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News - September 2011

20 More Oil Rigs Could Leave the Gulf Unless Permitting Is Increased

By Kevin Mooney
September 13th, 2011

Up to 20 oil rigs could leave the Gulf of Mexico, in addition to the 11 that have already left, since the Obama Administration imposed a moratorium on deepwater oil and gas drilling in May 2010, a new report from FBR Capital Markets has concluded.

Unless the permitting process is accelerated, FBR analysts anticipate that anywhere from eight to 20 rigs could depart the deep waters within the Gulf. The moratorium was imposed in response to the explosion of British Petroleum's (BP) Macondo oil well on April 20 of last year. The accident resulted in the death of 11 workers and caused an estimated five million barrels of crude oil to spill into the Gulf.

Although federal officials announced they were lifting the restrictions last October, a "de-facto moratorium" remains in effect that stifles energy production and undermines large and small businesses in the Gulf region, industry officials have argued.

"I don't think the people in Washington D.C. who implement these policies have an understanding of how much this has impacted our economy, especially in Louisiana," Renee Baker, the state director for the National Federation of Independent Business (NFIB), has observed. "We can't just look at the large businesses to understand what's happening, there are small businesses that do a lot of services for the rigs and they have been set back."

Although the Department of Interior (DOI) has been issuing permits with "relatively few political barriers," according to the report, there are "limited bureaucratic resources" available to meet existing demands.

But Bonner Cohen, a senior fellow with the National Center for Public Policy Research (NCPPR), does see a political agenda at work.

"What you are seeing in Louisiana is only a small piece of larger mosaic being put together by the Obama Administration to make affordable energy as inaccessible as possible," he said. "From the administration's war on coal to the serious consideration it is giving to imposing a nationwide regulation of hydraulic fracturing, to its shut down of deepwater drilling in the Gulf of Mexico, to its 'endangerment finding' from the EPA [Environmental Protection Agency], the administration is practicing its own form of selected industrial sabotage."

The backlog of permits that have been approved, but not activated, must reach a level of 60 as opposed to the 30 that were counted at the end of August to support the active rig count, which now stands at 20, the report says. The current pace permitting pace is down dramatically from where it has been in recent years. Historically, there have been three times the number of permits in backlog than there have been deepwater rigs operating in the Gulf, FBR analysts point out.

"Between 2006 and 2010, there were typically three times the number of permits in backlog than there were deepwater rigs working in the GOM (Gulf of Mexico)," the report says. "…Using the August 2011 pace of eight unique well APDs (A Permit to Drill) per month, the best-case scenario would be a rig count of just 14 rigs, less than the 28 marketed rigs in the Gulf. However this assumes sustainable just in-time permitting which, in our opinion, is unlikely. Based on the historical 3X ratio between APD backlog and rig count, a pace of 27 permits per month would be needed to support 28 rigs by the end of the year."

FBR has also identified "structural headwinds" that include "hiring and funding constraints, potential safety and permitting legislation, pending drilling safety regulation revisions and ongoing environmental litigation," that will specifically impact the Bureau of Ocean Energy Management Regulation and Enforcement (BOEMRE)'s ability to improve upon the current pace of permitting.

In a letter addressed to DOI Secretary Ken Salazar and BOERME Director Michael Bromwich, Sen. David Vitter (R-La.) expressed his "ongoing concern with the pace of permitting for offshore production in the Gulf of Mexico."

The latest figures available show there were 19 floating units operating in the Gulf, which up from a low of four in third quarter of 2010, but down from the average of 28 in the period ranging from 2007-2009, Vitter told federal officials in his letter.

"A rough estimate would suggest that each rig consumes 3 permits per year in order to stay actively working in the Gulf (28 rigs divided by 84 permits equals 3 permits/rig), Vitter wrote. "Given that a typical deepwater well takes approximately 120 days to drill, one can also assume that the roughly estimated numbers are fairly accurate. Accordingly, at Interior's 2011 pace of permitting what is the anticipated attrition rate of rigs from the GOM? Over the next two years, what are the anticipated production and employment impacts from the current pace of permitting? "

Vitter also inquired the number of times permit requests have been filed. Some operators claim they have filed an average of 3.6 times, with multiple permits surpassing eight times.

The letter then asks federal officials to address the economic fallout attached to diminished rig activity.

"For each rig not operating in the Gulf of Mexico, what is the multiplier effect on the Gulf economy?" Vitter asks. "How are small businesses, including but not limited to helicopter firms, restaurants, welders, carpenters, marinas, and hotels impacted by the loss of each rig? How is our economy impacted if in 2012 there are 1/3 the drilling rigs working in the Gulf than there were in 2009?"

