“Political uncertainty” bedevils Gulf region and discourages business investment

Ten oil rigs have left the Gulf of Mexico since the Obama Administration imposed a moratorium on deepwater oil and gas drilling in May 2010, according to documentation obtained from Sen. David Vitter’s (R-La.) office.

The ten rigs named in the document are: Marinas, Discover Americas, Ocean Endeavor, Ocean Confidence, Stena Forth, Clyde Bourdeaux, Ensco 8503, Deep Ocean Clarion, Discover Spirit, and Amirante. The rigs have left the Gulf for locations in Egypt, Congo, French Guiana, Liberia, Nigeria and Brazil.

“This highlights the problem we have with losing domestic energy production as a result of the drilling moratorium and the slow permitting,” David Kreutzer, a research fellow in Energy Economics and Climate Change at the Heritage Foundation, said. “We must also keep in mind that the impacts are not instantaneous, the rigs may be idle for a while, but once they move it’s going to be difficult to move them back once they are drilling in say Nigeria or Brazil.  The oil companies must have confidence they can move forward with their drilling plans and to know these plans won’t be revoked. Only certainty will bring them back.”

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), said. “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. We just want to see people get back to work.”

Unfortunately, the “political uncertainty” surrounding the Gulf region has discouraged companies from making investments that could help spur economic growth, Don Briggs, president of the Louisiana Oil and Gas Association (LOGA), laments. Even before the 10 rigs cited in the document from Vitter’s office pulled out, eight other rigs that were planned for the Gulf were detoured away, Briggs said.

“When you have companies that would be spending hundreds of millions of dollars, or some cases, billions of dollars, they need certainty,” Briggs explained. “We don’t have that now and I don’t expect that we will anytime soon. We will be in a deteriorating position until this changes.”

Briggs also questions the necessity of the moratorium that 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.

Despite whatever missteps were involved with BP’s oil drilling operations, the industry as a whole has a “great safety record” in the Gulf, but this has not been taken into account, Briggs noted.

“We would have implemented new rules and guidelines without any federal action. This could have been done without a moratorium. There is no getting around how severe the regulatory fallout has been for us,” Briggs said.

Meanwhile, Sen. David Vitter has called out top Obama administration officials for issuing what he views as conflicting and misleading statements on the correct number offshore drilling permits. A U.S. Justice Department motion filed in March stated there are 270 shallow water permit applications pending and 52 deepwater permit applications pending.

But in testimony before the Senate Energy and Natural Resources Committee this past March, Interior Secretary Ken Salazar said the Interior Department had received only 47 shallow water permit applications over the previous nine months and that only seven deepwater permit applications were pending. Michael Bromwich, director of the Bureau of Ocean Energy Management, Regulation, and Enforcement, told Vitter personally that only six deepwater permits were pending, and he publicly stated that deepwater permits would be limited because “only a handful of completed applications have been received.”

Over the past three months, deepwater permits are down 71 percent from their historical monthly average of 5.8 permits per month, Robert Bluey, a blogger and journalist with the Heritage Foundation, has reported on The Scribe. Shallow-water permitting have also fallen in past few weeks by 34 percent from the historical monthly average of 7.1 permits, Bluey reported

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After emotional debate, the Senate Energy Committee adjourned Thursday without voting on an amendment by Sen. Mary Landrieu, D-La., to accelerate increased oil and gas royalty payments to Louisiana and other oil-producing states.

“We live to fight another day,” said Landrieu, who ran into opposition from Committee Chairman Jeff Bingaman, D-N.M., and some other committee members, both Democrats and Republicans.

Over Bingaman’s admonition not to add “unrelated controversies” to his proposal to strengthen drilling safety regulations, Landrieu and Sen. Lisa Murkowski, R-Alaska, pushed an amendment to move up the implementation date for oil and gas revenue sharing from 2017 to 2015.

A 2006 bill co-sponsored by Landrieu gave Louisiana and other Gulf states 37.5 percent of royalty payments for off-shore development 3 or more miles off their state coasts, but it doesn’t take effect until 2017.

To generate more support for her proposal, Landrieu offered to include the same revenue-sharing mix for off-shore alternative energy projects, such as wind generators.

