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Positive Signs Point to GOM Market Returning to Life After Spill
U.S. Regulators Begin Approving New Gulf of Mexico Projects As Higher Price of Oil Drives Industry Investment

By Susanne Pagano
Sea Technology contributor
Houston, Texas

BW Offshore's BW Pioneer, the first FPSO approved to operate in U.S. waters, will begin oil and gas production soon at Petrobras America Inc.'s Cascade-Chinook field in the Walker Ridge area of the Gulf of Mexico. (Photo credit: BW Offshore)

With oil prices rising slightly over $100 per barrel in the first quarter of 2011, signs indicate the Gulf of Mexico (GOM) region is coming back to life nearly a year after the explosion of the Deepwater Horizon killed 11 rig workers and caused the worst oil spill in U.S. history.

Most offshore-related businesses are slowly recovering from the accident's impact and the subsequent drilling moratorium. As rigs resume drilling and field development projects get back on schedule, many anticipate an uptick in the domestic market in 2011. Oil and gas companies with GOM operations must now operate in a more rigorous regulatory environment to ensure safer exploration and production.

U.S. Regulators Begin to Approve GOM Projects
After the BP plc (London, England) oil spill in the GOM, U.S. regulators began a six-month deepwater drilling moratorium in late May. The Department of the Interior's Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) lifted the ban in October, but said it would grant new permits on the condition that stricter rules and regulations were met.

In the months following, with no deepwater drilling permits being issued, industry representatives called for an end to what they perceived as a 'de facto' moratorium of deepwater drilling. This came to an end in late February after BOEMRE officials permitted Noble Energy (Houston, Texas) to resume drilling the Santiago prospect in Mississippi Canyon area in 6,500 feet of water. A similar permit was issued several days later to BHP Billiton (Melbourne, Australia), and as of early April, the agency had approved eight deepwater well permits. Regulators are expected to approve additional drilling permits over the next several months, a step welcomed by the offshore industry.

New government action was not limited to deepwater drilling. In mid-March, BOEMRE approved the first floating production, storage and offloading (FPSO) facility to operate in U.S. waters. Petrobras America Inc. (Houston) secured the necessary production safety system permit and deepwater operating plan to begin oil and natural gas production at its Cascade-Chinook field offshore Louisiana. The approved FPSO facility is BW Offshore's (Oslo, Norway) BW Pioneer, which is located in the Walker Ridge area in 8,200 feet of water. BW Pioneer, with a production capacity of 80,000 barrels of oil per day and 16 million cubic feet of natural gas per day, features a disconnectable turret buoy that will allow the facility to move off location in the event of a hurricane or tropical storm. Production is expected to commence soon, though the company was experiencing problems in April after a buoyancy can became separated from its Chinook Free Standing Hybrid Riser.

Additionally, the BOEMRE issued a call for information and nominations for future oil and gas lease sales in the Gulf of Mexico's Western and Central Planning Areas for the 2012 to 2017 Outer Continental Shelf leasing program, an indication the government will continue offshore leasing opportunities for energy companies.

Rig Counts in the GOM
As of mid-March, some 69 rigs were under contract in the GOM, but many were not working as they awaited pending drilling permits.

'Sooner or later, additional drilling permits will be issued, and everybody is going to have to adjust their expectation of how long it takes to get a permit with all of the new regulations and requirements,' said ODS-Petrodata Inc.'s (Houston) Tom Marsh, who is vice president of marine and publisher of the company's market intelligence analyses.

Marsh expected the Gulf's shallow-water drilling market to be 'relatively flat' in 2011 because of lower natural gas prices, which have fallen to around $3.80 per million British thermal units.

Strength of the deepwater market hinges on the number of drilling permits issued to oil and gas operators, Marsh said. 'We should see more deepwater permit applications entering and coming out of the system.'

A subsea capping stack, part of the Marine Well Containment Co. interim system, has the ability to shut in oil flow or flow the oil to surface vessels. (Photo credit: Marine Well Containment Co.)

