Will They All Rush to the Sea?

The moratorium on deep-water drilling in the Gulf of Mexico was lifted, but hurdles remain and costs are yet to be calculated and passed to oil day rates

Stephen Ellis 13 October, 2010 | 4:15PM
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US Secretary of the Interior Ken Salazar decided to lift the deep-water moratorium in the Gulf of Mexico on Tuesday, provided that Gulf operators and drillers can comply with all of the new safety and drilling rules. The moratorium has been lifted ahead of its planned Nov. 30 end date because the industry was able to meet Salazar's original conditions for removing the moratorium, which included the increased availability of oil spill resources, improved blowout containment capabilities, and progress in safety reforms.

The early lifting of the moratorium will remove a roadblock from the offshore drillers' path, but permitting hurdles for both shallow-water and deep-water rigs remain. We expect regulators to take an extremely cautious approach to approving any new permits, which will mean it will take well into 2011 before most of the currently idle rigs in the Gulf return to work. In addition, we think the existing red tape, as well as our belief that the current regulators are ill-equipped to fully analyse the much more complex permits, will cause more permitting delays. That said, existing major Gulf drillers like Ensco (ESV), Transocean (RIG), and Noble (NE) might be able to obtain permits faster for many of their newer deep-water rigs, as the almost brand-new equipment is more likely to meet regulatory approval.

The US Department of the Interior also released estimates on what it would cost for the offshore industry to comply with its new rules. The initial estimates are about $183 million a year, which breaks down into an extra $1.4 million for a deep-water well and $90,000 for a shallow-water well. This amounts to an extra 1% or 2% of a typical well cost, and at first glance, is much lower than our original estimates of 10%-20% cost increases. However, the department plans to introduce additional safety measures that could include redundant blind shear rams, remote activation systems for the blowout preventers, and other blowout preventer enhancements. Depending on the new rules, we could easily see well costs escalate further. We do not anticipate the additional costs will affect the drillers too much, as they will eventually be passed through to the oil and gas companies in the form of higher day rates.

 

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Stephen Ellis  Stephen Ellis is a senior stock analyst on the Energy Team.