Shortly after a six-month deepwater drilling moratorium was announced in response to the Deepwater Horizon / BP rig disaster, any hope for a continued strengthening in the Gulf of Mexico offshore energy market had all but vanished.
The May 27 moratorium not only affects drilling contractors but every business sector related to the U.S. Gulf oil and gas industry, including caterers, equipment companies, mud and cement companies, and offshore service vessel operators and the companies that service and supply the boats. If deepwater rigs and drillships move out of the U.S. Gulf or drilling contracts are cancelled, it could be a long time before the industry returns to business as usual.
A few days after the moratorium announcement, oil companies were beginning to cancel contracts for vessels that service the rigs, a result of what Offshore Marine Service Association (OMSA) president Ken Wells called a cease-and-desist order by the Obama administration. "This is a real shock to the economic system on the Gulf Coast," he said.
Many industry officials say that the moratorium will likely result in rigs leaving the U.S. Gulf for work elsewhere, such as Brazil or West Africa.
Whether the rigs stay or go, what lies ahead is the grim prospect of over 100 idled OSVs, thousands of layoffs, and significantly lower OSV day rates and utilization.
Some OSV operators and others have received work from BP as a result of the disaster, and that may continue for a while. But the future is unclear.
OPERATORS WORRIED
"The long term is not good," said Bill Foret, president, Abdon Callais Offshore , Golden Meadow, La. "To shut down the whole Gulf of Mexico because of this event is foolish."
Abdon Callais has four vessels working on the cleanup. One is serving as a command center that provides water, fuel, supplies and housing, two others are pulling containment boom, and one is working on the relief well BP is drilling.
"Bad" was the way Paul Candies, president, Otto Candies LLC, Des Allemands, La., described the long-term outlook. They have no vessels involved in the cleanup, but three are supporting some of the wells that are included in the moratorium. The company operates about a dozen U.S.-based OSVs, according to its Web site.
And shipyards will suffer, too, particularly those along the Gulf Coast that have traditionally relied on OSV construction and repair. "If you no longer need an American-flag vessel, why would you continue to build it here?" Candies said.
One supply vessel operator hopes that after the government has some time to study what went wrong, it will reconsider the moratorium.
"It's a knee-jerk reaction to the spill and a shortsighted approach," said the operator who requested anonymity. "I can understand that the government wants to learn the reason for the catastrophe, which I believe is human error and not equipment failure. Hopefully, calmer, cooler heads will prevail once the spill is stopped. In the meantime, we won't be keeping equipment in the Gulf if we can help it."
Another vessel operator, who also requested anonymity, concurred. "We can and have been conducting safe operations for a long, long time," he said. "This is an aberration. I'm sure we will get to the bottom of it quickly with all of the investigations. But how can you stop an industry cold in its tracks?"
Still another vessel operator echoed some of the same concerns.
"If [the moratorium] plays out the way the administration indicated, we will obviously see a very negative impact. My gut tells me it won't be sustainable and that once the real impacts of the moratorium are known, with numerous layoffs taking place within the offshore drilling industry, I think there will be a significant pressure on the Administration to at least revisit the moratorium.
"Certainly, the regulatory process will look very different, and it may be significantly more costly [to drill] with a longer process."
"Shutting down drilling for six months in the Gulf of Mexico is going to be a disaster for many," said Shane Guidry, chairman and CEO, Harvey Gulf International Marine , New Orleans. "Everybody is doing it right. Why punish the rest?"
Hornbeck Offshore Services Inc. said it planned to hold charterers to their contracts. The Covington, La., OSV operator has nine vessels on time charters, "and does not believe that any of them can be validly cancelled" because of the moratorium. In early June, Hornbeck filed suit against the federal government. In the suit, Hornbeck claims that the government illegally ordered the moratorium. Bollinger Shipyards Inc. and Edison Chouest Offshore joined the suit. A hearing date for the lawsuit was set for June 21 in New Orleans.
The uncertainty is making everyone cautious, said OMSA's Wells. "You're not seeing panic, but you are most definitely seeing the [positive] trend we've seen over the past few months of taking boats out of stack and bringing in crews just come to an abrupt halt."
While it is still too early to determine whether the six-month moratorium on deepwater drilling will be reduced or extended, there are other activities operators can conduct in deepwater.
"There are several deepwater operations that the industry can continue doing," said Matthew Donovan, editor of the Gulf of Mexico Newsletter . "I think some operators may shuffle some work in order to conduct those operations."
There are several activities that are not included in the DOI's moratorium. They include workover, completion or abandonment operations, emergency and non-emergency interventions, and waterflood, gas injection or disposal wells.
