Deloitte: Six months until GOM returns to full steam

Gulf of Mexico operations will not return to full steam for a good six months, but deepwater will continue as an important source of global oil and gas, according to Gary Adams, vice chairman and oil and gas practice leader for Deloitte LLP. Mr Adams spoke at the 2010 Deloitte Oil & Gas conference 18 Nov in Houston.

“Deepwater is expected to drive growth well into the future,” said Mr Adams. “The US looks to GOM production to provide 30% of needed oil and that is expected to grow.”

The firm also revealed responses from a survey of oil and gas executives regarding the impact of the Macondo spill in the Gulf of Mexico (GOM). Summing up the US “energy situation,” respondents:

• Hold a negative view of the US energy situation, though positive impressions have increased slightly since last year;
• Are optimistic about natural gas, but 54% believe that the best days for economically favorable oil are behind us;
• Believe that the Macondo spill further soured public perception of the industry and that resulting new regulations may damage the industry and US energy supply.

Even with the moratorium lifted, compliance with new rules and procedures will take the industry about six months, according to Mr Adams. He said that the moratorium has caused production delays, leading to higher oil prices and use of imports. Mr Adams also noted that the biggest impact from the spill is the potential for an increased liability ceiling, which he said could reach $30 billion.

Operating companies are evaluating their portfolios to determine whether they could absorb this level of liability should a large spill recur. Of the 300 companies operating in the GOM, only about 10 boast capitalization of $30 billion dollars or more, he noted. Mr Adams commented that mergers and acquisitions could increase as a consequence of firms seeking to avoid huge liabilities. Also, countries besides the US may well adopt new regulations.

So why should companies bother to stay in the GOM? “For right now and a long time to come, oil in their portfolio is a very favorable thing,” Mr Adams said. “The general consensus is that the GOM is still a very good, economical place to operate. It’s close to the largest consumer of oil and gas, the US. The fact that there are a lot of reserves and the companies have technology to develop these resources has been the reason that we have not seen a mass exodus.”

Also, according to Branko Terzic, executive director of the Deloitte Center for Energy Solutions, “Capital goes where it is welcome. Capital goes where the return is adequate.” Risk is relative, he noted. If one has capital to invest in production, the question is really whether the risk of doing business in the GOM is more acceptable risk than that in a votatile political situation, such as in Africa.

Will the structure of joint venture agreements change as a result of the spill? Mr Terzic said there is an ongoing review of contracts, including appropriation for expenditure (AFEs) and those between companies and their suppliers. “There could be profound changes coming out of this. Regulation is a moving target,” continued Mr Terzic. “All this needs to settle before changes can be made.”

Among the findings of the Deloitte survey were:

• Initial post-spill regulations, such as the drilling moratorium, are believed to have already damaged the US oil and gas industry. Respondents expect post-spill regulations to further harm the oil industry by causing permitting delays, increasing drilling costs and reducing employment.
• As a result of anticipated regulations and their negative effects, oil prices are expected to rise in the future.
• Independent oil and gas companies are predicted to be hit hardest by potential post-spill regulations due to their difficulty to absorb additional operations costs.
• Respondents do not expect that new regulations will shift energy development interests onto domestic soil, with more than half saying that the regulations will not increase onshore oil and gas development in the US.
• Any improvements in drilling safety will come from the industry itself, rather than from external regulations, discoveries or requirements.
• A majority of respondents don’t expect the price of crude oil to exceed the $80-$100 per barrel range next year. One in four thinks the highest price will not surpass $80 per barrel.

The survey was conducted among oil and gas employees who have worked in the industry at least five years, are college educated and earn at least $100,000 per year.