Post-Macondo Spill Containment Equipment
U.S. federal regulators now require oil and gas operators to prove they have access to oil spill containment devices in order to secure drilling permits for wells in water depths greater than 500 feet. In response, two Gulf Coast groups have unveiled specialized subsea equipment designed to rapidly contain and control deepwater oil spills in the GOM.

The Marine Well Containment Co. (MWCC), a nonprofit Houston-based partnership created by four major oil companies—ExxonMobil Corp. (Irving, Texas), ConocoPhillips (Houston), Shell Oil Co. (Houston) and Chevron Corp. (San Ramon, California)—has completed an initial well containment system capable of providing emergency containment response capabilities in the event of a subsea well blowout in water depths up to 8,000 feet. Since its formation was announced in July, BP and Apache Corp. (Houston) have joined the organization.

The MWCC system, available for mobilization within 24 hours of being notified of an incident, includes subsea dispersant injection equipment, manifolds and surface vessels to provide processing and storage of the oil and gas. Technip USA Corp. (Houston) provided front-end engineering and design of the well containment equipment. If deployed, the MWCC system would employ three dedicated oil containment vessels.

Separately, Helix Well Containment Group (Houston), a venture of 20 independent exploration and production companies, developed a containment system that includes subsea equipment and the Q4000 and Helix Producer I vessels to facilitate control and containment of spills in water depths up to 5,600 feet, according to the group. The Helix Fast Response System was specified in the first deepwater drilling permit approved for Noble Energy. Helix used both vessels to respond to the Macondo oil spill last year.

Deepwater response equipment is also being developed abroad. Oil and gas operators in the North Sea commissioned Cameron Ltd. (Leeds, United Kingdom) to manufacture a modular well-capping device that will become a key element of the U.K. offshore industry's oil spill response contingency plans. The cap, suitable for capping up to 75,000 barrels a day in 5,500 feet of water, is scheduled for completion this summer.

In March, the American Petroleum Institute (API) announced the creation of the Center for Offshore Safety, which will promote safety through 'an effective program that addresses management practices, communication and teamwork, and which relies on independent, third-party auditing and verification,' according to Jack Gerard, API president and chief executive officer.

The API said the center, based in Houston, will draw on lessons learned from successful, existing safety programs to meet challenges of oil and gas operations and enhance offshore safety and environmental performance.

Arctic Update
One major accord that attracted worldwide industry interest was the announced strategic global alliance between BP and the state-owned oil company Rosneft (Moscow, Russia). In January, the partners said they would explore and develop three license blocks in the South Kara Sea covering approximately 125,000 square kilometers on the Russian Arctic continental shelf. Under the $16 billion share swap, Rosneft will hold five percent of BP ordinary voting shares in exchange for about 9.5 percent of Rosneft's shares, according to BP. The partners further agreed to continue their joint technical studies in the Russian Arctic to assess hydrocarbon prospects beyond the Kara Sea.

Separately, the BOEMRE recently conducted meetings in Alaska to get local community input in preparation for the agency's draft environmental impact statement on oil and gas leasing opportunities in the Chukchi and Beaufort seas and Cook Inlet planning areas from 2012 through 2017.

While oil and gas companies continue to express interest in Alaska's Arctic region, Shell disclosed in February that it would cancel a 2011 drilling program in Alaska and use the remainder of the year to work with regulators to obtain the permits needed for an exploratory drilling campaign in 2012.

Rigs, FPSOs and Subsea Orders
Several U.S.-based drilling contractors are moving forward with new rig orders. Atwood Oceanics Inc. (Houston) tapped Seoul, South Korea-based Daewoo Shipbuilding and Marine Engineering Co. to construct an ultradeepwater drillship, to be named Atwood Advantage. Delivery of the approximately $500 million rig is planned for September 2013.

