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Insight

Impact of the US Moratorium on Deepwater Drilling

Wed, 01/25/2012 - 14:36

On May 30th 2010, when US Secretary of the Interior Ken Salazar declared a six-month moratorium on all deepwater offshore drilling in US waters, 30 drilling operations in the US Gulf of Mexico were suspended: 25 in active operation, and another five preparing to start drilling within the six-month period. The aim of the moratorium was firstly to halt drilling on other wells during the investigation into the causes of the Deepwater Horizon spillage, and secondly to implement new safety standards across the offshore drilling industry. Offshore regulators around the world took the Macondo blowout as an opportunity to reassess their safety strategies, but for the US this was of critical importance, both to reassure the population and the drilling industry that they were taking the accident seriously.

The moratorium predictably took its toll on the businesses in the Gulf of Mexico that had entered into agreements with drilling companies to lease drilling equipment on a long-term basis. In July 2010, the first drilling rig halted by the moratorium left US waters. The Endeavour, owned by Diamond Offshore, had previously been leased to Devon Energy Corp. Devon paid the US$31 million early termination fee to end the leasing agreement with Diamond, expecting that the cost of termination would be less than the cost of keeping the rig for the full extent of the moratorium. This was a view shared by many of the companies with idle equipment in the US sector of the Gulf of Mexico; they began to look for new long-term drilling opportunities outside of US waters. A good example of the financial impact of the offshore drilling moratorium is Shell, which booked losses of US$115 million in the first five months after the announcement of the moratorium.

Before the moratorium, drilling companies operating in the Gulf of Mexico had not been significantly affected by the global financial crisis thanks to long-term contracts that ensured they still had existing work even if little new work was being put on the books. The moratorium had a different impact on operations – oil companies leasing drilling rigs were faced with the choice of continuing to pay for idle drilling equipment, or to terminate their contracts. While day rates for jack-up rigs in the Gulf remained fairly consistent between the start of the financial crisis and the moratorium, fleet utilization rates dropped significantly following both events.

Despite the fact that the moratorium was focused solely on deepwater drilling, it also took its toll on shallow water operations in the US Gulf, as regulators were hesitant to approve any new drilling permits for the region. In September 2010, Reuters reported that the number of shallow water drilling permits approved since the Deepwater Horizon incident had dropped from around 12 per month to ‘barely one per month’. Gustavo Hernández García, Subdirector of Planning and Evaluation at Pemex E&P, explains that the moratorium also caused a rise in the demand for jack-ups in the US Gulf of Mexico in 2011, following caution over deepwater drilling activities the year before: “The 2010 moratorium had caused operators to look more to shallow waters, so by 2011 many of the jack-up rigs in the Gulf of Mexico had been contracted.”

The moratorium was lifted in early October 2010, well ahead of the original November 30th deadline, but drilling activity was slow to return to the US Gulf as a result of caution from the government in order to ensure safety standards were at acceptable levels. The first drilling contract after the ban was lifted was awarded in February 2011 to Noble Energy for the continued drilling of a well that had already been drilled to just under 4,000m before the ban halted work. In May 2011, Shell’s was awarded a licence to begin new drilling operations at its Appomattox prospect, the first new license the US government approved since the moratorium began.

By mid-2011, it was possible to gauge the impact of the Macondo blowout on the rig count in the US Gulf. Combined utilization for drillships, semi-submersibles and jack-up rigs was approximately 300 basis points lower than it had been before the BP spill, and averaged 57% in the second quarter of 2011. However, on a positive note, by the end of Q2 2011, both drillships and jack-up rigs had increased their utilization rates above pre-Macondo levels. However, total numbers of both drillships and jack-ups in the Gulf in 2011 are much lower than before the BP spill, which accounts for the high utilization rate. At the start of March 2012, there were 117 rigs in the US Gulf of Mexico, with a utilization rate of 63.2%.

Mexico had a fantastic opportunity to take advantage of the drilling moratorium given the country’s need to increase offshore drilling to raise production levels and the abundance of drilling rigs lying idle across the maritime border. However, the numbers do not really show Mexico taking advantage of the opportunity. In 2009, Pemex had an average of eight exploration drilling units operating offshore throughout the year. This number dropped from to an average of six in 2010, and five in 2011. The number of rigs stationed at Pemex’s main shallow water regions (Cantarell, KMZ and the southeast marine region) for development work went from 21 in 2009, with the figure remaining stable during 2010, the year of the Deepwater Horizon incident, and then dropping to 20 in 2011.