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The sun sinks over the Gulf of Mexico seen from Key West, Florida February 21, 2011. (KAREN BLEIER/KAREN BLEIER/AFP/Getty Images)
The sun sinks over the Gulf of Mexico seen from Key West, Florida February 21, 2011. (KAREN BLEIER/KAREN BLEIER/AFP/Getty Images)

Oil industry sees Mideast turmoil as catalyst to crank up Gulf of Mexico Add to ...

As oil prices soar amid spreading unrest in Libya and across the Middle East, pressure is growing for U.S. regulators to allow new deepwater drilling in the Gulf of Mexico, where an idled industry is desperate to get back to work.

Legislators and oil companies are now using global crude supply fears - and expected pain at the gas pump - as new ammunition in their fight to prod the stalled system back into action.

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A federal moratorium on deep drilling in the Gulf, enacted after the devastating BP spill last spring, expired in October. A shallow drilling ban ended last May.

But little has changed since then. Rather than resuming drilling and developing new sources of oil, great parts of the industry - an economic lifeblood on the Gulf Coast - have endured a prolonged dormancy forced by the slow pace of approvals at the Bureau of Ocean Energy Management. The new offshore regulator has enacted a slew of new rules meant to prevent a repeat of last summer's disaster.

Before the Macondo well blowout, oil and gas companies received roughly 10 drilling approvals per week. But since last June, not a single deepwater permit has been issued. Just over 30 shallow-water permits have been granted. The U.S. government expects production to spiral down nearly 20 per cent this year - and more in 2012.

Now, however, the energy industry is hoping to capitalize on the public attention pricked by gas price scares to energize efforts to restart Gulf oil production.

The Libyan crisis has become an "I told you so" moment for companies that have warned about the perils of slowing domestic oil development, said Lee Hunt, president of the International Association of Drilling Contractors.

"This is one of the consequences of hobbling U.S. domestic production capability. You become more dependent on unstable and potentially unreliable sources of supply," Mr. Hunt said. "That's what we're going to see."

By advancing more drilling in the Gulf, which is responsible for 29 per cent of current U.S. crude production and 19 per cent of its oil reserves, legislators could help ease some of the supply concerns that have contributed to the recent oil price spike.

Calls for action are growing. This week, six Gulf state congressmen published a letter asking that drill permitting be restarted in part because "the intensifying instability in the Middle East is threatening our supply" and "gas prices continue to rise."

Such demands come amid several developments that already served to raise the pressure on regulators to move on long-stalled permits. Last week, an industry consortium announced it has built a new deepwater well cap that can rapidly move to siphon away up to 60,000 barrels a day from a leaking well - enough to cover a well like Macondo. A federal judge also gave the U.S. government 30 days to decide on the status of five drilling permits being pursued by one company.

For Gulf Coast states, the stakes are high. In the wake of the BP disaster, production in the Gulf has dropped far below previous expectations. Output is expected to reach 1.46 million barrels a day this year, some 310,000 barrels a day below the initial forecast of 1.77 million barrels a day - about the same amount Libya was producing before its crisis shuttered production and transportation of much of its oil. And the 2012 forecast for the Gulf has dropped by about a third, or some 610,000 barrels a day.

Twelve rigs have already left the Gulf, half the shallow-water fleet is now idle and no deepwater rigs are working.

One offshore driller, Seahawk Drilling, sought bankruptcy protection before selling its assets; others consolidated. Nearly 30,000 Louisianans became unemployed between April and December last year, a 20-per-cent increase at a time when national unemployment fell.

The impacts are not universal. Onshore U.S. drilling has increased following the BP disaster, with the active rig count growing by 13.5 per cent since the April 20 explosion. That has created a bonanza for service companies able to shift from offshore to land-based work. Energy explorers drilling for natural gas in shallow Gulf waters have seen permits continue to flow. And some workers have held onto paycheques by following the money into hot new oil and gas plays in places like Montana and Pennsylvania.

The halt to offshore work has, however, taken a dramatic toll on many. Take Twin Brothers Marine LLC, for example. The fabricator of offshore oil and gas platforms has dropped more than half of its workforce. Its platform work, once a corporate mainstay, has fallen to "pretty well zero," said Cameron Webster, one of the company's partners.

"We've been impacted there severely," he said.

But he remains doubtful that things will turn around quickly - indeed, job losses and other issues have not succeeded in pressing the Obama administration into speeding approvals - even if he hopes problems in the Middle East spur action.

"Is it going to happen? I have no idea," he said. "I think the political atmosphere up in Washington is just totally opposed to anything taking place for us."

Indeed, the year ahead remains fraught with uncertainty. Some new regulations have been rolled out, including beefed-up standards for well design, casing, and cementing. But the Bureau of Ocean Energy Management says it is still "considering the various recommendations for improvement received from multiple investigations and analyses." In other words, more changes could yet be in store.

Existing changes are already substantial enough that researchers believe the cost of drilling a single well has grown by 10 to 20 per cent. In part, that's because new inspection requirements are expected to prolong the time it takes to drill a well - a fact that is expected to hurt the economics of some drilling.

"Will it be business as usual? I very much doubt it," said Candida Scott a senior director in the cost and technology group with Cambridge Energy Research Associates.

"I think it's going to be a very slow return to drilling as we go through 2011. Obviously, what you've got is a process here with a regulatory body trying to find a way and trying to understand what they need to do."

Yet if the troubles in the Middle East do serve as a Gulf catalyst, it's unclear how much good it would do in the near term. Some of the most prospective plays are in deep water, where it can take five years to bring a well from concept to production; drilling alone can take hundreds of days.

And even some industry players say it would be a mistake to use a foreign crisis as a reason to rush back to work.

"People want to drill, people want to do the work. There's no problem with that. They just got to do it right," said Bruce Johnson, president of Ocean Energy Inc., a naval architecture and marine engineering firm. "The fact that the Arab world has gone nuts can't be allowed to affect that. Macondo happened because we made some mistakes. We have to correct those mistakes."

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