A Nexen drilling operation in the Gulf of MexicoTodd Korol
The U.S. declared itself "open for business" for oil exploration in the deep waters of the Gulf of Mexico, but production in the energy-rich region will remain limited as companies meet tough new safety rules and face permitting delays due to an under-staffed regulator.
Drilling in the deep water of the Gulf of Mexico has been on hold since April, when BP PLC's Macondo well blew out, killing 11 workers and spewing some four million barrels of crude into the Gulf Of Mexico.
The Obama administration ended the moratorium on Tuesday - 45 days ahead of schedule - but said companies would have to demonstrate compliance with a raft of new regulations before they get a permit to drill.
With congressional elections just two weeks away, President Barack Obama has been under intense pressure to end the work stoppage, which the industry and Gulf Coast politicians blamed for the loss of thousands of jobs. But in a conference call Tuesday, Interior Secretary Ken Salazar said the government is determined to dramatically toughen the lax oversight the sector had received prior to the BP blowout.
"We are in a new day with respect to oil and gas drilling on the outer continental shelf," Mr. Salazar said, adding the government is adopting the "gold standard" of regulation.
"It is a new day and there are requirements that will have to be met by industry … and there will be costs associated with the compliance with those requirements."
The costs include less output for one of the oil industry's key producing regions. The combined impact of the moratorium and the regulatory uncertainty is expected to reduce planned production in the Gulf of Mexico next year by 193,000 barrels per day - or 10 per cent of total output, says a report by Wood Mackenzie, a British-based consulting firm. Company analyst Matthew Snyder said higher regulatory burden and the heightened perception of risk associated with deep-water activity in the Gulf could permanently reduce the region's production.
In the five months since the blowout, several companies have redeployed drilling rigs to locations outside the Gulf, though some international oil companies, including Royal Dutch Shell PLC, have kept rigs on standby and say they are eager to begin work as soon as possible. Shell is partnering with Calgary-based Nexen Inc. to develop some major discoveries in the Gulf, including the Appomattox find, which the companies estimated contains some 250 million barrels of oil equivalent.
Neither Mr. Salazar nor Michael Bromwich, director of the Bureau of Ocean Energy Management, Regulation and Enforcement, could say how quickly the industry would be back to normal, and both acknowledged that the bureau will be hard-pressed to meet the increased demands on it until it can boost its staff levels.
Mr. Bromwich said some companies will be able to meet the new rules quickly, but that it would take time for the bureau to process their permits. "I think anybody who hazards a guess at this point as to how long it will be before we approve the first deep-water drilling application is just guessing," he said, though he added some permits would be approved by the end of the year.
Mr. Salazar said the government is introducing new regulations in three keys areas: well safety, which includes new standards for cementing the well casing and for blowout preventers; spill response and blowout containment. And he suggested the administration is continuing to review whether other measures are necessary, as inquiries proceed into the ultimate cause of the BP disaster.
The lifting of the moratorium itself is less important than the government's ability to clearly spell out the regulatory requirements and to process permits needed for drilling, said Raoul Leblanc, an analyst with PFC Energy Group in Houston.
"Whether the moratorium was lifted this week, last week or three months ago, the inability to get a permit is the key issue," Mr. Leblanc said, echoing concerns raised by several industry association. "There's going to be a period of chaos when nobody knows clearly what the new rules are, or what they ought to be."
However, some environmental groups say the Obama administration acted prematurely by ending the moratorium before investigators determined the cause of the BP blowout.