FBR Capital: “No cookie-cutter process” for offshore drilling permits

Analysts are cautious about the pace that the US government might take in issuing deepwater drilling permits.

The Bureau of Ocean Energy Management, Regulation, and Enforcement approved the first Application for Permit to Drill (APD) for the deepwater Gulf of Mexico since the Macondo well blowout in April 2010 and the resulting oil spill.

“BOEMRE’s case-by-case evaluation of spill containment resources will not produce a cookie-cutter process for APD approvals, which are site specific and may require additional resources from operators,” FBR Capital Markets analyst Benjamin Salisbury said in a recent research note.

He believes the resumption of deepwater permitting “marks the beginning of a long period of slow approvals.” This is because BOEMRE significantly increased the volume of work involved in its review, verification, and approval of each permit application.

BOEMRE Director Michael Bromwich wrote an opinion article for the Houston Chronicle in which he said: “We need to ensure that our new drilling safety rules are fully complied with; we need to review certifications by professional engineers of every stage of the drilling process; and in many cases, we need to conduct more detailed environmental reviews. All of these steps are necessary and appropriate, but they extend the time needed to approve permits.”

RFF suggests putting deepwater risks in context

Resources for the Future, an independent economic research group, suggests that neither government or the oil and gas industry yet has adjusted to the high-risk context of deepwater operations. RAF recommends setting liability caps for individual wells at a level reflecting damages from worst-case spill scenarios.

Lynn Scarlett, RFF visiting scholar and former deputy secretary of the interior, made this comment during a Feb. 15 luncheon symposium hosted by ConocoPhillips at its Houston headquarters.

“One might argue it is rocket science,” Scarlett said of regulating drilling and production activities in the deepwater Gulf of Mexico. “No project is business as usual.”

RFF recommends that third-party insurance should be researched as a possible way to strengthen external monitoring of deepwater oil and gas operations. If insurance pools are used to assist smaller firms, fees should be related to risk, Scarlett said.

She said both government and the private sector lacked capacity and practices for performing adequate risk assessments.

‘You just don’t know what you don’t know,” Scarlett said, adding that risk assessment capacity and practices will be a key issue for both industry and regulators going forward after the April 2010 Macondo well blowout and resulting massive oil spill in the gulf.

The count starts, how many deepwater rigs will leave GOM

Diamond Offshore is moving two of its deepwater drilling rigs out of the Gulf of Mexico for work outside the US given uncertainty about the length of a drilling moratorium on new deepwater drilling in the gulf. This marks the start of an ongoing count. The question is how many deepwater rigs might be relocated.

“We believe the risk that a substantial number of deepwater rigs will leave the gulf has risen considerably,” FBR Capital Markets analysts wrote in a July 13 research note after Secretary of the Interior Ken Salazar issued a second moratorium on deepwater drilling moratorium based on technology and drilling configurations instead of water depth.

A New Orleans federal judge struck down the first drilling ban. Salazar reissued a second drilling moratorium on July 12 until Nov. 30, pending interim rules that might end it sooner. He also reserves his right to end the moratorium earlier or to extend it.

“Despite the focus on a Nov. 30 horizon, we believe that the content of the decision memo will increase the uncertainty in the minds of the deepwater producers as to when the moratorium may end,” FBR analysts said.

They suggest the new moratorium could prompt more lawsuits, although analysts emphasize that litigation is unlikely to resolve the uncertainty.

“Interior’s decision to allow the drilling of waterflood and injection wells while not allowing the drilling of development wells could represent an avenue for further litigation,” FBR analysts said. “The DOI can continue to refine the moratorium or impose almost unlimited requirements regarding safety that will keep the drilling industry in limbo.”

One industry spokesman last week suggested this scenario reminds him of having his engine halfway out of his car. Given that situation, more deepwater rigs are very likely to be leaving the gulf.