Markets

Big Oil's Plan to Survive the Gulf of Mexico Spill: Let's Get Outta Here

By Kirsten Korosec

Updated on: June 3, 2010 / 5:27 PM EDT / MoneyWatch

The Gulf oil spill has plenty of victims on its hit list: the 11 workers who died on the Deepwater Horizon oil rig; the seafood industry; tourism dollars; and marine life. And now, the rest of the offshore drilling industry.

Analysts and industry-folk have warned for weeks about the impending doom that faces the rest of the offshore drilling industry in the Gulf of Mexico. But it was mere speculation until President Obama issued last week a six-month moratorium on exploratory drilling in the Gulf to allow a commission to review and recommend better safety regulations.

The moratorium may be a necessary step to ensure another disaster like the BP oil spill doesn't happen again. But that doesn't change the profound affect the moratorium will have on the industry far beyond the six-month time frame. In short, companies are losing money and many are choosing to get the heck out of Dodge before they lose anymore.

Here's why.

Nuts and bolts of the moratorium The moratorium initially applied to exploratory drilling at 33 deepwater wells in the Gulf of Mexico. The moratorium applies to exploratory drilling in Gulf waters at 500 feet or deeper. This means that more than 33 deepwater wells could be shut down because the initial list included only rigs drilling in more than 1,000 feet of water, the Times Picayune noted this week. The Interior Department is expected to prepare a more detailed list of the affected drilling operations.

Who's affected? The financial sting will be felt immediately by the companies that were leasing those exploratory drilling rigs. Chevron (CVX), Shell (RDS) and Anadarko are among companies affected by the moratorium. Other companies affected by the moratorium include Exxon (XOM), which had two projects scheduled to start last month, BHP Billiton, which idled five of its rigs, and Cobalt International Energy, which is pulling up stakes in one of its projects.

The financial losses will add up quickly. Floating deepwater rigs lease for anywhere between $250,000 to $500,000 a day. Prior to the explosion, BP was leasing the Deepwater Horizon rig from Transocean (RIG) for some $458,000 a day and the adjustable rate was set to hit $517,000 a day this September. That adds up to between $8.3 million and $16.5 million in lost revenue each day, according to the Louisiana Mid-Continent Oil and Gas Association. And that's just for the rig leasing. Lost wages could hit $330 million, the Times-Picayune noted. Although many employees who work for larger companies will be transferred to other projects.

Offshore drilling in the Gulf is not only a direct employer, it also supports all kinds of secondary businesses, like catering services, making it more difficult to quantify total losses. What is clear is that a number of oil and gas companies -- and the oil field services businesses, like Halliburton (HAL), that support them -- have been forced to shut down drilling operations or cancel projects that were scheduled to begin this summer. The larger companies, like Exxon (XOM) and Halliburton will be able to relocate workers to other projects. Halliburton and Baker Hughes, for example, said this week it will relocate workers and equipment to shallow operations in the Gulf, North American land drilling projects and Brazil.

Long-term impact Here's where it gets dicey. Offshore drilling companies won't be back drilling in the Gulf the day after the moratorium ends. Exploration projects don't work that way. If a company has to shut down a project, it will place its resources and effort somewhere else. Exploratory projects take time. Which means it could be more than a year -- some analysts say as many as three -- before an oil and gas company has the resources to return to the Gulf's deepwater projects.

This isn't merely speculation. Anadarko Chairman and CEO Jim Hackett said Thursday management is "evaluating opportunities to reallocate some of the 2010 capital from the Gulf to other areas of our global portfolio, including our numerous onshore liquids-rick opportunities."

Anadarko, which is a minority owner of the BP well that is gushing up to 19,000 barrels of oil a day into the Gulf, has declared force majeure to drilling contractors for three rigs. Force majeure is a provision included in most large contract that allows them to be canceled in the event of an extraordinary circumstance. Cobalt International also invoked the force majeure provision this week and estimated the financial impact at $15 million. Cobalt's decision also impacts Diamond Offshore (DO.N), which owns the rig Cobalt was going to lease.

And there's an impact to the rest of us taxpayers as well. Royalties from oil and gas are paid to the U.S. government. The moratorium will likely make seven current discoveries uneconomical to produce, notes Greenwire. That puts $7.6 billion in future government revenues in question.

All of this highlights just how entangled the U.S. economy is with oil and gas. It goes far beyond our massive appetite for fossil fuels. Whole economies, such as Louisiana are built on the continuation of an industry we no longer completely trust. And any proposed substitute, such as renewables, isn't anywhere near big enough yet to replace the total loss in jobs and revenue.

Photo of closed sign from Flickr user runran, CC 2.0 Related: