New rules slow Gulf drilling pace in shallow water

[September 14, 2010]  LONDON (AP) -- The drilling moratorium enacted after the BP oil spill applies only to the deepwater Gulf of Mexico. Yet energy exploration in the Gulf's shallow waters has come to a virtual standstill as drillers grapple with tougher federal rules since the spill.

The pace at which regulators grant drilling permits in water less than 500 feet deep has slowed sharply this summer, an Associated Press analysis of government data shows. Just four out of 10 shallow-water drilling applications have been approved from June through August; 15 applications were sought and approved in the same period last year.

Environmental groups are encouraged by the trend. But drilling executives say the new rules, which require them to produce detailed spill-response plans and estimates for worst-case scenarios, are adding millions of dollars in costs and causing delays that have led to layoffs. Executives worry that when the Obama administration lifts the six-month moratorium on deepwater drilling, where the risks are greater, the permitting process will be even slower.

These worries grew after the Sept. 2 fire on an oil and gas platform owned by Mariner Energy that was working in the Gulf's shallow waters. Thirty-one out of 47 rigs used for shallow-water drilling in the Gulf will be out of work by the end of September, industry officials say.

"It certainly appears there's some kind of agenda in place" to punish offshore drillers, says Kurt Hoffman, chief operating officer of Houston-based Seahawk Drilling, which provides drilling services in shallow Gulf waters. The company has laid off 200 to 300 workers since the BP spill.

Federal regulators say they're sympathetic to the industry's mounting frustrations and that they're not trying to curtail drilling in the Gulf -- only to make it safer.

"We will not approve applications until and unless they fully comply with the new requirements," Michael Bromwich, director of the Bureau of Ocean Energy Management, Regulation and Enforcement, said Monday in a statement. "That will not make everyone happy, but it is the right way to proceed."

Shallow-water drilling has been the heart of the offshore industry for decades. Ninety-eight percent of the 3,400 platforms operating in the Gulf are in shallow water. They produce 30 percent of the Gulf's oil and roughly two-thirds of its natural gas. In recent years, oil giants like BP and Royal Dutch Shell have pushed into deeper waters to find bigger oil and gas fields.

Immediately after the deadly April 20 explosion of the Deepwater Horizon, the government put in place a six-month moratorium on drilling at any depth. On June 8, it lifted the moratorium on new shallow-water drilling.

The AP analysis of government data shows that from 2007 until just before the BP spill, 605 shallow-water permits were submitted and 576 were approved. From January through April of this year, 45 permits were sought and 44 were approved.

While the pace of approvals has slowed since the spill, over time the vast majority of drilling applications are likely to be granted -- it's just that the process will take longer, according to Melissa Schwartz, a spokeswoman for the ocean energy management agency.

The reduction in applications in recent months is a reflection of drillers' uncertainty about the new rules, industry officials say. On average, drillers applied for 20 permits a month in 2007, 18 a month in 2008 and fewer than nine a month in 2009, as falling energy prices curbed the industry's zeal. In the first four months of 2010, applications were back up to 11 a month.

Complying with the new rules hasn't been easy, drillers say. They must hire independent experts to review well designs and certify that spill-prevention equipment -- the very equipment that failed BP -- will stop the flow of oil if there is an accident.

The government has held weekly conference calls with oil industry officials to explain the new rules. Still, industry officials say they remain perplexed by some requirements -- like how to calculate worst-case spill scenarios for an exploratory well.

"We just started asking them, 'Tell us what you want,'" says Seahawk's Hoffman. "It's still really confusing."

For Nabors Industries, drilling on one of its shallow-water rigs was held up for almost two months this summer even after it received a permit, spokesman Dennis Smith says. The company had to buy new hoses, choke lines and other equipment to comply with new rules. At one point, the company waited for several days while the government searched for a federal inspector that didn't know anyone on the rig -- a policy enacted after the BP spill.

Before the Gulf spill, it typically took one week to begin drilling after a permit had been approved.

"Some of this stuff gets borderline silly," says Smith, who estimates that the delays and new requirements to slash about $30 million from company operating income this year.

Shares of shallow-water drillers have tumbled sharply since the BP spill. Seahawk shares are down 59 percent; Nabors' shares are off 14 percent.

BP's well took 87 days to plug in large part because the company wasn't prepared for a major spill at a depth of 5,000 feet. The company had to rely on remotely operated deep-sea vehicles to plug its well.

Shallow-water wells are considered less risky and easier to repair if damaged because they can be reached by divers.

But major accidents have happened in shallow water. The 1979 Ixtoc oil spill -- the biggest in the Gulf until the Deepwater Horizon disaster -- was caused by the blowout of a well in just 160 feet of water. Last year's Montara spill off the western coast of Australia was caused by an explosion on a rig in 250 feet.

On a rig operated by Hercules Offshore Inc., a crew of about 100 men are doing maintenance and painting while awaiting orders to start the next drilling gig. Hercules general counsel Jim Noe says workers will be laid off if the company leasing the rig doesn't get a drilling permit soon.

"We have 1,400 jobs swinging in the balance," Noe says.

The deepwater moratorium is in effect until Nov. 30, though regulators have indicated they're considering lifting it before then. While offshore companies have threatened to abandon the Gulf, most have stayed.

Interior Secretary Ken Salazar wants to make sure drillers can handle blowouts like the one that sank the Deepwater Horizon rig, and he's considering requiring additional equipment in case another "blowout preventer" fails. Congress is looking at raising the liability cap for oil spills and forbidding companies with poor safety records from receiving new permits.

Oil companies are working on a series of new safety standards of their own. They've pitched in on a $10 billion network that could respond to another major spill.

Environmentalists say the government should remain stingy about approving drilling permits.

After enjoying a cozy relationship with regulators for generations, the industry is finally facing a tough posture from the government, says Kieran Suckling, the director of the Center for Biological Diversity in Tucson, Ariz.

"They're just going to have to get used to it," Suckling says. "The cowboy days of the oil industry running (the government) are over."

[Associated Press; By DAVID KOENIG and CHRIS KAHN]

Koenig reported from Dallas. Kahn reported from New York.

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