Landrieu and Murkowski also supported a provision, designed to pick up three crucial Democratic votes on the committee, to dedicate 12.5 percent of royalty payments to an alternative energy trust fund for the states. But Bingaman helped defeat the proposal, 12-10, arguing that the financing isn’t guaranteed.

The defeat made it unlikely there would be a majority vote for the Landrieu-Murkowski revenue-sharing proposal.

At that point, several Republicans and Landrieu left the committee room, leaving Bingaman without the eight members needed to consider his safety bill.

“I don’t know how we proceed,” said Bingaman, clearly annoyed about prospects for more delay in passing a drilling safety bill more than a year after the massive BP spill in the Gulf of Mexico. His bill would provide increased pay so the Department of Interior can recruit more experienced inspectors, and it would give regulators twice the current 30-day time limit to complete environmental reviews of oil exploration plans.

Among other objections, Bingaman questioned the impact on federal deficits of diverting 37.5 percent of the $5 billion generated annually from off-shore oil and gas exploration to producing states.

Landrieu did little to hide her disdain for Bingaman. If the New Mexico senator is “so concerned” about the deficit, Landrieu said, he should return the 50 percent of revenue from oil and gas production on federal lands in his state, as well as the 40 percent of land-based oil exploration revenues set aside for water projects in western states.

But Landrieu had problems with other members, as well. Freshman Sen. Rand Paul, R-Ky., sought to modify the Landrieu-Murkowski proposal so that all 50 states shared in off-shore royalty payments based on population. He said his proposal was not only fair, but would generate more political support for increased domestic drilling — since all states would have a stake in raising federal royalty revenues.

But Landrieu said Paul’s proposal takes away a major purpose of her proposal: to encourage states to accept off-shore energy development and reimburse states willing to accept such projects. In Louisiana’s case, Landrieu said, the money would go to critical ecosystem restoration work.

“Every 30 seconds we lose a football field of land” due to coastal erosion, Landrieu said. “We are in a desperate race against time to save our coast.”

Paul’s amendment was defeated.

Landrieu said she remains optimistic.

“Despite the chairman’s adamant opposition, there are members on the Democratic side and many members on the Republican side that seem to me willing to move forward; that is really the good news,” Landrieu said.

The Senate committee did report out legislation that would encourage off-shore natural gas development and provide Interior Department expenditures for seismic testing to find oil and gas deposits. It also contains a provision that would do away with deepwater exploration royalty relief approved in 2005.

Landrieu said she would move to strike it when the bill reaches the Senate floor.

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NEW YORK

An energy research group predicted that an increase in drilling activity in the Gulf of Mexico could create 230,000 jobs and add $44 billion to the economy next year.

IHS on Thursday echoed the industry’s argument that regulations enacted following the Gulf oil spill have slowed down the time it takes companies to receive drilling permits. IHS based its conclusion on an analysis of government data.

If the process was streamlined to allow the industry to operate at peak levels, the U.S. would produce more jobs, more tax revenue and another 411,000 barrels of oil per day, the study said.

Government regulators have said that the new regulations and scrutiny are needed to prevent another oil spill.

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–The rising tide in mergers and acquisitions in North American shale sector is expected to continue surging.

–Buyers could include Asian state-owned companies bullish on the long-term recovery of natural gas prices.

–Natural-gas prices in the U.S. have remained depressed due to an overabundance of supply due to the shale boon.

HOUSTON (Dow Jones)–A wave of multibillion-dollar deals by major oil companies has swept the North American shale oil-and-gas sector during the last few years. The rising tide is expected to continue to surge.

So-called shale oil and gas, which are extracted by fracturing the underground rock and then pushing water through cracks to release hydrocarbons, has seen the total value of deals in the U.S. shale sector rise from $15 billion in 2008 to more than $50 billion in 2009, a year when Exxon Corp. (XOM) announced it purchase of XTO Energy. Deal value totaled more than $38 billion in 2010, according to consultancy IHS Herold.