The letter concludes by asking how much money the federal government has awarded to various environmental groups, which have filed suit over a new drilling plan. It reads as follows:

"On June 9, 2011 the Natural Resources Defense Council, Defenders of Wildlife, Center for Biological Diversity, Sierra Club, Inc., Gulf Restoration Network, Inc, and Florida Wildlife Federation filed suit challenging BOEMRE's approval of Shell's drilling plan. Can you please provide the total amount in attorneys' fees that Interior Department has awarded these environmental groups under the Equal Access to Justice Act and Judgment Fund for fiscal years 2008 through 2011?

The oil rigs that have departed the Gulf include the Stena Forth, Ocean Confidence, Ocean Endeavor, Transocean Marinas, Ensco 8503, Ensco DS-4, Noble Clyde Boudreaux, Discoverer Spirit, Transocean Amirante, Noble Paul Romano and Ocean Monarch.

N. American oil output could top 40-year-old peak

By Tom Fowler, Houston Chronicle
September 28th, 2011

North America appears headed for an oil renaissance, with crude production expected to hit an all-time high by 2016, given the current pace of drilling in the U.S. and Canada, according to a study released by an energy research firm this week.

U.S. oil production in areas including West Texas' Permian Basin, South Texas' Eagle Ford shale, and North Dakota's Bakken shale will record a rise of a little over 2 million barrels per day from 2010 to 2016, according to data compiled by Bentek Energy, a Colorado firm that tracks energy infrastructure and production projects.

Canadian crude production is expected to grow by 971,000 barrels per day during the same period, with much of the oil headed for the U.S.

Combined, the U.S. and Canadian oil output will top 11.5 million barrels per day, which is even more than their combined peak in 1972.

Goldman Sachs has estimated the U.S. could move from being the No. 3 oil producer behind Saudi Arabia and Russia to the No. 1 spot by 2017.

It's a reversal of the steady downward production trend that started after 1971, when U.S. oil production peaked around 9.5 million barrels per day.

And the pace of production now has caught quite a few people by surprise, says Joseph Pratt, a historian at the University of Houston who has written extensively about the oil and gas industry.

"We have this momentum out there to set about doing what we said we wanted to do back in the 1970s: reduce the flow of imports from volatile regions," Pratt said. "It was like the Holy Grail back then. And suddenly it seems possible."

The surge is fueled by the same drilling and production techniques that opened up natural gas production in recent years - the combination of horizontal drilling and hydraulic fracturing - as well as the success of deep-water Gulf of Mexico projects and the ramp-up of Canadian oil sands projects.

The natural gas glut has kept its price low, prompting producers to focus more effort on oil and natural gas liquids, which fetch better prices.

Earlier this year, the number of land and offshore oil rigs working in the U.S. exceeded the number of natural gas rigs for the first time in 18 years, according to data compiled by IHS-CERA.

And Texas oil and gas industry employment returned to its pre-recession highs in June, according to the Texas Petroleum Index, topping the last boom that peaked in October 2008, thanks largely to oil drilling.

The oil boom has plenty of economic upside potential. IHS-CERA predicts oil production could directly and indirectly generate another 1.3 million U.S. jobs over the next decade and raise an additional $97 billion in federal taxes and royalty payments.

But plenty of people are concerned about the other costs that might come with more oil production.

The proposed Keystone XL pipeline, a major project to bring Canadian oil sands to U.S. Gulf Coast refineries, has become a rallying point for environmentalists, with hundreds arrested during a sit-in in front of the White House several weeks ago.

And the Environmental Protection Agency is moving forward with new rules aimed at tighter controls on emissions from oil and gas drilling, production and transportation.

The industry contends the proposed rules put a costly burden on a job-creating industry at a time when the country needs jobs.

But Daniel Weiss, a senior fellow at the Center for American Progress, a liberal-leaning think tank, said the industry is far from being hobbled financially. He noted that the five oil majors - Exxon Mobil, Shell, BP, Chevron and ConocoPhillips - have reported $67 billion in 2011 profits and are sitting on $60 billion in cash. Yet they have cut more jobs than they've created in recent years and spent billions buying back their own stock, Weiss said.

Pratt predicted that tensions among the resurgent oil industry, community groups and environmental groups - heightened by last year's Deepwater Horizon accident and oil spill - will continue.

The conflict was manifest in public hearings Monday in Port Arthur, where federal officials took comments on the Keystone XL pipeline project, Pratt said.

"The first 25 speakers were union workers and locals saying they needed the jobs the pipeline would bring. Then the bus from Houston pulled up, and the environmental groups spoke about how it's the filthiest oil in the world," Pratt said.

"All of them had passion about their point of view, but there are questions of fairness and justice and economics that we just don't know how to talk about."