Short term impact of BP oil spill negligible

By Brad Smith | July 15, 2010
June 25The Minerals Management Service issued new safety guidelines June 8 for offshore drilling. Deepwater drilling remains halted by the moratorium while President Obama's independent commission investigates. Shallow water drilling permits were halted, and in some cases revoked, while new standards are devised. Drillers must follow seven new MMS safety regulations to resume drilling in waters less than 500 feet deep, including demonstrating the ability to shut in a well at multiple stages under different circumstances with verification tests certified by third party engineers.

For natural gas, the short term effect of the spill and moratorium is negligible. The spill is northeast of the primary Gulf production and, thus far, has resulted in precautionary shut downs of only a handful of wells. The Energy Information Agency estimates the six month moratorium will reduce output by an inconsequential 8 bcf and 74 bcf in 2010 and 2011, respectively, which will easily be displaced by onshore production. Deepwater represents the primary growth area for Gulf oil and gas production, and the acknowledged risks have obviously increased. Politically, the climate will move quickly toward domestic rather than reverting to Middle Eastern. Large E&Ps will move toward the lower risk, stable returns of onshore gas production. The move from offshore to onshore natural gas production has been underway with more than $60 billion in shale acquisitions and joint ventures since 2008, and the pace is likely to quicken.

For oil production, the EIA estimates cumulative reductions averaging 9,000 barrels per day (b/d) in September to 80,000 b/d by December 2011, which is not likely to change fundamentals, considering inventories and high spare capacity. It is unclear whether the moratorium will be lifted after six months, and there is talk of higher liability caps, insurance premiums and costs for retrieving drilling equipment as well as new regulations and increased equipment costs. Anadarko has told shareholders it will move three of its deepwater rigs "from the Gulf to other areas of our global portfolio." Noble and Transocean have expressed confidence that the moratorium is temporary. I suspect the moratorium will be lifted sooner rather than later as political pressure mounts over the effect on locals of destroying the environment and then creating layoffs in the region's primary industry.