To date, including the mid-July $15 billion proposed takeover of Petrohawk Energy Corp. (HK) by BHP Billiton (BHP), transaction value in the shale sector has garnered about $33 billion, nearing the total for all of 2010, IHS Herold said.

And more deals are expected. The shale market will continue to attract long-term strategic-minded international investments by well-funded global international oil companies. It will also attract Asian state-owned companies bullish on the long-term recovery of natural gas prices, experts said. Natural-gas prices in the U.S. have remained depressed, trading at about $4 per million British thermal units, due to an overabundance of supply caused by the shale boom. Natural gas prices abroad have been trading higher.

“North American assets are in demand,” says Dan Pickering, chief energy analyst at Tudor, Pickering & Holt. “The combination of visible growth, long-lived assets and a reasonable regulatory regime is attractive to buyers and will continue.”

International oil companies are expected to continue adding to their recently acquired shale-gas positions. They will also expand their foothold in oil-and-liquids rich shale properties to boost their hydrocarbons reserves. At the same time, state-owned oil companies, some of which already have venture partnerships with independent producers, are seen becoming operators by acquiring entire companies.

“Overtime many of the Asian national oil companies that are currently joint venture partners will aspire to become operators,” said Adam Waterous, head of Scotia Waterous, the oil and gas merger and acquisitions division of Scotia Capital. “These guys are very good students.” The bank advised BHP on the Petrohawk deal and on the purchase of Chesapeake Energy Corp.’s (CHK) shale assets in Arkansas.

Some joint-venture partners with enough resources to continue expanding include Cnooc Ltd. (CEO, 0883.HK), China’s biggest offshore-oil producer, which has a agreement with Chesapeake in oil-and-gas rich shales in Texas and Nebraska. France’s Total SA (TOT) and Norway’s Statoil ASA (STO) are also partners of Chesapeake in various shales across the U.S., while Korea National Oil Corp. has a joint venture agreement with Anadarko Petroleum Corp. (APC) in Texas. India’s Reliance Industries Ltd. (500325.BY) became partner with Chevron Corp. (CVX) in the Marcellus Shale after the oil giant closed its purchase of Atlas Energy this year.

Possible buyers could also include large independent oil and production companies that are eager to acquire shale assets to improve their production growth profile, says Jim Dillavou, a merger-and-acquisition transaction partner at consultancy Deloitte & Touche LLP.

Marathon Oil Corp. (MRO), which became an independent producer in July after spinning off its refining arm, recently paid $3.5 billion for 141,000 acres in the Eagle Ford in Texas, one of highest prices paid for oil shale assets. Marathon’s move was driven by its need to boost its production growth estimates. Oil giant ConocoPhillips (COP), which announced last week it will split into two stand-alone companies next year, could find itself in the same position, says Sterne Agee & Leach analyst Michael McAllister. “They may have to go and acquire growth,” he said.

On the other hand, takeover targets include exploration companies like Range Resources Corp. (RRC), Whiting Petroleum Corp. (WLL) and Cabot Oil and Gas Inc. (COG), which have vast shale resources in U.S. basins, says Fadel Gheit, an analyst at Oppenheimer and Co.

There have been attempts at shale deals outside the U.S. as well. A $5.5 billion proposed investment by PetroChina Co.’s (PTR) in a big shale-gas project in Canada, led by Encana Corp. (ECA), fell apart last month. That deal faltered on technical issues related to the investment, according to both sides, but experts said interest in Canada shale gas will continue.

The recent string of deals show focus on shale oil and gas resources in North America, Gheit said. “This trend will continue and may accelerate, and the question now is, who is next?”

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Houston (Platts)–21Jul2011/1139 am EDT/1539 GMT

The complexity of new drilling equipment and consequent inspections required in the Gulf of Mexico in a post-Macondo world is likely to result in more downtime on rigs going forward, the heads of two major drillers said Thursday.

As the “tolerance for anomalities” that could result in disasters such as last year’s oil spill from the BP-operated Macondo well blowout in the US Gulf heads toward zero, equipment will have built-in redundancies but will require more inspections and periodic double-checks, Noble CEO David Williams said during a quarterly conference call. 

The Macondo accident caused the largest marine oil spill in US history.

