Mendacity, Insanity And Stupidity: The Obama Administration’s Offshore Drilling Policy

On Friday, the Times-Picayune had an article touting a suspicious fact – namely, that there are more oil rigs in the Gulf of Mexico today than there were prior to the Deepwater Horizon tragedy last April.

Suspicious, of course, because it’s thoroughly misleading. While there are 125 rigs displacing Gulf water, just 34 of them are actively engaged in drilling for or pumping oil. And that number is just half as many rigs as were operating before the explosion.

From the article…

While only 34 of the 125 rigs in the Gulf are actually working — half the total that were active before the Macondo well blowout — the vast majority of the idle rigs, particularly those slated for big-ticket jobs in deepwater, will remain under contract for the rest of 2011.

In the shallow-water Gulf oil fields, where the government has never officially banned drilling but has issued few work permits in the past several months, activity has rebounded to near its pre-blowout levels.

There are 26 shallow-water rigs operating now, just 11 fewer than before the BP blowout, according to ODS-Petrodata. In December, the government issued seven shallow-water drilling permits, matching the monthly average from the year leading up to the BP disaster.

What the Picayune’s David Hammer didn’t mention in the article, though, is the January figures from the Bureau of Ocean Energy Management, Regulation and Enforcement – namely, the seven shallow-water permits issued in December fell to just two in January. Such a steep decline gives the lie to Hammer’s indication that things are getting back to normal; that is clearly not the case.

Greater New Orleans, Inc. has been keeping tabs on the permitting process and the numbers are damning – of the 124 drilling plans submitted to BOEMRE since the “lifting” of the Obama administration’s offshore moratorium, just 12 have been approved – only three more than the nine plans operators pulled off the table in frustration.

Some 103 plans are still awaiting review.

There hasn’t been a deepwater permit issued since the Deepwater Horizon incident. The next possible permit, announced last week, might go to Shell – who filed a plan to drill three wells some 130 miles south of Vermilion Parish in its Auger field. Public comment on the plan was opened Jan. 28, meaning BOEMRE is due to make a decision by the end of this month.

But even if the Auger plan is approved – something which is by no means certain – it’s clear that the current regulatory structure is wholly inadequate to resurrecting an industry with crucial national-security implications. Current estimates indicate a falloff of some 220,000 barrels per day in Gulf oil production, which would indicate a loss of $3.7 million dollars in federal royalties per day at the current price of $90 per barrel. But that’s a small sliver of the damage; those 220,000 barrels will have to be purchased from foreign countries, meaning a transfer of $19.8 million per day in American dollars to foreigners.

BOEMRE director Michael Bromwich is feeling the heat from the oil industry as he attempts to counter a lack of expertise and competence within his new agency – and his response is to counterattack, claiming the reason BOEMRE isn’t giving permits is the industry’s inability to meet his requirement for ironclad new systems to contain wild undersea wells. This has been panned as totally unrealistic within the industry, which is pouring millions into new systems.

“The most critical missing piece in the process of approving applications for permits to drill in deep water is the demonstration of well control and subsea containment capability,” said Bromwich in a letter Friday to Helix Energy Solutions and Marine Well Containment Company (formed as a joint venture by the industry in response to the Deepwater Horizon spill). “These systems are critical to moving forward with safe and responsible deep-water drilling activities.”

But Bromwich hasn’t established a set of goalposts for the industry to aim for, and that has created chaos.

Joe Hill, an analyst with the Houston-based investment bank Tudor Pickering Holt & Co., said the government’s judgments about the effectiveness of the containment systems will depend on the well conditions envisioned by federal regulators. The capping stack that ultimately worked to contain BP’s Macondo well last year might not work on a different kind of blowout, he said.

“I don’t think you can have a system that can deal with every potential scenario — at least not cost-effectively so that anyone can drill a well again,” Hill said. “What happens if the well blows out and the rig burns up and the chassis falls down on top of the wellhead? You can play games all day long figuring out stuff where nobody in their right mind could handle what happened.”

What Bromwich has managed to do is to set the industry up as a scapegoat for his agency’s failure to resurrect permitting by establishing impossible standards.

Which brings us back to Hammer’s happy, if improbable, piece in the Times-Picayune on Friday.

Bromwich said Thursday that his agency is trying to strike a balance between “regulatory certainty” and new safety reforms, promising that “the processing of drilling permit applications and proposed drilling plans will not be delayed while these additional reforms are developed.”

Tom Marsh, U.S. publisher of ODS-Petrodata, predicts a return to pre-spill activity in the Gulf, even if the new safety regime will require more patience than operators are used to.

“Eventually the government will get it together and the companies will get it together and stuff will start flowing in one end and out the other end,” Marsh said. “Just because it takes longer to do doesn’t mean there will be fewer rigs drilling. These companies have a lot of money invested in these leases.”

The quote from Marsh seems optimistic, and it depends greatly on his assumption that “eventually the government will get it together.” When Noble Corp. moved its Clyde Boudreaux rig to Brazil – at a reduced day rate, no less – it indicated there’s a distinct lack of Marsh’s faith among people whose capital is burning as the Gulf rigs stay idle. As’s Loren Steffy notes…

Roger Hunt, Noble’s senior vice president for marketing and contracts, told analysts that the company “cannot predict when a return to normal might occur or what the new normal might look like” in the Gulf.

Companies like Noble, which saw its fourth-quarter profit fall to $99 million from $446 million because of the drilling moratorium and the subsequent stagnation of new permits, endured the moratorium but has decided it can’t wait any longer.

“There is life after the Gulf of Mexico, and that would be in Brazil,” Hunt said.

In other words, the Clyde Boudreaux probably won’t be the last Noble rig heading south.

While the Gulf remains mired in uncertainty, the rest of the world moves forward. Almost half the new reserves discovered between 2006 and 2009 came from deep-water drilling, according to the energy research firm IHS.

Steffy asserts that Noble is anything but the only company looking elsewhere to place their assets…

Meanwhile, companies operating in other parts of the world are reaping the benefits from the administration’s foot-dragging in the Gulf.

Houston-based Hyperdynamics plans to begin drilling off Guinea, in West Africa, before year’s end, and it has about eight rigs from which to choose for the project. Company President Ray Leonard told me he doubts he would have so many prospects if it weren’t for the Macondo well blowout last April.

Edge in stability gone

Companies used to flock to the Gulf because it offered lucrative potential reserves in a stable political and economic climate. Now, companies are becoming hesitant to put capital at risk here.

“Suddenly, West Africa is not looking half bad,” Leonard said.

While that may benefit his company in the short term, Leonard worries about the long-term implications for the country as global oil demand continues to rise.

“As an American, I’m very discouraged by the whole thing,” he said.

In short, the administration is driving jobs away by its foot-dragging. Foreign countries are benefiting both by getting work they otherwise wouldn’t get and ultimately by selling America oil we would produce in our own right but for Obama’s policies. It’s unclear whether any real progress is being made to rectify the situation or whether there is any fundamental desire to try.

And morale couldn’t be lower.

Whether the Auger permit is either approved or denied will be a major benchmark in determining whether there is a future for oil in the deepwater Gulf. But given that BOEMRE isn’t even ramping up shallow-water permits – the January figures show an opposite direction – there is no reason to trust anything this administration says or does on offshore oil.



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