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What You Need to Know About the Latest Gulf Incident

by | published September 3rd, 2010

This is one of those heavy travel weeks. I returned yesterday (September 2nd) from Colorado Springs, where I was addressing a meeting of the Energy Impact Assessment Task Force of the U.S. Energy Council, and will be off to London for oil finance meetings tomorrow (September 4th).

In between, of course, we had another platform incident in the Gulf of Mexico.

The fire on the Vermilion 380 platform run by Mariner Energy Inc. (NYSE:ME) caused another round of telephone conversations yesterday afternoon and this morning – some of them with Congressional committee staffs in Washington drafting various proposals for regulating, or banning, offshore drilling. I am scheduled to testify before committees on both sides of the rotunda, once they decide what to do with the scaled-down energy bill. That has meant I stay in touch with staff, and they periodically call me for updates.

There will be some major decisions made shortly. And here’s what the takeaway is going to be before I leave Merry Ole England on Monday evening.

I now expect a strong move to extend the current deepwater offshore drilling moratorium; a new set of regulations… and some attractive U.S. onshore and selected global offshore investment alternatives.

The Government Will Respond

This is the picture sketched in Colorado Springs. Among the policymakers, movers, and their advisors, two overarching assumptions are emerging.

First, the current surpluses in both crude oil and oil products will not last. We are moving into the development of supply-constricted market conditions, likely to hit as early as 2014. The wild card here remains how long it will take until the demand withheld from the market (due to the financial crisis) returns.

We have indications that demand is returning in other parts of the world quicker than in the U.S. That will simply make the upcoming London meetings more interesting. There, we will be discussing the availability of credit for oil projects worldwide. Most of that is not in North America, and much of it is already ramping up. However, movements of both the market and company planning in the U.S. over the past week are pointing toward a recovery beginning here, as well.

If the 2014 target is accurate, the entire oil sector is under the gun, since it takes from three to five years on average to turn a new drilling project into a producing field.

We are already behind the curve.

The second major conclusion from the meetings at the Broadmoor – the grand hotel on the outskirts of the Rockies, where the sessions were held – addresses the prospects for offshore drilling.

Everybody acknowledges that offshore drilling in general, and deepwater (over 1,200 feet) in particular, will increase globally… with the exception of in the Gulf of Mexico. That’s because, worldwide, most of the major fields undiscovered are deepwater. Projections are that to avoid a significant decline in available volume, we will need to pump 10% of all oil internationally from deepwater by 2015.

In London, we will be devoting over half of all discussion to credit for deepwater drilling – a clear indication that this is where the emphasis will be, moving forward.

And then the latest event hit in the Gulf…

Mariner’s Explosion Is Different from the BP Blowout

For one thing, it is a production platform, not a drilling rig (as was the case with the Deepwater Horizon disaster). That means fewer moving parts and a much smaller crew (all of whom were rescued safely this time).

For another, this is not a deepwater project. Mariner’s Vermilion platform sits in less than 400 feet of water, not the 5,000 feet in the BP case. Also, despite some early reports, there may not have been an oil leak, and all production from all wells on the platform is closed.

That’s the good news.

The other side of the coin is where the problems are.

The fact that this is a shallow-water incident means attention is no longer only on rigs operating in deeper waters. And then there are rising concerns over the advancing age of the offshore installations.

The Mariner platform began operations in 1997. Now, a 13-year old platform is well within the service life for an offshore project, but it does introduce several disconcerting notes.

Of the almost 3,900 platforms now operating in the Gulf of Mexico, a majority of them are reaching or have exceeded their initial design lives. When combined with the thousands of capped wells in the Gulf providing additional oil leakage concerns, Congress is beginning to take a closer look at the overall offshore field development picture.

And indications are, they don’t like what they see.

BP’s argument, that they would find it difficult to meet financial compensation obligations for the Macondo-1 oil spill without resuming deepwater Gulf production, will fall on deaf ears. Even if drilling does resume, the new environment will require considerable added regulatory oversight.

These will certainly involve the new Bureau of Ocean Energy, Management, Regulation, and Enforcement (BOEMRE) in more segments of the drilling and production process, requiring formal approval before companies can move from one stage of a project to the next. In addition, testing requirements, equipment oversight, redundancies, and operating procedures will also be stiffened.

Remember, BOEMRE is directed by Michael Bromwich, a tough former inspector general in the Department of Justice. The political situation means he will not be taking any prisoners.

Mariner has assured that the fire is extinguished, there is no oil leak, and all hands are safe. However, the likelihood that the fire began in about 100 barrels of gas condensate (natural gas in liquid form) stored on deck means there will certainly be changes required to a wide range of standard practices. There are more than 1,000 incidents of this kind each year on offshore platforms.

That will simply add fuel to the regulatory fire (pun intended).

In the wake of the Mariner platform incident, there are again calls to ban all offshore drilling, regardless of water depth.

An outright permanent moratorium on all offshore drilling in the Gulf will not happen. But tighter, more intrusive regulations are a certainty. And it does prompt measures requiring greater scrutiny and company responsibility, especially in an election year. All of this means added expense, more delay, and increasing government oversight.

For you, however, all of this is going to provide a range of opportunities moving forward. I have already been reviewing several of these, here in Oil & Energy Investor, and in the Energy Advantage service.

[Editor’s Note: For more information about Energy Advantage, click here.]

Two Sectors Will Benefit from Congress’ Actions

First, expect a resurgence in specific regional onshore oil plays in the U.S. This will benefit medium and smaller-sized companies currently positioned to take advantage.

Second, the move from crude oil to natural gas will intensify. With incentives in the new energy bill, there will be a greater push to utilize natural gas in transportation. Yes, this will take some time. But with a surplus of unconventional gas from shale, coal bed methane, and tight gas formations available to supplement free-standing traditional gas drilling, this market that will be expanding moving forward.

Finally, with offshore drilling increasing elsewhere, and concerns rising over sufficient supply moving in near-term, there will be several opportunities with companies that are able to bridge offshore and onshore drilling in other parts of the world. This will also benefit U.S.-based oil companies, rig operators, and service companies.

In short, when we are ready to move, I’ll explain how you piggyback on foreign tradable majors (the initial investment play) to improve return on a range of other companies (the secondary plays).

This is not your father’s oil market. It’s going to be your oil market.

Kent

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