The extended duration of the oil spill from BP’s Macondo well completely floored operators and service companies working the deepwater Gulf of Mexico.
Maybe that’s why so many of them said the subsequent moratorium on deepwater exploration felt like being kicked while you’re down.
Four major players scrambled to put together a $1 billion spill-containment response system for the deepwater Gulf, and some companies issued dire predictions of an aftermath from the spill.
Those affected by the event expressed themselves from different perspectives:
♦“The potential for removal of the liability cap for claims of damages from oil spills, and/or the enactment of onerous rules and regulations regarding activities in the deepwater Gulf of Mexico could significantly alter our industry,” Noble Energy Corp. reported. “Such rules could effectively limit which companies can operate in the deepwater Gulf.”
♦ T. Paul Bulmahn, chairman and CEO of ATP Oil & Gas Corp. – a significant explorer in Gulf waters – talked about the seriousness of an accident in which 11 lives were lost.
“As nothing compares to the tragedy of loss of life, we also ask that no one forget the estimated 45,000 workers and the families of those workers that will find themselves unemployed as a result of the imposed deepwater work stoppage," he said.
♦ Offshore crews hoped their unemployment would be temporary, limited to the extent of the drilling moratorium.
And for the most part, oil companies continued to push forward their Gulf of Mexico exploration plans in the face of the delay.
♦“The drilling moratorium has impacted our offshore Gulf of Mexico operations in several ways. We expect some lost production in 2010 due to permitting delays on the shelf and a slower ramp-up at Perdido,” said George Kirkland, executive vice president, global upstream and gas for Chevron Corp., in discussing the company's second-quarter results.
“Although the longer-term impact of the moratorium remains unknown, we are focused on progressing our projects in the deepwater Gulf of Mexico,” he added. “The Tahiti 2, Jack-St. Malo and Big Foot projects remain on track to reach FID (final investment decision) later this year, assuming the moratorium is lifted.”
♦Anadarko Petroleum Corp., a 25 percent partner in the Macondo well, reported it had $3.3 billion of unproved property acquisition costs and $377 million in exploratory drilling costs that were affected by the Gulf moratorium.
The company said no impairment of those properties had been recognized and its “intent to continue exploration and development of these properties is unchanged at this time.”
Reacting to the moratorium created something of a dilemma for Gulf players.
Companies active in the deepwater quickly emphasized their own safety records – except for BP – and downplayed the potential effect of the moratorium on their financial results.
At the same time, they warned that the suspension of activity and imposition of stricter regulations could have a materially negative impact on their future.
Financial effects of the spill quickly spread through the industry.
♦ Halliburton estimated that the deepwater suspension would lower its earnings by 5 to 8 cents per share for each quarter for the remainder of 2010.
♦ Baker Hughes said the drilling moratorium reduced its earnings by 3 cents per share during the second quarter and had a potential negative impact of 8 to11 cents a share per quarter in the second half of the year.
♦ Noble Energy announced, “As a result of the moratorium, we entered into an agreement to terminate our contract for the Noble Clyde Boudreaux drilling rig and recognized rig contract termination expense of $26 million during second quarter 2010.”
The company suspended operations on an exploration well at the Santiago prospect (Galapagos project) in the Gulf and a sidetrack to an exploration well at the Deep Blue prospect, and temporarily abandoned both locations.
One of the early casualties of the Gulf spill was the U.S. Minerals Management Service. In May, the Interior Department announced that the service would be restructured. It was renamed the Bureau of Ocean Energy Management, Regulation and Enforcement.
Initial plans called for breaking up the agency into three departments, the Bureau of Ocean Energy Management, the Bureau of Safety and Environmental Enforcement and the Office of Natural Resources Revenue.
Key to those plans was the idea of separating the environmental and safety arm of the new bureau from the leasing and revenue operations. Michael Bromwich, a former inspector general of the Justice Department, became head of the new bureau and leader of the reorganization effort in June.
By August, industry developments resulting from the oil spill and the deepwater moratorium included three major elements, in addition to spill containment and clean-up efforts:
ExxonMobil, Shell, Chevron and ConocoPhillips announced in July they would each commit $250 million toward creation of the nonprofit Marine Well Containment Co., to operate and maintain a spill response system for the Gulf of Mexico.
The planned system would be capable of containing up to 100,000 barrels of oil per day, functional in up to 10,000 feet of water depth and deployable within 24 hours.
It would capture all flowing oil and feed it to one or more capture vessels through a system of jumpers, manifolds and risers, and include capture caisson assemblies to enclose a damaged connector or leak outside the well casing.
ExxonMobil was named project leader on behalf of the sponsor companies. Plans called for existing equipment to be secured for the response system within six months, with specially made equipment finished and the system operational within 18 months.
BP said in July it would sell up to $30 billion of assets during the following year and a half, primarily from its upstream business. The company took a charge of $32.2 billion to reflect costs related to the Macondo spill.
Apache Corp. agreed to pay $7 billion to acquire all of BP's oil and gas operations, acreage and infrastructure in the Permian Basin of west Texas and New Mexico and Egypt's Western Desert, plus most of BP's upstream natural gas business in western Alberta and British Columbia. The deal included estimated proved reserves of 385 million barrels of oil equivalent.
BP could offer a stake in its Prudhoe Bay operations in Alaska, reportedly part of but then excluded from the Apache acquisition. It also may offer assets in Vietnam, Pakistan and Colombia for sale.
In addition to negative public opinion and the possibility of operating restrictions in the Gulf, deepwater explorers expressed concern about the higher perceived risks of drilling.
“The ability to insure such risks is limited by the capacity of the applicable insurance markets, which may not be sufficient to cover the likely cost of a major adverse operating event such as a deepwater well blowout,” ExxonMobil said.
“Small and medium-sized oil and gas companies might not be able to obtain insurance coverage at economically appropriate levels or meet financial responsibility requirements and would have to exit the deepwater Gulf of Mexico,” Noble Energy warned.
One proposed solution would have companies acquiring their own liability coverage up to $1 billion, then paying into a cooperative insurance pool for additional coverage. That money would be available to a contributing operator that experienced a catastrophic accident, blowout or spill.
Jim Mulva, chairman and CEO of ConocoPhillips, was asked about the possibility of a changed liability cap and a cooperative insurance approach during a discussion with industry analysts.
“The oil spill insurance fund, we have to make sure that whatever we do, if there are changes to it, it’s done in a way that those funds if collected are really used in the case of a very unfortunate, tragic incident,” Mulva responded.
“That is what they need to be used for, and more of a collective mutual insurance by the industry to the extent you pay in, than to be a vehicle by which the government collects money from the industry and then uses it for things other than its intended purpose,” he said.
An obstacle to cooperative insurance coverage may be the industry’s attitude about responsibility for serious accidents in deepwater. BP was widely criticized by other operators and accused of lax operations leading to the Gulf oil spill.
“We believe the investigations of this tragedy,” Kirkland said, “will show that it was preventable.”