Absent uncertainty about the cost and time-frame of acquiring regulatory approval for deep water drilling in the Gulf of Mexico, oil and gasoline prices would be even lower,” Weinstein argues.

Weinstein notes that oil futures contracts did not drop in price after the deep-water drilling moratorium was lifted in October 2010, even though there was a decline when former President George W. Bush lifted an executive moratorium on drilling along most of the outer continental shelf.

According to Weinstein, the lack of change after the Obama administration’s move in 2010 was because of the prospect of new safety rules governing offshore drilling. “The market foresaw a drawn-out period of clarification and uneven implementation, with the potential to negatively impact Gulf of Mexico deep-water operations,” the report says.

The Obama administration has defended the moratorium as an essential pause while oil was still gushing out of BP’s failed Macondo well and afterward, when regulators and the industry were working on ways to boost the safety of offshore drilling with voluntary changes and new federal mandates.

“Our reforms are helping to ensure that the United States can safely and responsibly expand development of our domestic energy resources, and they are part of this administration’s commitment to an all-of-the-above strategy for American energy that includes increased oil and gas production nationwide,” said Adam Fetcher, an Interior Department spokesman. “In addition, offshore permitting is back to pre-Deepwater Horizon levels and average permitting times have dropped by half in the past 10 months alone -– while at the same time we have instituted historic reforms to make sure that development continues safely and responsibly.”

According to federal data, from April 20, 2011 to April 19, 2012, the government granted 67 permits for drilling new deep-water wells — three fewer than the same time frame before the blowout of BP’s Macondo well on April 20, 2010.

In the new report, Weinstein argues that the number of permits is less important than the time it takes to get them — and the work they cover. He notes that it can take months for submitted applications to drill to be officially deemed “submitted” and ready for regulators’ review.

Administration officials have pointed to a boom in the number of rigs drilling in the Gulf of Mexico as a sign that work has improved. And Weinstein himself notes that in recent months, “more rigs have been spotted in the Gulf than has been the case for the past few years.”

According to Baker Hughes, there were 48 rigs working offshore as of May 25, with all but one of them in the Gulf of Mexico.

The SMU report says even though rigs may be present in the Gulf, they are doing workovers and maintenance — not actively drilling new wells.

SMU report on regulatory risk premium for offshore drilling