New Report Hammers Obama Administration For Regulatory Mess On Gulf Drilling

From a release put out by the Gulf Economic Survival Team this afternoon comes a rebuttal to the idea put out by the Associated Press today that the Obama administration is all talk when it comes to going after oil companies. Because while statistically the EPA may have been less oppressive on oil drilling under the current president than his predecessor, Obama’s Interior Department has overseen a regulatory morass that has artificially inflated oil prices while killing jobs and keeping Gulf of Mexico production down.

Dr. Bernard L. Weinstein, Associate Director of the Maguire Energy Institute, Cox School of Business, Southern Methodist University, today released a report detailing the fallout from two years of difficulty implementing offshore regulations that were revamped after the Macondo blowout.   The continuing regulatory issues have led to decreased federal revenue, fewer active rigs in the Gulf, and lower forecasts of future production from the Gulf of Mexico.  The report was prepared for the Gulf Economic Survival Team (GEST).

According to the report, companies attempting to plan and execute enormously expensive, multi-year offshore energy projects are not receiving the transparency and predictability required to conduct business.  When the market lacks confidence that the government will remove obstacles to energy production in the Gulf of Mexico and elsewhere, traders incorporate this risk into current thinking and future price structures.  Today’s offshore regulatory regime has bred a high “U.S. regulatory risk premium” that is dampening production and causing a hidden surcharge on the price of oil and gasoline in the market.

“Regulatory actions matter,” said GEST Executive Director Lori LeBlanc.  “They affect business confidence, investments and ultimately production, and these factors in turn affect prices.  When President Bush lifted the drilling moratorium off America’s coasts in 2008, the price of oil fell twelve percent.  Yet when President Obama lifted the deep-water moratorium after Macondo, similar price drops did not occur.  Why?  Because new rules governing Gulf activity were simultaneously announced and issued with very little clarity. In turn, the market correctly predicted a lengthy and choppy period of implementation with the potential to negatively affect offshore activity.”

The national economic consequences of this regulatory uncertainty are clear and significant:

• Federal revenues from Gulf activity have dwindled. Under the Obama Administration, offshore lease sales have gradually declined each year, depriving the U.S. Treasury of a sorely needed source of revenue. New lease bids went from $9.4 billion in 2008 to $979 million in 2010 to a mere $36 million in 2011.



• Total active rig counts in the Gulf are far short of pre-moratorium numbers. In May 2010, there was an average of 27 “active” rigs in the Gulf – those engaged in drilling activities as opposed to maintenance, completions, and workovers.   As of May 1, 2012, there were only 18 total active rigs in the Gulf.

• Production in the Gulf is down by 30 percent over projections. According to the Energy Information Administration (EIA), Gulf production fell from 1.55 million barrels per day in 2010 to 1.32 mb/d in 2011.  This year, EIA estimates Gulf output will fall further to 1.23 mb/d.  But two years ago, before the moratorium, EIA predicted that production would reach 1.76 mb/d this year.

• Federal revenues from Gulf activity have dwindled: Under the Obama administration, offshore lease sales have gradually declined each year, depriving the U.S. Treasury of a sorely needed source of revenue. During 2008, $9.4 billion was generated in new offshore lease bids. That dropped to $1.1 billion during the recessionary year of 2009, $979 million in 2010, then a paltry $36 million in 2011 as only one lease sale was held during the entire year.

• GOM rig count increases are misleading: Prior to the deep-water moratorium, there was an average of 27 “active” rigs in the Gulf – those engaged in drilling-related
activities as opposed to maintenance, completions, workovers, etc. According to the Baker Hughes count of active rigs, as of May 1, there were 18 total active rigs in the Gulf – far short of pre-moratorium numbers.

• Deemed ‘submitted’ period expanded: When an operator submits a plan, regulators first determine whether it meets the initial criteria to be ready for review, or deemed “submitted”. No one officially tracks this phase. The SMU report reveals that the average number of days to obtain approval for a plan from original submission to final approval has risen from 50 days pre-Macondo to 207 days – attributable to the fact that the average number of days from original submission to deemed “submitted” has ballooned to 160 days since Macondo.

• Permit approval claims overblown: Since early 2012, the administration has touted the number of permit approvals issued for unique wells in the deep waters of the Gulf – claiming in early March 2012 to have approved permits for 94 unique wells. Yet only 32 of those 94 permits covered unique new wells specifically permitted to reach hydrocarbons. The rest applied either to pre-moratorium wells in need of revised plans, or permits that allow shallow batch set depths, which need additional permits to reach total depth for hydrocarbons.

• Just in time permitting breeds uncertainty: Current drilling permit approvals are being issued on a “just-in-time” basis, sharply hindering a company’s ability to plan for the next job. A back-log of at least three approved drilling permits is sought for each active rig in order to secure the long-term contracts that the industry utilizes. With 18 active deep-water rigs, the inventory of approved permits should be at least 54. As of March!31, there were only 6 – leading companies to question where their rigs will be going next.

“Given all the issues that come to light in this report, it’s little wonder that the U.S. Energy Information Administration lowered projections for Gulf of Mexico production by 30 percent during the past few years,” concluded LeBlanc. “The administration has made a lot of progress implementing its post-Macondo regulatory revamp, but there is more work to be done to ensure we are harnessing our nation’s energy resources as effectively as we can.”

UPDATE: Steve Maley’s take on the report

In a rational world, the Federal government would play the role of a motivated lease owner who was interested in expediting the safe and environmentally responsible development of his mineral resource, consistent with sound engineering conservation practice. That’s why there’s a permit process in the first place.

Since Macondo, that’s backwards. Operating practices must conform to the permitting process that has, um, evolved in a purely political environment: practical considerations, economics and common sense be damned. And while the movements of the politicans’ lips indicate a concern for production levels and product prices, their actions and policies tell another story.

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