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Exodus of Rigs Hasn’t Happened

THE WALL STREET JOURNAL

JULY 21, 2010

By ANGEL GONZALEZ

Agence France-Presse/Getty Images: An undated photo of a drilling rig in the Gulf of Mexico.

The recent transfer of two deepwater drilling rigs from the Gulf of Mexico to waters elsewhere prompted critics of a government drilling ban to repeat predictions of a mass flight that would wreck the region’s economy and severely curtail U.S. energy production.

But nearly eight weeks after Interior Secretary Ken Salazar announced a six-month moratorium on deepwater drilling, 31 of the 33 rigs that were operating in the Gulf when the Deepwater Horizon exploded remain there.

While at least one other rig could be moved soon, several experts say an exodus is unlikely. Oil companies have found few other promising reservoirs where they could immediately transfer their rigs. Moreover, an expected surplus of newly built rigs next year will make it easier to replace rigs that do leave.

“The dire predictions will not come to pass,” said Amy Myers Jaffe, head of the Baker Institute Energy Forum at Rice University.

Oil companies are finding formulas to keep leased rigs in the area, such as agreeing to pay standby fees to drilling contractors or doing maintenance or other work unrestricted by the ban. Two oil-industry analysts predict that only about one-fourth to one-third of the Gulf’s deepwater rigs will end up leaving, and many will eventually return or be replaced.

Joe White discusses why BP is considering yet another method to kill its ruptured Gulf of Mexico oil well amid concerns that the cap it installed last week could allow oil and gas to seep out the sides.

“There’s no reason rigs won’t migrate back,” said Tom Kellock, a consultant for ODS-Petrodata, a company providing market intelligence to the oil and gas industry.

The equation could change if drilling is restricted beyond November, or if oil companies find the new regulations unpalatable. But right now oil companies are taking a wait-and-see attitude before changing drilling plans, even as they vehemently oppose the moratorium. The Gulf’s rich deepwater reservoirs are critical to the growth plans of behemoths such as Chevron Corp. and Royal Dutch Shell PLC. So they are working with drilling companies, which own the rigs, to try to keep many of them in the Gulf.

“We will resume our activities in the Gulf when we can,” said Statoil ASA spokesman Ola Morten Aanestad.

The suspension of drilling activities and strengthening of oversight have become key issues for the Obama administration, which saw an initial moratorium from May 27 struck down by federal courts. A new moratorium, expiring on Nov. 30, was put in place July 12, riling oil-industry executives and Gulf Coast officials who say it will cost the region thousands of jobs.

“We’ve already seen rigs leaving, and heard talk of others making plans to move units,” said Mike Killalea, a spokesman for the International Association of Drilling Contractors, a trade group. “We’ll export an entire high-technology industry.”

U.S. authorities say a pause in drilling is needed until the causes of the catastrophic April BP PLC well blowout are known. The explosion killed 11 people and unleashed the worst offshore oil spill in U.S. history.

At lease rates of about $500,000 a day, drilling contractors and oil companies have strong incentives to find work for idle rigs elsewhere. The departure to Egypt and Congo of two Diamond Offshore Drilling Inc. rigs in the past two weeks, which stirred concerns of moratorium critics, and the idling of other units is prompting the company to cut 250 jobs, Chief Executive Larry Dickerson said.

The Houston-based drilling contractor, which sued the federal government over the moratorium, is trying to market other idle Gulf rigs abroad, Mr. Dickerson said. “We’re having a smaller and smaller Gulf presence,” he said. Diamond has four other deepwater drilling rigs in the Gulf.

Noble Corp. is also marketing an idle deepwater rig abroad, Chief Executive David Williams said in an earnings call Tuesday. Another drilling contractor and an oil company are in talks to transfer a rig abroad under an existing contract, said ODS-Petrodata’s Mr. Kellock.

But vessels come and go. Four rigs have actually arrived since the May 27 moratorium announcement, Mr. Kellock said.

Some oil and gas companies have struck deals with drilling contractors to keep rigs close by while they wait out the moratorium. Shell, which has four leased deepwater rigs in the Gulf, or about 40% of its global deepwater fleet, is paying standby fees to Noble and Transocean Ltd. to keep critical staff employed and to allow for a quick restart of its drilling program. “These are high-performing rigs with great people and we have a clear desire to keep them in our fleet,” Shell said in a statement.

Australia-based BHP Billiton Petroleum, a unit of BHP Billiton Ltd., also agreed to a standby fee with Transocean.

Smaller companies are in on the act as well. Noble Energy Inc. reached an agreement to pay Noble Corp. $145,000 a day to keep a drilling rig in the Gulf for as long as restrictions last. (The companies are not related.)

Other companies are playing hardball to negotiate cheaper rates, said Joe Hill, an analyst with energy investment bank Tudor Pickering Holt. Statoil, Eni SpA, Anadarko Petroleum Corp. and Chevron have sought to cancel their normal obligations on some contracts. Such force majeure declarations are opposed by drilling contractors.

“It’s all negotiation,” Mr. Hill said.

The fate of Gulf deepwater drilling may ultimately depend on whether oil companies perceive that the ban will be extended, or that they’ll be subjected to unreasonable rules. If so, more flight is likely, Mr. Hill said. But if the price of crude rises and political pressure subsides after the spill stops, recovery will be quick, he said.

—Jason Womack contributed to this article.

Write to Angel Gonzalez at [email protected]

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