33 WELLS TO HALT OPERATIONS
The moratorium affects 33 exploratory wells in the Gulf deepwater/ultradeepwater market. In addition, the federal government canceled pending lease sales in the Gulf and off the Virginia coast, suspended the issuance of new permits for deepwater wells, and also postponed proposed exploratory drilling in the Arctic. It also is requiring shallow-water drillers (in less than 500' of water) to prove that they comply with new safety standards.
Soon after the moratorium was announced, Marathon Oil Corp. and Anadarko Petroleum Corp. said they would suspend work on deepwater wells. But Anadarko, which has an interest in the Macondo well at the heart of the spill, held out hope for the future. "We also expect to resume our exploration, appraisal and development activities in the Gulf as soon as we receive greater clarity and the authorization to proceed," CEO Jim Hackett said in a prepared statement.
But if it appears that the moratorium will continue for the entire six months or longer, it won't take long for oil and gas companies to begin moving deepwater rigs to other markets if they have other opportunities. Oil companies won't allow a rig to sit idle when they are paying upwards of $500,000 per day. On the other hand, if an operator doesn't have international exploration prospects, force majeure is a way to get out of the contract.
Colbalt International Energy was the first to make the move when, on June 1, it invoked the force majeure clause in its contract with Diamond Offshore for the semisubmersible rig Ocean Monarch , which can drill in depths up to 8,000'.
Cobalt International said the permits were already in place, and the rig was moored and ready to begin drilling operations at its exploratory well in Garden Banks Block 959 when the administration announced the moratorium.
The spill has cast a pall over the offshore energy industry. The Gulf alone represents about 30 percent of domestic oil production and 11 percent of natural gas production, according to the National Ocean Industries Association. An OMSA study released earlier this year shows that U.S.-flag offshore service vessels and the shipyards that build them are responsible for about $18 billion in annual spending and more than 100,000 in direct and indirect jobs.
The International Association of Drilling Contractors said that a better alternative to the moratorium would be to validate the fitness of current deepwater drilling operations and then let those that pass validation continue to operate.
Even before the moratorium was announced, Larry Rigdon had this observation:
"My bet is that there are probably heavy-lift ships off the Straits of Florida waiting," said the former owner and CEO of Rigdon Marine and former Tidewater Inc. executive, who along with many others expects some rigs to go elsewhere.
"I hope I'm wrong. Short term, certainly, it's going to create some business, but it's nothing like the gold rush some people were expecting."
OSV utilization moved from the 60 percent range just prior to the spill to the high 90s for some companies during the cleanup, and as a result spot day rates ticked up, said Pierre Conner, managing director and oilfield services analyst with Capital One Southcoast Inc., New Orleans.
MORE REGULATIONS
Dennis Bryant, a Florida-based maritime consultant and retired Coast Guard captain who supervised implementation of the Oil Pollution Act of 1990 after the 1989 Exxon Valdez spill, doesn't see the Gulf being closed to further exploration.
"Yes, there's going to be a tighter regulatory regime in the future, both in regard to enforcement of current rules and some new requirements," he said. "It's been so long since we had a major spill in this country, everyone just thought it would continue that way. The oil spill contingency plan regime has been allowed to kind of drag its feet for some years now."
"How many fire stations do you need? How many fire trucks?" he said. "You've got to examine that every once in a while and see if you have enough. You can't order a new fire truck when something's burning."
In addition to changes to oil spill plans, there will likely be longer waits for drilling permits, a result of an increase in the time the Minerals Management Service could have to review exploration plans. This could affect drilling across the Gulf, in shallow as well as deepwater.
In oil spill response legislation submitted to Congress on May 12, the administration has proposed changing the timeframe the MMS has to review exploration plans from the current 30 days to 90 days, which could be extended further to complete additional environmental and safety reviews if necessary.
Among the new regulations being bandied about are requiring standby vessels and relief rigs.
"We see some people in our industry sort of hoping that there will be requirements for standby vessels thinking that it will be better for them," Tidewater CEO Dean Taylor told analysts a month after the accident. "But ultimately it has to be better for our customers as well, because if our customers' economics deteriorate to the extent that a project that was marginally feasible prior to the implementation of regulations becomes economically unfeasible, then nobody wins."
Capital One's Conner agreed.
"It's not a good thing because we'll be putting more cost on these wells, SDRq he said. SDLq Ultimately, there's probably no benefit to any regulations associated with additional vessels. This is a big change for the cost structure in the Gulf of Mexico because the government is going to get highly involved."