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Oct 13, 2010 10:13 PM by Alison Haynes

Gulf moratorium is over but drilling has to wait

NEW ORLEANS (AP) - A day after the end of the federal moratorium on deepwater drilling, the Gulf oil industry was a mix of furious activity and tortured waiting around.
Companies that are helping the industry meet new regulations are scrambling to keep up with increased business while oil-rig workers must remain idle until the new requirements are met.
Industry officials fear that's the way things will be for months to come.
The Obama administration lifted its moratorium on deepwater drilling six weeks earlier than expected. But a combination of bureaucratic and technological hurdles means it will be months before most of the two dozen rigs idled by the moratorium resume drilling.
"There's a big difference between lifting the moratorium and getting back to work," said Marvin Odum, president of Shell Oil, which is eager to get its six rigs drilling again in the Gulf.
One company that won't yet divulge its plans for new deepwater drilling in the Gulf is BP PLC. The British oil company leased the rig that exploded on April 20, killing 11 people and leading to the largest offshore oil spill in U.S. history. Five weeks later, the government imposed the moratorium.
Analysts say the new rules could have a long-term effect on Gulf drilling activity. One analyst predicts they could lead to a 17 percent reduction in Gulf oil production by 2015.
Among the industry's biggest concerns include how regulators will conduct environmental reviews of projects and how they will require companies to plan for worst-case oil spill scenarios. Officials also are braced for new rules that get written as more is learned about the rig explosion.
In the meantime, some companies that support the industry are racing to perform the extra work required to meet some of the new regulations enacted since June.
For example, one new rule requires that operators use a third part to certify equipment that prevents a well from blowing out. Such a device, called a blowout preventer, failed to stop the BP spill. Michael Montgomery, president of West Engineering Services,
does this work and would love to help-when he can get to it.
"We are backed up," he says. "We're busy around here, and we're staffing up as quickly as possible."
Others are busy too. Part of the certification process, especially for older equipment, requires bringing the equipment back to shore, disassembling it, and putting it back together. During that process, replacement parts have to be ordered and installed, and then the whole mechanism needs to be tested.
Then the paperwork needs to be gathered, and government inspectors must inspect every rig.
Bureau of Ocean Energy Management director Michael Bromwich said Tuesday that he could see some new deepwater drilling permits being approved by the end of the year. But he wouldn't say exactly when or how many permits he expects to issue.
He vowed the inspections would happen promptly even though the bureau has a limited number of people to do the job. That lack of manpower concerns drillers itching to get back to work.
Bromwich said what could slow things down is the time oil and gas companies are going to need to have their applications in order. And his agency will need time to ensure the paperwork complies with all the new rules.
Meanwhile, the rig operators and others wait.
Helicopter transport company PHI Inc. was initially kept busy through a contract with BP to fly workers out to the site of the oil spill. Richard Rovinelli, PHI's chief administrative officer, now expects it to be several months before his business returns to pre-spill levels.
Industry executives aren't worried about getting their paperwork in order. Instead, they fear regulators will be overly cautious given the scope of the recent disaster.
"Every employee of BOEM regional offices is terrified of losing their job for making a decision," said Lee Hunt, chief executive of the International Association of Drilling Contractors. "Nobody's bold enough to go out and issue a drilling permit."
The impact of all the confusion and delay on U.S. oil production isn't immediate because the government didn't ban production during the moratorium. This year U.S. production is expected to rise by 2 percent because of output in the Gulf continued and there was a
sharp increase in production in North Dakota.
The Energy Information Administration expects production to fall in the Gulf to fall by 170,000 barrels per day next year. Overall U.S. production will drop just 1 percent, to 5.4 million barrels per day, because production in the lower 48 states is expected to
grow by 130,000 barrels per day.
As drilling is delayed, however, the effect on U.S. production starts to add up. Matthew Snyder, a Gulf of Mexico analyst at the consulting and analysis firm Wood Mackenzie predicts that Gulf production could be reduced by 340,000 barrels per day by 2015, 17 percent less than what was predicted before the BP disaster.
The government estimates that the new rules and regulations will cost the industry $180 million per year.
Analysts say costs will grow with the length of time it ultimately takes to get permits. The part of the process that could delay things most is the environmental review of drilling applications. Prior to April, most new projects did not have to go through a full environmental review because they were similar to
other nearby projects that had already been studied. Now each project will have to be evaluated separately. It is unclear how detailed a review the government will require.
Benjamin Salisbury, an analyst at FBR Capital markets, predicts that drilling activity will return to about half of what it was before the Deepwater Horizon incident by the end of next year.
The speed at which drilling projects resume will determine how quickly idle rig workers get back to work. According to the charity that runs a $100 million fund set up by BP for workers affected by the moratorium, many were kept on the payroll by their employers. That explains why only 623 of an expected 9,000 applied for grants. The charity has said it plans to offer a second round of grants - this time to workers who support the deepwater rigs.
If deepwater drillers have an experience similar to shallow water drillers, who had a drilling ban lifted at the end of May, it could be quite a while before things get back to normal.
Jim Noe, Executive Director of the Shallow Water Energy Coalition, says the government had been issuing 10 to 15 drilling permits per month. Since the shallow-water moratorium was lifted, only seven permits have been issued.
"It is a completely hollow gesture to lift the deepwater moratorium," said Noe. Shallow water drillers "haven't been allowed to get back to work, and our rigs are simple compared with" those used by deepwater drillers.

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