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US Gulf activity soars three years post-Macondo: Lease sales hit record highs as explorers jump back in

By Starr Spencer, with Gary Gentile in Washington and Bridget Hunsucker in Houston

April 19, 2013 - Three years after the devastating Macondo oil spill in the Gulf of Mexico, activity is soaring above pre-event levels -- with dayrates for drilling rigs matching or exceeding peak levels five years ago, improved permitting times and operators spending more money than they have in decades on deepwater acreage.

But explorers also face double-digit cost increases in the Gulf along with the need for increased time and manpower to assure safety since the accident. Safety has become the watchword for all US Gulf operations, a concern that appears to have spread offshore globally. Since Macondo, US offshore authorities, drillers and Gulf operators, including BP -- which operated the deepwater well that blew out on April 20, 2010 -- have racheted up safety practices throughout the exploration and production chain.

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"We’re seeing more investment, more production, and it’s being done more safely and more responsibly than ever," Tommy Beaudreau, the director of the US' Bureau of Ocean Energy Management, recently told "Platts Energy Week" TV program.

As the accident recedes into history, operators are drilling up a storm. The latest deepwater activity report issued by the US government shows, as of April 15, a total of 36 floating rigs were operating in the Gulf, versus about 30 at the time of the accident -- and work was underway on 51 projects sited in more than 1,000 feet of water.

The deepest current exploratory well is Anadarko Petroleum's Phobos prospect in 8,553 feet of water in remote Sigsbee Escarpment near Mexican territorial waters -- the first well in that area.

Moreover, oil operators have shown a hearty appetite for choice deepwater acreage and have not been shy about opening their wallets to secure it. The two post-Macondo Central Gulf lease sales, in 2012 and in March 2013, raked in total high bids of $1.7 billion and $1.2 billion respectively, which ranked them among the largest sales in the 59 years of Gulf lease sale history. The biggest single bid in both auctions was placed by Norway's Statoil, which plunked down $157.1 million and nearly $82 million respectively for blocks a mere nine square miles apiece.

"We [spent those sums] because...the profitability in a big offshore development is very, very attractive," Statoil North America spokesman Ola Morten Aanestad told Platts.

However, oil companies say the cost of doing business in the US Gulf has risen about 15% since Macondo, largely from what IHS Petrodata analyst Cinnamon Odell called “timing” of activities.

“Permits take extra time and planning; they need to go through extra steps,” Odell said. Safety checks, which loom large over the post-Macondo operating milieu, require money: “The need to pull up [rigs' BOPs or blowout preventers] for more frequent inspections than before, for example, adds to costs.”

A few companies have exited, or plan to leave, the US Gulf since the accident. Devon Energy announced a month before the Macondo explosion that it would sell its deepwater acreage to BP. Newfield Exploration sold its shallow-water Gulf acreage last year and should open a data room soon to sell its deepwater blocks there. And small Gulf player Callon Petroleum is transitioning onshore.

Stepping up

But many existing US Gulf operators have stepped up activity and at least one company, Venari Resources, was formed last year specifically to operate there.

"I’m a huge advocate of that basin," Venari CEO Brian Reinsborough, former president of US Gulf operator Nexen Petroleum USA, told Platts in a recent interview. Nexen was acquired in February by China's CNOOC.

"You can find big oil close to infrastructure and close to the largest consuming energy market in the world, [in] a very stable fiscal regime and great tax system," he said. "Of all the right buttons you want, the Gulf of Mexico has a lot of them."

The Macondo accident caused 11 deaths and spewed an estimated 4.9 million barrels of crude -- including 800,000 barrels that were captured -- before the well was capped in mid-July 2010 and sealed two months later. The event led to a temporary hiatus for deepwater drilling while stricter new federal safety measures were put in place.

The first post-Macondo deepwater permit was issued on February 28, 2011, but for months afterward critics said that well permitting still took too long. Since then, the time gap has narrowed, according to Greater New Orleans, an organization that has tracked post-Macondo permitting.

In its latest report in March, GNO says 10 deepwater permits were issued in December 2012 -- three more than the average of seven permits/month in the three years prior to the oil spill. In November 2012, 11 deepwater permits were issued, four more than the seven-permit average prior to the accident, GNO, a group promoting New Orleans-area development, said.