Another driller, Diamond Offshore Drilling Ltd. (Houston) exercised an option to build a second ultradeepwater drillship with Ulsan, South Korea-based Hyundai Heavy Industries Co. Ltd. The rig is projected to carry a $590 million price tag and will be designed to drill in 12,000 feet of water. Look for delivery in late 2013. Additionally, Noble Drilling Holding LLC (Zug, Switzerland) entered a contract with Hyun'dai Heavy Industries to build two new deepwater drillships, a deal estimated to cost slightly more than $1 billion.

Dresser-Rand Group Inc. (Houston) disclosed in December a $250 million contract for advanced turbomachinery for five major offshore projects, including an FPSO vessel, a semisubmersible, a tension-leg production platform and two fixed-leg platforms located in various oil and gas fields, from Southeast Asia to the GOM. The compression systems and gas turbine generator packages are expected to be shipped beginning in late 2011 through the second quarter of 2012.

Other domestic and international projects are proceeding. Chevron moved ahead with another phase of its long-anticipated Jack/St. Malo field in the GOM, and it awarded a multimillion-dollar contract to Technip for engineering, fabrication and subsea installation of flow lines, steel catenary risers, manifolds and related equipment.

Separately, Cameron (Houston) secured a sizable order for subsea production systems for a deepwater and offshore gas processing and pipeline project in the South China Sea. Competitor FMC Technologies (Houston) entered an agreement with China National Offshore Oil Corp. (Beijing, China) to manufacture and supply subsea production equipment for the Liuhua 4-1 development project offshore China, a project valued at around $85 million.

Technology Deals Continue
Cameron also signed a memorandum of understanding that will increase the company's future technology cooperation with Petrobras (Rio de Janeiro, Brazil). The company said it will enhance its research and development efforts in the country through a $30 million investment in facilities that will support Brazilian exploration and production activities. Cameron said it will add leading-edge testing capabilities at its Jacarei plant in the Brazilian state of S'o Paulo and set up a new joint center for technology development at a university there, Universidade Estadual de Campinas.

Rig Market Update
An estimated 138 rigs are under construction, on order or planned worldwide, including jackups, semisubmersibles and drillships, with delivery dates ranging from 2011 through 2013, according to ODS-Petrodata. Approximately 51 rigs will be delivered over the next eight months. The current worldwide rig fleet includes about 793 units.

Daily charter rates for certain classifications of rigs have improved slightly in recent months. Jackups working in the GOM are commanding rates ranging from the mid-$30,000s to the low $100,000s a day. Rates of semisubmersibles designed for deepwater drilling range from around $200,000 to $480,000, depending on the rig's water-depth capabilities. In the worldwide market, semisubmersible rates range from the high $200,000s to the high $400,000s a day. Jackup rates vary from about $75,000 to $130,000, depending on the specific market and the rig's water-depth rating.

Earlier in the year, rig owner Ensco plc (London, England) agreed to acquire competitor Pride International (Houston) for $7.3 billion, a deal that would create the world's second-largest oil and gas drilling contractor with a combined fleet of 74 rigs.

Additionally, global exploration and production spending should rise by an estimated 11 percent to $490 billion in 2011, Barclays Capital reported in its latest energy and production spending survey of 402 oil and gas companies. The increase is led by spending gains in Latin America, the Middle East/North Africa and Southeast Asia.

Other Highlights
Companies reported notable international contract awards in the first quarter of 2011. McDermott International Inc. (Houston) signed orders valued at more than $700 million to provide engineering and related services for platforms and subsea facilities to be installed in the Arabian Sea, Indian Ocean and the Caspian Sea.

Energy companies continue to express a strong interest in deepwater markets offshore Brazil and West Africa. New natural gas play has been logged off Mauritania and Ghana while discoveries have been reported in the Santos Basin offshore Brazil.

Susanne Pagano, a frequent contributor to the magazine, has more than 25 years of experience covering the oil and gas industry and was editor of a weekly international energy newsletter.

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