Spill effects spread to smaller players

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The oil pouring into the Gulf of Mexico is punishing a broad contingent of smaller companies whose offshore exploration plans are being clouded by a growing regulatory clampdown.

Canada's Nexen says its strategy will be affected by a U.S. government-imposed six-month moratorium on offshore drilling in the Gulf, where oil continues to leak from the out-of-control well punctured by the Deepwater Horizon rig which exploded and sank in April.

The Calgary company has been forced to delay at least one exploration well in the Gulf of Mexico, and is re-examining the timing of others.

Nexen is the only sizable Canadian company operating in Gulf waters, which has made it a subject of particular interest to Canadian investors.

Some have grown nervous that the interruption in U.S. offshore work, combined with looming changes in safety statutes, could hurt the company - and potentially drive it from the U.S. offshore if it is forced to shoulder substantially more liability in case of an accident.

Shares of Nexen dropped 4 per cent Tuesday as a host of energy stocks fell sharply amid the nearly 15-per-cent tumble in shares of BP PLC.

The U.S. government said it has launched criminal and civil investigations into the Gulf spill, which BP has so far failed to stop despite various attempts.

Nexen's market value has fallen 15 per cent since April 23, the day after the Deepwater Horizon rig sank. Shares in a broad range of other independents have also tanked, including sharp drops Tuesday by Noble Energy Inc., Newfield Exploration Co., Walter Energy Inc., and Murphy Oil. Corp.

Nexen says decisions have yet to be made on how to proceed with partner Shell Offshore Inc. on Appomattox, a significant Gulf discovery it announced in March.

But the company says it will feel relatively little impact this year as it has already spent much of its $200-million capital budget in the region.

"We had no rigs drilling in the deep water at the time [the moratorium was announced] so we were not forced to stop suddenly," said Pierre Alvarez, Nexen's vice-president of corporate relations.

Nexen expects the Gulf of Mexico to contribute 10 per cent of its total production this year, although U.S. oil and gas provided less than 5 per cent of corporate cash flow last year.

The Gulf drilling halt "will impact the production outlook for sure," for Nexen, although "it's more a case of delay in what they were doing down there," said Randy Ollenberger, an analyst with BMO Nesbitt Burns Inc.

Still, investors have begun to worry about the longer-term implications of new U.S. offshore drilling regulations. Those have the potential to substantially affect companies like Nexen, so-called "independents" without the financial breadth of supermajors like Shell and BP.

"The question is whether the 'non-majors' can manage the cost pressures from tougher regulations, as well as the delays in monetizing resources caused by longer permitting processes, as effectively as the supermajors," said Robert Johnston, director of energy and natural resources for the Eurasia Group.

Another longer-term worry: changes to the cap on corporate liability in the case of an accident like the Deepwater Horizon. U.S. lawmakers have already discussed raising the current $75-million (U.S.) cap as high as $10-billion.

If that happens, drilling a single well could, "for a company with a lower capitalization, potentially put the whole company at risk," said Guy Caruso, the former administrator of the U.S. Energy Information Administration, who is now a senior energy adviser at the Center for Strategic and International Studies.

Companies could also be on the hook for large bills relating to oil rigs they have committed to use - often at enormous daily rates.

Nexen has signed rig contracts for this year, but Mr. Alvarez declined to comment.

"As we work through the issues, we're not going to speculate or comment on costs, if there are any," he said. "The time to look at new rules and changes will come."

Nexen (NXY)

Close: $22.47, down $1.03