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New drilling rules’ impact goes beyond Big Oil

By CHRIS KAHN (AP) 28 May 2010

NEW YORK — President Obama’s decision to halt new deepwater oil exploration will extend beyond the Gulf of Mexico, affecting boat captains, helicopter pilots, mechanics and others who rely on drilling for their livelihoods.

The industry employs a community of service companies with 75,000 workers in the U.S. Many of them can’t afford to rearrange their plans as easily as oil giants like BP and Shell.

“This can’t be good,” said Mark Cuevas, owner of a crew boat that transports passengers and cargo to deepwater rigs and production platforms in the Gulf. Cuevas’ business focuses on established oil platforms not affected by Obama’s announcement. That business also will suffer as service companies go after a smaller number of drilling contracts.

“We’re a small company,” he said. “We can’t compete with some of these guys.”

Obama announced the dramatic policy changes on Thursday as crews tried to plug BP PLC’s ruptured well off the Louisiana coast. The well ruptured more than a month ago, and scientists estimate it has so far leaked 19 million gallons of oil into the Gulf.

The government’s new drilling rules include a six-month moratorium on permits for deepwater wells. Obama also canceled lease sales in the Gulf and off the coast of Virginia. Companies like Shell Oil were asked to shelve plans to explore offshore near Alaska. Thirty-three deepwater rigs were forced to shut down.

The announcement doesn’t affect existing production of oil and natural gas, however, and it won’t apply to drilling in waters less than 500 feet deep.

Companies that have been probing the ocean floor for new oil sources will feel the impact immediately. The International Association of Drilling Contractors estimated earlier this month that a moratorium on new offshore projects will put at least 50 rigs out of work by the end of June.

Environmental groups cheered the decision. It’s “the first step needed in broader reform of a broken system,” said Vikki Spruill, president and CEO of the Ocean Conservancy. But industry observers point out that it also could lead to layoffs and possible bankruptcies as service companies struggle to adapt.

Analysts with Jeffries & Company said contract drilling companies could see profits slashed by 5 to 15 percent in 2010 and 2011 as oil companies move out of the Gulf. Shares of a variety of companies with ties to offshore exploration tumbled on Friday.

Noble Corp., Ensco PLC, Diamond Offshore Drilling, Schlumberger and Hornbeck Offshore Services saw their stock fall at least 4 percent in afternoon trading. Shares of BP and its partners in the oil spill — Transocean Ltd., Halliburton and Cameron International Corp._ also dropped.

“We’re going to see six months of tough times for the industry — at least,” Jeffries & Company analyst Jud Bailey said. “You’re going to see a lot of people lose jobs or take pay cuts. That means they’re going to spend less money, and that will impact the entire Gulf Coast.”

Shell said that it is evaluating the new drilling rules and how they will affect its exploration business. In a statement, the company said that its plan to drill in Alaska has already undergone “an unprecedented level of review.”

John Hofmeister, former president of Shell Oil and founder of Citizens for Affordable Energy, said Obama is overreacting. Penalizing drillers before investigators conclude what led to the rig explosion that caused the spill is “akin to shutting down the airlines because there’s an anomalous aircraft accident,” he said.

BP, Shell, Anadarko and others will be able to redeploy their drilling operations off the coasts of West Africa, Brazil, the North Sea and other waters. Smaller companies that live off the Gulf will suffer, he said.

Fadel Gheit, an analyst with Oppenheimer & Co. disagreed. Out of work contract workers “have found a good long-term job in the cleanup,” Gheit said. “They’re going to be cleaning up the mess, and that will cost billions of dollars. I think that beats drilling anytime.”


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