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January 2011 Issue

Signs of Optimism Return to Gulf After Deepwater Horizon

By Susanne Pagano
Sea Technology Contributor
Houston, Texas

Nine months after the worst oil spill in U.S. history sent shockwaves throughout the Gulf of Mexico's energy sector, signs of optimism are returning to the marketplace. Immediately following the April 20 explosion aboard Transocean Ltd.'s (Geneva, Switzerland) fifth-generation ultradeepwater semisubmersible, the Deepwater Horizon, domestic exploration activities came to an abrupt halt. The foremost goal was to cap the runaway Macondo well, an unprecedented task finally achieved by a diverse team of scientists, engineers, academic scholars and technical experts. Once the well was finally officially declared killed, the industry turned its efforts toward ramping up domestic drilling and field-development activities in the context of the new federal regulatory environment.

Within seven weeks of the accident, the U.S. Department of the Interior issued a directive to oil and gas operators implementing stronger safety requirements for shallow-water and deepwater drilling operations. Energy companies must now certify that offshore drilling is in compliance with more stringent operating regulations, including the ability to quickly contain a blowout. Additionally, operators must adhere to new inspection and reporting requirements for all blowout preventers and well control system configurations, which are key targets in ongoing investigations into what led to the rig explosion and spill.

With the oil and gas industry transitioning to more restrictive federal drilling rules and enhanced offshore safety standards, there appears to be optimism that the offshore market in the gulf will bounce back in 2011.

Although the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEM) lifted the temporary moratorium on deepwater drilling imposed after the Deepwater Horizon accident, the agency has been slow in processing and approving drilling permits, triggering frustration in the energy sector. Federal regulators say the reforms will raise the bar for safety and environmental protection in the offshore industry.

Between June and December, BOEM said it had approved 16 new shallow-water drilling permits and 48 revised applications for existing wells. Trade organizations representing energy businesses and contractors continue to encourage federal agencies to hasten the permitting process so that normal operations can resume.

Another major development in 2010 occurred in December, when the Department of the Interior backed off an aggressive strategy announced earlier in the year that would have opened new areas for exploration off the United States. As a result of this decision, areas offshore Florida's west coast in the Eastern Gulf of Mexico and in the Mid and South-Atlantic planning areas will remain off limits for drilling and potential development through 2017.

Impacts Continue From BP Spill
Effects of the Deepwater Horizon are far from over. Multiple investigations are under way to determine the root cause of the spill. BP plc (London, England) and rig owner Transocean are conducting internal investigations. Other queries are in progress by the National Academy of Engineering and the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. Initial reports are scheduled to be released this year.

Shortly after the accident, four of the major energy companies disclosed plans to accelerate the engineering, construction and deployment of equipment designed to improve capabilities to contain a potential future underwater blowout in the Gulf of Mexico. Chevron (San Ramon, California), Conoco Phillips (Houston, Texas), Exxon Mobil Corp. (Irving, Texas) and Shell Oil Co. (Houston) set up the nonprofit Marine Well Containment Co. and agreed to pool $1 billion to build specialized equipment suited for use on a wide range of well designs, oil and gas flow rates, and weather conditions. The containment equipment will be engineered for use in water depths of up to 10,000 feet with initial capacity to contain 100,000 barrels per day. BP later announced its intent to join the venture and make its underwater well containment equipment available to all oil and gas companies operating in the U.S. gulf.

Some companies mobilized their deepwater rigs in the Gulf of Mexico during the moratorium to more lucrative regions. Transocean disclosed that it would move two rigs from the Gulf of Mexico to Egypt and West Africa. Another deepwater driller, Diamond Offshore Drilling Inc. (Houston) similarly moved two rigs for contracts in the same regions. It is uncertain when these units might return to the domestic market.

Higher drilling and production costs associated with new mandates, among other uncertainties related to the more complicated regulatory regime, could prompt some energy companies to shift investment overseas.

A Look Back at 2010
In the latter part of the year, oil and gas companies commenced work on several deepwater projects. Shell committed to its Mars B deepwater development 130 miles south of New Orleans, Louisiana. A tension-leg platform, named Olympus, will be built to enhance recovery from the prolific Mars field. Chevron Corp. sanctioned its $7.5 billion Jack/St. Malo deepwater project offshore Louisiana. Chevron said the development will encompass three subsea centers tied back to a hub facility. Separately, Houston-based Anadarko Petroleum Corp. announced plans for its Caesar Tonga field in the Gulf of Mexico.