“I’m just cautioning you that as we move through the months and years ahead and we more clearly define what the rules and expectations are, it’s clear that we may have more downtime,” said Williams. “The ultimate saddle for this may ride on the backs of the consumer, because it’s gonna cost more to drill these wells.”

Larry Dickerson, CEO of deepwater driller Diamond Offshore, also said in his company’s quarterly conference call that his employees are similarly preparing for more time spent on rig inspections, particularly on key components. 

”In future projections, we’re building in a little more downtime for blowout [preventer inspections],” Dickerson said.

Noble’s Williams also noted that there is a “growing confidence” in the process of heightened safety implementation in the US Gulf, although “you don’t see it in terms of permits rolling out the door.”

But “there’s a growing wave of excitement from operators on how they’re getting the work done, and the dialogue that’s been building” around the process, he added.

Diamond earlier Thursday posted net income for the second quarter of $266.6 million, or $1.92/share, compared with net income of $224.4 million, or $1.61/share in the comparable 2010 period. Revenues were $889.5 million in the 2011 quarter, compared with $822.6 million in the 2011 quarter. 

Late Wednesday, Noble reported second-quarter earnings of $54 million, or $0.21/share, missing analysts’ $0.27/share target and 75% below the $218 million, or $0.85/share, it earned in the same period of last year.

Revenues for contract drilling services in the 2011 period totaled $590 million in the quarter, below $687.5 million in the year-ago period.

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NEW YORK

The nation’s natural gas supplies rose last week by about as much as analysts expected, according to government data released Thursday.

The Energy Department’s Energy Information Administration said in its weekly report that natural gas held in underground storage in the lower 48 states grew by 60 billion cubic feet to 2.671 trillion cubic feet for the week ended July 15.

Analysts expected supplies to increase by 58 billion and 62 billion cubic feet, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The inventory level was 2.2 percent below the five-year average of 2.730 trillion cubic feet, and 7.4 percent below last year’s storage level of 2.884 trillion cubic feet, according to the government data.

Natural gas futures lost 4 cents at $4.433 per 1,000 cubic feet in morning trading on the New York Mercantile Exchange.

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–Peak temperatures from heat waves are set to arrive in the East, supporting prices

–A smaller-than-average inventory build of 62 bcf is expected in data release

–Inventory report will be released at 10:30 a.m., EDT

By Amy D’Onofrio

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Natural-gas futures edged higher Thursday as traders awaited weekly storage data expected to show a smaller-than-average increase in U.S. inventories.

Natural gas for August delivery recently rose 1.8 cents, or 0.4%, to $4.518 a million British thermal units on the New York Mercantile Exchange.

Worries that the storage data will disappoint have weighed on the market, causing prices to come off one-month highs seen earlier in the week. Hot weather is continuing to give support to futures, however.

Record heat from the Midwest to the East is expected from now through the weekend, and heat indexes in some areas have surpassed 100 degrees.

Temperatures will return closer to normal in the six- to 10-day forecast but will then rise again to above-normal levels, private forecaster MDA EarthSat Weather said.

Demand for natural gas tends to increase in the summer as temperatures rise, as the fuel is used to generate electricity to power air-conditioning.

Last week’s hot weather wasn’t as widespread as the current heat wave, but some traders are still looking for a lower storage injection for that week, betting more of the power-plant fuel was consumed.

The Department of Energy’s report, due at 10:30 a.m. EDT, is expected to show an inventory build of 62 billion cubic feet, on average, during the week ended July 15, according to analysts surveyed by Dow Jones Newswires. That is above last year’s 55-bcf injection and below the five-year average build of 67 bcf.

“It will probably take a reading closer to 50 bcf though to gin up more upward momentum,” Kilduff Group energy analyst Mike Fitzpatrick said in a note to clients.

Injections below predictions often lift prices, while those that exceed expectations typically push prices lower. In the past two weeks futures have plunged after the EIA reported larger-than-expected builds.

High natural-gas production remains a concern for traders, as prices have been limited by oversupply in recent years.

“Should storm activity remain subdued next month, the production factor will come increasingly into focus as a major limiter to upside price progress, especially given last year’s unusually small weather related injections,” said Jim Ritterbusch, head of trading advisory firm Ritterbusch & Associates, in a client note.

