Drilling in the deep Gulf of Mexico is becoming robust two years after the oil spill that prompted a six-month moratorium on deep-water exploration, but more of the work now is left to large companies.
Triple-digit oil prices are driving the activity, making it worthwhile to go forward even given the cost, risk and heightened government scrutiny of working in waters often a mile deep or more.
“We are seeing deep-water drilling coming back with a vengeance in the Gulf,” said Dr. RV Ahilan, executive vice-president for GL Noble Denton, a technical adviser for the oil and gas industry. “The price is too big to ignore. People are quite keen and are booking rigs for long drilling campaigns in deeper drilling waters.”
But while activity has resumed, it involves a smaller group of players with the deep pockets and deep experience necessary to navigate the complexity of the Gulf.
“It has always been dominated by the large internationals – the BPs and Chevrons – and in the future that is likely to be even more so,” said Pavel Molchanov, an analyst with Raymond James. “They are really the only companies that can take on the liability risk of having a multibillion-dollar oil spill.”
BP’s Macondo well blew out on April 20, 2010, destroying the Deepwater Horizon drilling rig, killing 11 workers and unleashing an oil spill the government estimates at almost 5 million barrels.
Chevron picks up pace
In the aftermath of the disaster, the federal government imposed a moratorium on certain portions of the Gulf of Mexico. It lifted the ban in October 2010.
It was several months, however, before the government issued new drilling permits because applicants had to prove they could contain a spill. That hurdle created a drag on deep-water drilling, but operators say the permitting process had become less of a hindrance as it’s become better understood.
The government awarded 163 deep-water drilling permits for the Gulf in 2009. The number dropped to 74 in 2010, but has climbed since then to 79 in 2011 and 44 through March of this year.
“Chevron’s pace of drilling in the deep-water Gulf of Mexico is ahead of our pre-moratorium pace,” said Steve Thurston, the company’s vice president of deep-water exploration. “Before the moratorium, we had three drillships working in the deep-water Gulf. We now have four drillships working, and our fifth drillship will arrive at the end of April.”
Chevron holds 14 of the 44 permits issued this year and Shell has 13.
While deep-water drillers have grumbled about the increase in regulations, some in the industry acknowledge that political stability still makes the Gulf appealing.
“We can talk about many parts of the world where you may have an attractive opportunity but it is clouded by political difficulties,” Ahilan said, noting the risk of nationalization or regime change. “The rules of the game are clear in the Gulf of Mexico, even if regulatory changes are taking place.”
Those that have stayed there seek to leverage years of experience. Noble Energy, for example, has been in the Gulf since the late 1960s. It began deep-water drilling there in 2000 and was the first to receive a permit after the moratorium. It now has four rigs operating the Gulf.
“We know we can operate here effectively and safely; that is why we say we want to continue operating here,” said John Lewis, Noble Energy’s vice president for North America, southern region. “We thought it was important to stay in the Gulf – it’s a huge resource based in the region and it’s great for America, being able to produce that oil domestically.”
A larger percentage of the newly permitted wells in the Gulf have a comparatively low flow rate, however, meaning that productivity has dropped and probably will stay lower even with a pre-Macondo level of new permits.
“The story is a nuanced one,” said Robert Kessler, an analyst with Tudor Pickering. “It is encouraging that the Gulf is getting back to work but it is going to take a lot of work to get anything close to the kind of productivity we had before.”
Kessler also noted that the time required for approval of exploration and development plans is still 150 days on average, compared to 54 days before the moratorium, another indicator of the added expense and challenge since the spill.
For independents and smaller operators, industry experts say, the tremendous opportunities in the last couple of years in onshore domestic exploration, such as the Bakken and Eagle Ford shales, have made the Gulf less appealing.
“We saw companies that had much more of their portfolio onshore or in domestic gas and decided that is where they should be,” said Jim Dillavou, leader of the merger and acquisition group for oil and gas at Deloitte & Touche.
Smaller companies still working in the Gulf have become more selective in picking partners, as the litigation surrounding BP and its contractors has made everyone aware of the tainting effect of an accident.
“People are not going to turn away from a good prospect,” said Amy Myers Jaffe, a fellow at Rice University’s Baker Institute, “but they will be pickier about who they partner with.”