In one new project, Marathon Oil (Houston) started production on its deepwater Droshky development in the Gulf's Green Canyon area. Internationally, new drilling programs began offshore Greenland, East Africa, Russia and the Caspian Sea.

Additionally, a significant merger and a lease acquisition highlighted the last quarter of the year. Apache Corp. (Houston) acquired small independent oil company Mariner Energy Inc. (Houston), a lessee of numerous deepwater tracts in the Gulf of Mexico. Another small energy company, Energy XXI USA Inc. (Houston), announced a $1 billion deal to acquire a group of shallow-water fields from Exxon'Mobil.

A few new drilling rigs began operations over the past 12 months. One new rig entering the global offshore fleet is a Stavanger, Norway-based Seadrill Management AS ultradeepwater drillship, the West Gemini. The rig initially worked offshore Angola.

Several new jackup rig orders were finalized during the year. Seadrill placed orders for a pair of high-specification units with Dalian Shipbuilding Industry Offshore Co. Ltd. (Dalian, China) that were designed by Friede & Goldman Ltd. (Houston). Deliveries are scheduled for late 2012 and first quarter 2013, respectively. Additionally, Atwood Oceanics Pacific Ltd., a subsidiary of Atwood Oceanics (Houston), contracted with Singapore-based fabricator PPL Shipyard Pte. Ltd. to build two premium Pacific-class rigs rated to drill in 400 feet of water. Deliveries are slated for fourth quarter 2012. Each rig carries an approximate $190 million price tag.

Late in the year, DryShips Inc. (Athens, Greece) secured an option with an unnamed South Korean shipyard to construct up to four modern ultradeepwater drillships at an estimated cost of around $600 million per rig, company officials said. Each of the four options can be exercised within 12 months, with deliveries possible in 2013 and 2014.

Utilization of the global fleet of 785 drilling rigs hovered in the low 70 percent range toward the end of the year, according to consulting group ODS-Petrodata (Houston). The rig fleet expanded by 37 units over the past year. Approximately 122 offshore mobile drilling units are based in the Gulf of Mexico, of which 63 were under contract to oil and gas companies at year's end.

In the last fiscal quarter of 2010, day rates of shallow water jackups ranged from about $40,000 for older-generation rigs to $180,000 for high-specification premium units, excluding the North Sea region, ODS-Petrodata said.

Jackup rates vary by the market region and individual contract terms. Worldwide daily charter rates for modern deepwater floating rigs ranged from about $225,000 to $450,000.

Outlook for 2011
Without question, oil and gas operators remain committed to the Gulf of Mexico. However, it is difficult to forecast market conditions for the gulf over the next 12 months, said ODS-Petrodata's Tom Marsh, vice president-marine.

'It is going to take a while for the deepwater market in the Gulf of Mexico to crank back up,' Marsh said. 'The process of getting permits is so extended now.'

The 2011 rig market in the gulf will depend on how quickly the government approves drilling permits, Marsh said. The domestic offshore lease sale will be delayed until 2012, he added.

Overall, Marsh noted, the gulf's jackup market is beginning to pick up. The actual count for that type of rig was several units ahead of jackup utilization in late 2009, even though the blowout intervened, he said. On the other hand, just six of the gulf's 36 floating deepwater rigs were working in December, compared to 30 out of 36 floaters a year earlier, Marsh said.

Early in the new year, crude prices are projected to hover in the $70 to $80 per barrel range, with natural gas prices possibly increasing to more than $4 per million British thermal units. These price levels are high enough to enable continued exploration and development of many promising oil and gas discoveries.

Market Bright Spots
Deepwater drilling, new products and technology, and related opportunities in the global market will be the year's bright spots.

New ultradeepwater rig orders are anticipated, including several for the Brazilian market. New rigs, including deepwater drilling units, are slated for delivery. Some of these remain available for charter.

Oilfield equipment and service businesses, including those who provide advanced subsea completion systems, expect strong activity in various hot spots, including Brazil and West Africa. Longer term, many believe demand will improve offshore India and China.

Operators also are expected to show renewed interest in Arctic projects in 2011.

Additionally, various countries, including Brazil, Norway and the United Kingdom, are expected to award oil and gas concessions. Drilling is also expected to begin off Cuba's west coast.

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