Pricing opinion on the U.S. offshore industry

How much could it really cost the industry in the wake of the Gulf of Mexico oil slick?
Call it what you will, the Deepwater Horizon oil spill, Gulf of Mexico oil spill, Deepwater BP (British Petroleum) oil spill, Macondo blowout or the Gulf Gusher; the predicament remains the same. At the time of publication it will be just shy of one month since BP’s Deepwater Horizon offshore drilling rig explosion took place on April 20, 2010, 50 miles off the coast of Louisiana in the Gulf of Mexico. To date, 11 workers are missing and presumed dead with 17 others injured. More than 2,500 square miles of ocean surface is submerged in oil which is leaking from 5,000 feet below sea level. Public estimates state that oil is secreting into this ocean location at a rate of 200,000 gallons of crude oil per day and private estimates go so far as to say this could actually be up to two million per day. At this stage, it is anyone’s guess.

As well as looking at how and why this disaster took place, it is vital we assess the further reaching implications of the occurrence on the United States offshore industry, the domestic energy economy, looking beyond the blame-game and the threat this poses to the progression of the nation’s climate bill. The fact is that the offshore industry might never be the same again.

Why?

The rig was in place and drilling at BP’s Macondo oil and gas prospect. It is located in the Mississippi Canyon and being operated through a partnership between BP (65 per cent), Anadarko Petroleum Corporation (25 per cent), and a subsidiary unit of Mitsui (10 per cent). The Deepwater Horizon rig is owned by Transocean and weighs in at a length of 396 feet and a width of 256 feet. The rig was built back in 2001 by Hyundai Heavy Industries at the company’s shipyard in Ulsan, South Korea. It can operate up to 10,000 feet depth and drill down to 30,000 feet, and cost approximately US$350 million when it was initially delivered. These are the specifics and everything seemed to be in order, so what happened here?

A formal investigation into what caused this disaster began on May 11, 2010. The inquiry is taking place under the helm of a joint group between the Coast Guard and the Minerals Management Service (MMS). The aims are to uncover what killed the 11 workers onsite at the drill rig, what caused the rig to sink and how the leak resulting in the large-scale subsequent oil spill was originally made.

The public hearing was officially opened in Kenner, Louisiana, by Captain Hung Nguyen of the U.S. Coast Guard, the co-chair of the inquiry. Nguyen has vowed to “locate every available piece of evidence” and, following comment from Doug Suttles, BP’s CEO, on Monday May 10 that the disaster was “significantly smaller than seven to 10 days ago,” thanks to controlled burning and dispersants, things seemed to be under control.

To date, the exact cause of the rig explosion is not known, but there are some rumours carrying weight. It’s a tricky one to decipher for various reasons. First, we have the missing data; the information from the final seven hours prior to the explosion, including written logs from those onsite, went down with the rig. This makes it extremely difficult and, unsurprisingly, has created an air of distrust and mystery around exactly what might have been recorded, what warnings may have been disregarded and what actions were taken.

Then there is the blame game, as Capitol Hill demands companies face up and fess up for their portion of the disaster. This results in sensational headlines which damn these business majors, declaring that the only true cause of the disaster was greed on their parts. Within this comes that age-old news agenda leverage to settle old scores, particularly for BP. It was roughly 10 years ago that the company embarked upon a mass publicity and branding campaign using the play on its initials, ‘Beyond petroleum,’ to convey its message as the greenest of all oil companies. This disaster in the Gulf of Mexico has presented an opportune moment for haranguing and tarnishing the company, which now appears far from green.

The results of BP’s internal investigation were delivered on May 8, 2010. They suggest that a methane gas bubble escaped from the oil well and made its way swiftly up the drill column, growing as it moved and shattering barriers and seals in its path. This was hailed as the most detailed explanation of what took place to date, and was backed up by testimony from several individuals on the scene.

Next comes the leaked reports and one of the most contentious rumours, circa May 15, 2010: that the crew aboard Deepwater Horizon argued about the drilling plan’s final requirements needed in order to shut down the well as it neared completion. A sworn statement from a worker verifies this to the media and appears to play out in sync with the available drilling records and statements by workers which have already been supplied to congress. The story goes that the crew was preparing to remove the drilling mud which provides down-pressure on gas below, but before doing this and replacing it with seawater, a cement plug stretching 300 feet down needed to be poured in. That didn’t happen after a disagreement took place over the mud removal, the running of a ‘negative pressure’ test, and administering the seal assembly.

Yet ultimately whatever the cause—whatever dome, funnel, sub-rig, structure or piping is used to stop the leak, and however the blame is finally dished out, greater damage has already been done to the health of the United States offshore industry. The environmental impact is devastating, throwing up endless images of oil-ridden birds, dolphins and other flora and fauna, threatening Louisiana’s fishing industry right at the beginning of peak season, and destroying huge plains of coastline. There is no denying that in terms of coastal nature, this event has caused great damage. However, for the purposes of this article, it is important to focus more specifically on the further implications to the U.S.-offshore industry.

The first signs: California

One of the first projects to be hit by the BP oil slick backlash was Plains Exploration’s Tranquillon Ridge project, otherwise known as the T-Ridge project.  California Governor Arnold Schwarzenegger spoke out at a state fire-fighters briefing in the week beginning May 3, announcing that he was withdrawing his support for the project in light of what happened with Deepwater Horizon.

“Despite those studies and support, all you have seen when you turn on your televisions the devastation in the Gulf and I’m sure that they were also assured that it is safe to drill,” he told attendees.

“I see on TV the birds drenched in oil, the fisherman out of work the massive spill and oil slick destroying our precious ecosystem. It will not happen here in California and this is why I’m withdrawing my support for the T-Ridge project.”