"The government has gotten a lot better" in speeding up permits, Reinsborough said. Deepwater permits "are being approved within a 90-day window. That's longer than pre-Macondo but it's very predictable, and you can plan that into drilling your wells."

Production struggles

Gulf of Mexico production, however, is still struggling. The region averaged 1.599 million b/d of oil output in March 2010, the month before the accident, according to figures supplied by the US Energy Information Administration. And in early April 2010, the EIA had forecast an average 1.75 million b/d of Gulf output production for full-year 2010 from new developments due to come onstream.

US Gulf production hit a post-Macondo low of 1.090 million b/d in September 2011 before heading back up. By December 2012 output had climbed to 1.403 million b/d. In its latest short-term energy outlook, EIA forecasts US Gulf production will reach 1.52 million b/d -- a bit short of pre-Macondo levels -- only in fourth-quarter 2014.

But companies' enthusiasm for the Gulf suggests they are trying to make up for lost time. Even before the first post-Macondo deepwater permits were issued, Chevron had sanctioned its remote St Jack/Malo and Big Foot projects. Other deepwater discoveries subsequently received developmental green lights, such as Anadarko's Lucius, ExxonMobil's Hadrian South and also LLOG Exploration's Delta House, located just six miles from Macondo.

In the process, brisk demand for deepwater rigs in the Gulf and elsewhere has driven up leading-edge dayrates well past the $600,000/d level for the most advanced units. "We would say dayrates for ultra-deepwater rigs...are either at or above prior-cycle highs," RBC analyst Justin Sander said.

But even while champing at the bit to drill farther and deeper in the Gulf, operators appear mindful of safety. BP, for example created the Houston Monitoring Center in July 2011 to provide 24/7 real-time communication between its rigs and experts onshore. Drilling operators are supported by teams of monitoring specialists in Houston with extensive offshore experience, who work 12-hour rotational shifts and rely on screens to oversee drilling.

"The direct involvement of shore-based staff in drilling activity is an example of additional layers of checks and balances that we continue to implement throughout our businesses,” BP said.

Meanwhile, regulation of offshore drilling has changed dramatically since Macondo. The former Minerals Management Service was split into three new agencies: the Office of Natural Resource Revenue, which collects and distributes royalty payments for onshore and offshore production; the Bureau of Ocean Energy Management (BOEM), which conducts lease sales and supervises exploration plans; and the Bureau of Safety and Environmental Enforcement (BSEE), which enforces safety regulations and inspects offshore operations.

Safety rules

Macondo also resulted in a raft of new safety rules. Last August, BSEE made final a set of emergency rules put in place shortly after Macondo. The rules require new cementing integrity tests, third-party verification of a BOP's blind shear ram capability and also require a professional engineer certify casing/cementing plans. BOPs are devices that can seal a well. More focused requirements for next generation BOPs should be proposed later this year.

In addition, the US has zoomed in on critical safety decisions made on rigs. BSEE now requires operators to have a Safety and Environmental Management System that details steps to limit the role human error and poor organization play in offshore accidents. A second proposed rule would give rig and platform workers authority to stop work at any time for safety reasons.

Legal issues from the accident are also being resolved. Last November, BP agreed to pay $4 billion and plead guilty to 14 criminal counts to settle charges brought by the US, including 11 counts of felony manslaughter, one count of felony obstruction of Congress and violations of the Clean Water and Migratory Bird Treaty Acts.

BP also agreed to pay a $525 million fine to settle charges from the Securities and Exchange Commission over oil flow estimates it provided in the 14 days after the blowout. Also, the US suspended the company from entering into any new government contracts, including leases for offshore exploration. BP was formally sentenced in January. The suspension still stands.

BP refused to settle civil charges, saying it would not agree to the government's claim that its actions constituted "gross negligence." The first part of a two-phase trial to gauge the extent of BP's civil liability, which could be more than $20 billion, ended April 18. A second phase begins in September.

In January, Transocean -- whose Deepwater Horizon rig drilled the Macondo well -- agreed to pay $1.4 billion in fines and penalties and to plead guilty to one count of violating the US Clean Water Act for its role in the disaster.

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