Industry still skeptical after first drilling permit since Macondo

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 1 -- Issuance this week of the first deepwater drilling permit since the Macondo blowout last year is “not a return to normalcy” but rather a show-and-tell exhibit for US Department of Interior Sec. Ken Salazar to display when he testifies before the Senate Energy and Natural Resources Committee on Mar. 2.

Prior to announcement of the permit, Frank Maisano, a Washington-based energy and political analyst, said, “Bookmakers are heavily favoring that Interior will issue a deepwater permit this week so Sec. Salazar won’t have to go to the Hill without a bird in hand, as a hostile Congress lies in wait.”

Analysts at FBR Capital Markets & Co., Arlington, Va., said, “Now when Sec. Salazar appears before Congress this week, he will have an [approved] application for permit to drill (APD) in hand to respond to allegations that the administration has imposed a de facto moratorium. We expect media attention on the permitting issue to dissipate significantly, even if few additional permits are forthcoming. Instability in the Middle East and high oil and gasoline prices will help keep the issue in the mainstream.”

Both Republicans and Democrats have cited the economy and rising oil prices to pressure the administration to issue permits for deepwater drilling in the Gulf of Mexico. However, FBR analysts predicted, “Political pressure is likely to abate somewhat.”

Salazar said Feb. 25 he would not bow to political pressures from Congress or Gulf Coast governors to speed up permits for offshore drilling in the gulf. In approving the permit Feb. 28, Michael Bromwich, director of the US Bureau of Ocean Energy Management, Regulation, and Enforcement also said the move was not motivated by politics nor related to Louisiana Federal Judge Martin Feldman's recent order to expedite five drilling permits within 30 days for Ensco PLC.

Bromwich further implied the decision had nothing to do with restoring jobs along the financially troubled Gulf Coast, the rising cost of fuel to consumers, replacing quickly depleting US oil and gas reserves, or threats to foreign supply as a result of civil uprisings in the Middle East and North Africa. “This permit was issued for one simple reason: the operator successfully demonstrated that it can drill its deepwater well safely and that it is capable of containing a subsea blowout if it were to occur,” he said. “We expect further deepwater permits to be approved in coming weeks and months based on the same process that led to the approval of this permit.”

However, analysts warn the industry and investors not to hold their breath while waiting for the next permit to drop. “We do not view this permit as a precursor to a tsunami of permits,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. However, he said, “This action on the part of the BOEMRE could sway sentiment positively for shares of companies with meaningful gulf exposure.”

FBR analysts also do not foresee “a sea change for Gulf of Mexico permitting.” They said, “In our view, this permit is more likely to mark the beginning of a long period of low permitting that is likely to underwhelm investors seeking an immediate revitalization of the gulf. Resource constraints in the face of a significantly greater workload will continue to challenge BOEMRE and operators.”

For example, they said, “The department has requested from Congress funding to hire as many as 40 additional permitting personnel and said that, without the money, it would be hampered in its ability to process permits. Likewise, new exploration plans (beyond the ‘grandfathered’ permits) will require enhanced environmental review, which opens the possibility for continued delays.”

The “handful of permits” for wells being drilled prior to the moratorium will have “a much easier pathway than new permits that require new exploration plans, which we view as much more susceptible to policy and litigation delay,” they said.

FBR analysts warned investors against “chasing a further short-term rally in [equity] stocks exposed to a recovery in US Gulf of Mexico deepwater permitting. We expect a continued rally in affected shares but caution that, as momentum wears off and incremental permits are scarce, the stocks will give back most of the current rally.”

They also reported, “Our industry channel checks indicate that BOEMRE is satisfied with both Helix Well Containment Group's containment system approved for the Noble permit and with the interim system of the ExxonMobil-led Marine Well Containment Co. However, 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.”

Among the seven deepwater permit applications now pending are two for new wells, three for revised new wells, one for a sidetrack, and two for revised sidetracks.

The permit was issued to Noble Energy Inc. to drill a bypass around the plugs it was forced under the moratorium to set in Well No. 2 in Mississippi Canyon Block 519 about 70 miles southeast of Venice, La. The well was spudded Apr. 16 in 6,500 ft of water and drilling was suspended June 12 under the drilling moratorium issued after the Macondo blowout. The moratorium was subsequently lifted in October (OGJ Online, Feb. 28, 2011).

Contact Sam Fletcher at samf@ogjonline.com.



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