The six-month moratorium on deepwater drilling and permitting imposed by President Obama in the Gulf of Mexico will have long-term effects, analysts say. The moratorium applies to exploration, development or workover activity from floating facilities in water depths greater than 500 feet.
This new challenge may make deepwater action strictly a majors’ game, propelling M&A activity among smaller players. It also will drive some Gulf rigs to other arenas, such as West Africa, and depress offshore rig day rates in the U.S. Ultimately, drilling costs will rise due to increased safety procedures and government scrutiny, and NPVs (net present values) will be in question.
In a research note, Morgan Stanley’s Evan Calio says, “The drilling moratorium has limited impact on near-term production targets for the integrated oils, yet it will delay the pace of Gulf of Mexico exploration and development by more than six months and, hence, delay future GOM production.
“The possibility of any longer-term moratorium could have a more material impact for integrated oils, which are among the largest lease-holders in the GOM. We expect two positive offsets: First, support for the oil price, as up to 125,000 barrels a day of Gulf production is impacted by delays and higher decline rates in second-half 2010, and second, lower services costs, as force majeure could break existing rig contracts that were signed at higher rates in 2007-2008.”
Calio expects moderate delays to 2011 start-ups at Chevron’s Tahiti-2 well (10,000 barrels per day), Marathon’s Ozona Field (8,000 a day) and Chevron’s Caesar Tonga complex (8,000 a day).
“GOM 2010 exploration impacted includes: Chevron (two appraisal/development wells, three exploration wells), Marathon (three exploration, three appraisal), ConocoPhillips (one exploration), Murphy Oil (two exploration), Hess Corp. (one exploration, one appraisal). In our view, OXY (Occidental Petroleum), which has no offshore GOM exposure and the highest oil leverage, will continue to benefit during this period of uncertainty.”
Calio also notes, “The moratorium will be effective through the November elections. It is possible, depending on the composition of the post-election Congress, and the ultimate impact of the current oil spill, that the moratorium extends beyond 180 days. A longer moratorium or more prohibitive regulation could drive M&A activity as deepwater exploration becomes a majors’ game.”
Neil McMahon of Bernstein Research says, “Any delays and associated costs of new regulation will likely increase the marginal cost of new deepwater production by around 10%, assuming wells take longer to drill, as they will be required to carry out more frequent safety tests, as well as the additional costs that will be passed through from the drillers, associated with using more safety equipment, new blowout preventers…”
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