Two tropical storms, Bret and Cindy, are churning in the Atlantic Ocean, but neither is tracking toward the U.S. or areas of natural-gas production.

Natural gas for next-day delivery at the benchmark Henry Hub in Louisiana recently traded at $4.5650/MMBtu, according to IntercontinentalExchange, down 7.6 cents from Wednesday’s average. Natural gas for Friday delivery at Transcontinental Zone 6 in New York traded at $14.20/MMBtu, up $5.10 from the average a day earlier.

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Sens. Mary Landrieu, D-La., and Richard Shelby, R-Ala., introduced legislation Thursday to dedicate at least 80 percent of the Clean Water Act penalties assessed against BP for last year’s Deepwater Horizon spill to ecological and economic restoration of the Gulf Coast.

The result of long and difficult negotiations about how to divvy up the money among the five Gulf states, the legislation is co-sponsored by nine of the 10 senators from the region; only Texas Republican John Cornyn has yet to sign on. It also has the enthusiastic backing of Sen. Barbara Boxer, the California Democrat who chairs the Senate Environment and Public Works Committee and who has promised that the committee will mark up the legislation before the Senate breaks for the summer.

“Thank you for working so well together,” Boxer said at an afternoon press conference at which she joined Landrieu, Shelby and four other co-sponsors. “This was hard. But here’s the deal. We’re going to move forward this next week or the week after.”

While the idea of directing most of the penalty money to coastal restoration has won favor with the Obama administration and environmental groups and was heartily recommended by the National Oil Spill Commission, the filing of legislation Thursday representing the consensus of Gulf state senators was an important milestone.

Absent the earmarking for coastal restoration, the money would go into the Oil Spill Liability Trust Fund and into the federal treasury at a time when all Washington is on the hunt for what would amount to a cash windfall.

While Boxer and Landrieu are Democrats, all the other senators who attached their names to the bill — with the exception of Sen. Bill Nelson of Florida — are Republicans. Landrieu gave credit to both Shelby and Sen. David Vitter, her Louisiana colleague, for corralling the support on the Republican side. She also noted that both Vitter and Sen. Jeff Sessions, R-Ala., are members of the Environment and Public Works Committee.

At the news conference, Shelby commended Boxer, “because she doesn’t have, as we say, a dog in this fight, but she does care about the environment as we all know, and she really stepped forward to help us, the Gulf states, to come up with a remedy that makes us whole and restores a lot of the environmental and economic damage. This bill will do that.”

Depending on the result of negotiations between BP and the Justice Department, Landrieu said the total penalties could amount to anywhere between $5 billion and $20 billion.

The sticking point in the Senate haggling over the bill was how to devise a formula for sharing the money to address the damage done to Louisiana while acknowledging the harm done, both actual and in terms of public perception, to the other states.

Under the formula in the legislation, 35 percent of the penalty money earmarked would be divided among the five Gulf Coast states.

Thirty percent would go a federal-state Gulf Coast Ecosystem Restoration Council, which would develop a comprehensive plan to support efforts to protect natural resources, ecosystems, fisheries, marine and wildlife habitats and costal wetlands.

Another 30 percent would be assigned to states according to an impact formula based on a weighted average of shoreline miles oiled, proximity to the well and average coastal population.

The remaining 5 percent would establish a long-term science and fisheries endowment, which would conduct research in such areas as coastal wetlands restoration and ensuring the long-term sustainability of commercial and recreational fishing.

Meanwhile, Rep. Steve Scalise, R-Jefferson, said Thursday that he “will be introducing the House counterpart to this bill in the coming days as I continue working with other House Members to build momentum behind our plan to restore the Gulf Coast.”

“Rarely has the Gulf Coast come together as a region, even though our common challenges include the greatest continuous loss of land on the planet due to coastal erosion, subsidence and sea level rise,” said King Milling, chairman of America’s WETLAND Foundation, praising the legislation as a historic opportunity.

“We call to action all interested to let their senators know what is at stake and the need to support this bill,” Milling said.

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