On Gulf Coast, nail-biting over future of domestic oil drilling

Three months have come and gone since the Obama administration lifted the moratorium on deep-water drilling for oil and gas, but there hasn't exactly been a stampede back to the Gulf of Mexico to sink wells into the ocean depths.

It's harder now to meet the government's terms for offshore drilling in deep water, after last year's mammoth oil spill laid bare deficiencies in emergency planning and oversight. Only two permits for new wells have been issued since the moratorium ended on Oct. 12.

That worries people whose livelihoods depend on a robust schedule for drilling in the Gulf – people like Ray Walters.

Walking the dusty back lot of his manufacturing business in coastal Amelia, La., Mr. Walters pauses and rests his hand on one of four state-of-the-art oil skimmers built on order for the State of Mississippi. The vessels were meant to collect spilled oil in the Gulf, but once the Macondo well was capped and the oil stopped gushing, his contract was voided and he was only partially paid.

The spill and the subsequent drilling moratorium have had an adverse effect from which his company has not recovered. Before the moratorium began on May 28, "we were up to 37 [employees working] two 12-hour shifts. Since [the moratorium was issued] we're back to five people and barely maintaining. I don't think it'll ever get back to where it was," he says.

His uncertainty about the future reverberates through towns along the Louisiana coast. Their economies pegged, directly or indirectly, to offshore drilling, the locals are carefully watching the oil industry response to the US government's reshuffling of the regulatory regimen. Their big worry is that stricter drilling rules will be worse than the moratorium, creating such a financial burden that oil firms will not commit to long-term projects in the deep-water Gulf.

The new federal rules have indeed led to a wait-and-see situation for operators, as they assess higher costs for insurance, equipment maintenance, purchases of new technology, and other factors, says Michelle Foss, chief energy economist at the University of Houston.

"This is an enormous dilemma for all operating [oil and gas] companies, all of their backers and investors and shareholders," she says. "If [operators] can't see through the fog to see where things are heading and feel confident about it, they're going to start cutting back, and that's what everyone [in the region] is dreading."

The oil and gas industry has long been central to Louisiana's economy. In 2009, the state reaped $1.1 billion in revenue from taxes and royalties. The concern is that energy companies will pull up anchor and seek wells elsewhere in the world, such as Bolivia or Egypt, where they perceive the regulatory climate to be friendlier to their interests.

Ms. Foss, for one, sees that as a real possibility.

"The folks outside the US are not fools. They know they can take advantage of the situation right now and increase business in their own territorial waters while we struggle," she says.

Britain, for instance, has granted more than 100 exploration licenses for new drilling near the Shetland Islands, where now only four wells exist. About 160 miles north of the islands, Chevron is drilling a well that is 1,000 feet deeper than BP's blown Macondo well.

How serious is the drilling retrenchment in the Gulf? As of mid-December, 23 rigs were drilling in deep water, compared with 52 just before the Deepwater Horizon rig exploded in late April, according to data at the Louisiana Department of Natural Resources. In addition, two permits for new deep-water wells are approved and three are pending, reports the US Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), the agency that has replaced the discredited Minerals Management Service. Ten permits have been returned to the applicants for further work.

BOEMRE's reorganization of the permit process and the time operators will need to comply with stricter regulations will probably mean a decline in domestic output of crude oil this year, say analysts. Deep-water drilling in the Gulf accounts for about 1.25 million barrels of oil a day – or about one-quarter of America's domestic crude oil production. The Gulf contribution is expected to drop a bit, by about 180,000 barrels a day, in 2011, says the US Energy Information Administration.

Of course, drilling in shallower water is unabated, and BOEMRE has issued permits for 26 new wells in Gulf waters less than 500 feet deep since June 8, with 35 permits pending.

BOEMRE director Michael Bromwich denies his agency is "slow-walking" the deep-water permit process. In an address at an oil and gas industry conference in New Orleans last month, he acknowledged that "progress in processing permits has been slower than industry would like."

However, Mr. Bromwich said, BOEMRE is undertaking "the most aggressive and comprehensive reform of offshore oil and gas regulation and oversight in US history," and it "will not cut corners in the permit review process." Permits will be approved, he said, "only when we are satisfied that all applicable regulatory requirements are met."

Reinforcing that perspective is the presidential commission investigating the cause of the Gulf spill. It found that three companies – BP, Transocean, and Halliburton – cut corners to save time and money during operations to close the exploratory Macondo well.

But there's clearly tension between BOEMRE's intent to right the regulatory ship and those who worry the agency will make no allowances for risks inherent in deep-water drilling.

"Drilling for oil is a very risky business," says John Bambey, general manager of Energy Logistics, a Houston company that provides dockside services for drilling vessels along the Louisiana coast. BOEMRE "wants to come in and have a whole bunch of assurances, but they can only be assured so much." As a result, he says, the agency is kicking back the permit applications of oil operators, asking for more safety guarantees.

For some, stricter regulation has an upside.

At Johnny's Propeller Shop in Morgan City, La., where blacksmiths wield sledgehammers and torches to pound out dents in huge boat propellers, business is perking up. Manager Mike Mire says most of the business shifted to tugboat repairs during the moratorium, but he expects repairs on oil-rig support vessels will be in full swing by March.

Repair shops like his will "benefit in the long run because the [permitting] rules are going to be strict," he says. "[In the past], if you had damage to your boat and wanted to be in compliance, [regulators] would look the other way and sign off on it," he says. "Now, everybody is going to be held accountable and everything needs to be fixed."