The Rising Influence of Rising Affluence

[DewDiligence]

Feds Ban Exploratory Drilling in >500 Feet of Water

http://www.reuters.com/article/idAFN2714716920100528

›Thu May 27, 2010 11:06pm EDT
By Ayesha Rascoe and Tom Doggett

• Exploration rig safety review to idle 33 deep-sea wells
• Chevron among biggest deepwater Gulf producers
• Shell may suffer twice after Alaska plans suspended
• Analysts fear project delays, deferred oil production

WASHINGTON, May 27 (Reuters) - The U.S. government ordered a temporary halt to drilling at 33 deepwater exploration rigs on Thursday, part of a broader response to the massive BP oil spill that threatens efforts to tap offshore fields seen as crucial to increased U.S. oil output.

The move may potentially delay project development plans by companies like Chevron Corp in the Gulf of Mexico, where rising production has helped offset shrinking domestic onshore supply.

Unlike the administration's six-month extension of its ban on new deepwater drilling permits, and cancellation of a much-anticipated lease sale offshore Virginia, the pause for existing deep-sea exploratory rigs threatens to affect proven oil discoveries rather than untested areas.

"These actions are all guided by the need to take a cautious approach to offshore oil and gas development, as we strengthen safety and oversight of offshore oil and gas operations," U.S. Interior Secretary Ken Salazar said on Thursday.

Although the measures would not affect oil wells already in production, the 33 exploratory rigs are supposed to stop at the first safe opportunity and implement new safety measures before resuming operations, officials said.

Salazar confirmed that the halt would not apply to rigs operating in shallow waters.

That could increase costs and delay development plans for companies like Royal Dutch Shell, which is among the biggest Gulf explorers, while major contract drillers who could be left with idled rigs include Transocean Ltd and Noble Corp.

Brazilian state oil company Petrobras said the suspension could slow the development of its Gulf of Mexico Cascade-Chinook fields that were originally scheduled to begin production in the second half of this year.

"Petrobras is evaluating the impact of the six-month extension of the moratorium and could modify its schedule," the company said in a statement.

Those areas were expected to reach 80,000 barrels a day over several years.

Energy consultants Wood Mackenzie previously estimated a six-month extension of the ban would delay 80,000 barrels a day in U.S. oil production that was expected in 2011.

While that is only about 5 percent of the Gulf's total output, any delay to future development could elevate long-dated oil prices and would increase demand for imported crude, something President Barack Obama has sworn to curb.

In addition to canceling the Virginia lease sale, the department also canceled a lease sale that was planned for the western Gulf of Mexico in mid-August, an area that could have produced up to 423 million barrels of oil.

The Gulf of Mexico accounted for about 29 percent of U.S. crude oil production and 11 percent of natural gas output last year, according to the U.S. Energy Department.

About 24 percent of America's total oil production came from wells in Gulf waters more than 1,000 feet deep. About 5 percent of U.S. gas output came from wells at such depths.

New exploratory drilling in water depths of more than 500 feet will be banned under the six-month moratorium.

ASSESSING TOLL

With some wells already under way and drill ships booked months or years in advance, companies were still struggling to figure out how they would be affected.

Chevron lost a permit for one appraisal well under the previous moratorium, but the status of an exploration well it has already begun to drill was unclear, a spokesman said. That is one of three such exploration wells planned this year.

The U.S. government's moratorium on new drilling permits in the Gulf of Mexico delayed about $1.6 billion in oil and gas industry spending across the Gulf of Mexico region, according to Wood Mackenzie.

Shell may be hit twice as it will be forced to put on hold its imminent plans to drill exploratory wells off Alaska after Obama suspended permission to drill in the Chukchi and Beaufort Seas, where the company has paid $3.5 billion for oil leases and planned to begin drilling in July.

The freeze appeared to affect about half of the drill ships under contract for this year in the Gulf of Mexico, according to recent Baker Hughes Inc data.

Analysts said operators may fight back.

"This is a significant escalation that will have a much more pronounced impact on the development plans of the offshore industry, particularly for operators that were expecting to move deepwater production into the production phase over the next year or two," Eurasia Group said in a report.

"Producers may challenge this decision in court."

Following a 30-day safety review, Salazar said the Interior Department will also require that blowout preventers at offshore exploratory wells be certified to ensure they are working properly, addressing one of the factors believed to have caused a devastating blow-out on Transocean's Deepwater Horizon drill ship and the subsequent massive oil leak.

Salazar said a preliminary investigation shows problems with the cementing or casing, or both, at BP's offshore oil well may have contributed to last month's explosion of the Deepwater Horizon drilling rig leased by the company. The explosion killed 11 workers and caused the largest oil spill in U.S. history.‹