It wasn't so long ago that the Obama administration was warming up to offshore drilling, with its proposal to open up new development areas both in the eastern Gulf of Mexico and along the central and southern Atlantic seaboard. Following the BP (NYSE:BP) spill in the Gulf, however, there's little enthusiasm left for this policy. The administration this week announced its decision to keep the aforementioned areas off-limits until at least 2017.
In addition to maintaining this moratorium, the administration is also delaying two western and central Gulf lease sales currently scheduled for March and August 2011. This will give the Department of the Interior time to conduct thorough environmental impact studies. Next year could therefore be the first since 1965 to see no new lease sales.
Interior Secretary Ken Salazar was quoted as saying, "There's plenty of opportunity for oil and gas companies to go out and develop these additional resources," referring to the leases already in hand. That might be true, were these companies able to actually secure permits to drill these prospects. It appears they are making little headway in getting the green light from the government, however.
As of Monday, there were 13 active deepwater rigs in the Gulf, the same number as at the beginning of November. There has only been one new well permit granted since the lifting of the deepwater moratorium in October, and it's for a water injection well to be drilled by BHP Billiton (NYSE:BHP). This activity, used to increase production from a developed reservoir, was allowed during the moratorium, so it isn't very notable progress.
The current permitting situation puts a strain on both E&Ps -- and especially the contractors they hire to drill these wells. Let's take a look at a few select situations that reflect the overall scene.
Pride International's (NYSE:PDE) new Deep Ocean Ascension drillship arrived in the Gulf back in May, and was supposed to go to work for BP following final testing and acceptance procedures. The rig has been receiving a standby rate of $360,000 per day, which isn't the worst thing in the world, but it's supposed to be earning $540,189 per day.
Pride is now waiting for mobilization instructions from BP, which I'm thinking is likely to at least temporarily pull this rig out of the Gulf, as it has another Pride rig, the Deep Ocean Clarion, currently en route. This would mirror what's currently happening with a new Ensco (NYSE:ESV) rig under contract with Cobalt International Energy (NYSE:CIE). The latter firm must see little chance of getting a Gulf permit any time soon, as it's decided to sublet the ENSCO 8503 to Tullow Oil (OTCPK:TUWOY) and its partners in French Guiana for an approximate three-month gig.
As for Noble (NYSE:NE), the company has announced that its client Marathon Oil (NYSE:MRO) is seeking to invoke a termination clause if the Noble Jim Day rig isn't ready to start working as of Dec. 31. Even if the rig is ready in time, Marathon is also trying to declare force majeure as a result of the permitting situation. Basically, Marathon is doing everything it can to get out of this contract. Hopefully, the companies will be able to work out some arrangement, whether it's a reduced standby rate or a sublet. Even Nexen (NXY), which appeared to be playing hardball with Ensco, has agreed to a special (undisclosed) negotiated rate.
Hanging in there
These circumstances are no doubt causing some strained relationships in the industry, but the operators certainly have an interest in keeping the drilling contractors financially healthy. The last thing Chevron (NYSE:CVX) wants to do is maintain its own drilling fleet. I think the contractors also generally have very strong contracts in force, and will continue to secure reasonable standby rates as the permitting purgatory continues.
I think investors in these offshore names are right to hang on to their shares, as the long-term industry outlook remains strong. 2011 looks to be no picnic, though, and patience is required.
Disclosure: Author has no positions in companies mentioned.