This was a big and bold decision by Schwarzenegger, but not entirely unexpected given the governor’s green backbone. The plot thickens because this announcement is worth a lot of cash for the California General Fund; US$100 million to be exact, which Plains agreed to pay in advanced royalty revenues once the project was approved. Addressing this issue, Schwarzenegger said “If I have a choice between the $100 million and what I see in the Gulf of Mexico, I’d rather just figure out how to make up for that $100 million.”

So that was the end of offshore drilling for the foreseeable, wasn’t it? If the governor doesn’t include plans in his state budget for May, then there will be no new offshore drilling projects. However, we must remember that California’s deficit for the coming fiscal year tops US$15 to US$21 billion and on May 14, 2010, just days later, Schwarzenegger’s proposed budget revisions sought to include the T-Ridge deal after all. It appears that US$100 million up front and about US$1.8 billion over the coming 14 years was enough to subdue the Gulf oil slick fears in the end.

Impacting on the climate bill

The push for a climate bill in the U.S., giving the nation formal legislation with which to tackle the global warming and carbon emissions reduction battles, has been a continually contentious issue for some time and of course, the BP oil spill has had an impact here.

Prior to the disaster, the senate forming the bill was considering expansion offshore drilling for inclusion. When Massey Energy Company’s mining disaster at the Upper Big Branch Mine in West Virginia took place a few weeks ago, senate opinion swerved and began to consider implementing greater economic benefits towards cleaner coal. When the Gulf of Mexico oil slick took place, again opinion was caught. In order to gain Republican support, which will be needed for the bill to make it through, offshore oil expansion drilling is a key factor. Sources emerged, saying that it was a bit of a catch-22; lose the oil, lose the Republicans, keep the oil, lose public confidence. Everything was thrown up for debate, from the positive effects the Gulf spill might have in listing public attitude towards renewable and greener energy solutions, to the need for tighter regulation of offshore activity, to fuelling what is already a burgeoning growth of interest in nuclear power. It is also important to remember that when considering the climate bill, oil is not the only spanner in the works, but it is a large one.

On May 12, 2010, the American Power Act was unveiled, which included both plans for furthering nuclear energy supply (as firmly expected) and offshore drilling. In short, the Act can offer incentives for states which undertake expanded offshore drilling; a pleasing result given recent events. However, in light of these, the Act also introduces more control for said states over these lucrative offshore projects. One such control is state power to reject any drilling within 75 miles of the coastline, impact providing.  The environmentalists are far from happy too, targeting climate legislation head on and requesting the re-implementation of a ban on offshore oil exploration within the US outer continental shelf (OCS). U.S. President Barack Obama lifted and altered the OCS moratorium in just March 2010. Calls for some sort of established moratorium are mounting, and one of the vital economic aspects most threatened by this is U.S. domestic energy production.

Home economics damaged

Currently, Obama has put in place some sort of moratorium on offshore drilling until the Deepwater Horizon disaster is properly understood, which clearly could take the best part of the coming year.

The difficulty here is that putting offshore drilling on hold for now may appease the average Joe, but it does no good for the domestic energy production of the nation.

Speaking out about the aftermath of the Deepwater Horizon rig disaster the American Petroleum Institute (API) has advised that a new offshore drilling moratorium should not be reactionary. “In the wake of this accident, many people are understandably concerned about the safety and environmental risks associated with offshore drilling,” Cathy Landry, the API’s spokeswoman stated.

“It would be unfortunate if this accident were used as an excuse to roll back the gains we have made in finding new ways to explore and develop our own energy resources.”

Landry highlighted the fact that the nation simply cannot afford to react this way to recent events, stressing that it “does not change the reality of our energy future.”

“The demand for energy is growing. American needs domestic sources, and oil and gas will be part of America’s energy future for decades to come,” she explained.

It is important to consider the commercial value of the nation’s oil reserves; recent estimates suggest that there is up to 3.8 billion barrels of oil and 21.5 trillion cubic feet of natural gas in the eastern Gulf. There is also said to be 3.8 billion barrels of oil and 15.1 trillion cubic feet of natural gas between Delaware and Florida, on the Atlantic coastline, one of the areas Obama gave the green light to when he lifted the previous moratorium in March, 2010. Much to the dismay of environmentalists, the MMS has granted 27 exemptions to oil and gas corporations who now do not need to conduct in-depth environmental studies in the Gulf in order to secure exploration and production projects. This, of course, comes down to money.

The money issue has recently been reiterated by Alaska’s former Governor, Sarah Palin, too. She said that while America is going to have to struggle to come to terms with what has happened with the Gulf oil slick, further drilling is necessary if the U.S. wishes to avoid dependence on foreign oil exportation.
Obama has taken a different public track of late, focusing on the blame-passing which has ensued between the companies attacked over the event. On May 16, addressing said companies, the President said he was tired of them “falling over each other to point the finger of blame at somebody else.”
“I did not appreciate what I consider to be a ridiculous spectacle,” he stated.

Herein lies the issue: A reaction to the Gulf oil slick is inevitable, the media has gone wild, a climate change bill hangs in the balance and the financial requirements within domestic energy production remain unchanged despite what has happened. Companies have rushed to deny and/or shift liability, political figures have reacted accordingly to voice what the public want to hear, but ultimately the financial situation is still the same. Whether this means budgeting for lucrative offshore drilling expansion, granting exploration environmental study exemptions or weighing up a climate bill that stands a chance of squeezing through, this disaster has changed the political landscape but not the finances. This article seeks to address the further implications of the disaster, and in doing so one thing is certain: in the end, opinion can be expensive and it’s a case of what the nation can really afford.

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