New rules that will change the game for deepwater drillers
(I’m on vacation until August 24. From now through Friday August 13 I will be posting on a reduced schedule of once or twice a day on Jubak Picks. The site will go completely dark from August 13 to August 24 and then I will resume my normal schedule of posts.)
Age counts, according to legislation passed by the House of Representatives on July 30 designed to prevent a repeat of the Deepwater Horizon disaster in the Gulf of Mexico.
And that could be a game changer for global deepwater drilling companies.
Here’s the issue:
The legislation would set minimum safety standards for well design—and here’s the biggy—require oil drillers to use an enhanced blowout preventer. It was the failure of the blowout preventer that led to oil gushing uncontrolled from BP’s well after an explosion at the well.
But many older rigs are too small to accommodate the newer generation of blowout preventers. It will cost drilling companies billions to upgrade them and many older rigs either aren’t upgradable at a reasonable cost or upgradable at all. If the proposed regulations pass, these rigs will be out of U.S. waters (and out of the waters off countries that adopt similar rules) and they’ll wind up competing in more crowded and less lucrative markets with older and less stringent regulations. Only 16 out of the 33 floating rigs in the Gulf of Mexico have blowout preventers that would pass the new rules (after relatively minor work or with none at all), according to ODS Petrodata.
Investors can expect to see some drilling rig owners start to do everything they can to conserve cash.
China disrupts the oil and gas industry–again
You wouldn’t think that anybody, especially an anybody as savvy as ExxonMobil (XOM), could overlook China.
But that may be exactly what ExxonMobil did in formulating its plan to pin the company’s growth on natural gas—and in particular on liquefied natural gas (LNG).
According to U.K. oil and gas consulting company Wood Mackenzie, China looks like it will need only half as much additional liquefied natural gas in the decade beginning in 2020 than big oil companies such as Royal Dutch Shell (RDS), BP (BP), Chevron (CVX), and, yes, ExxonMobil had projected.
Projects such as ExxonMobil’s Qatargas Trains 4 and 5, RasGas, Al Khaleej Gas, the South Hook liquefied natural gas terminal, and the Golden Pass LNG terminal—and this is only a partial list of ExxonMobil’s planned investments in LNG in 2009 and 2010–that made investment sense when it looked like China would be importing an additional 16 million tons of LNG annually in the coming decade now face a scenario in which China will need to add only half as much to its annual imports.
That will hit all the international oil companies hard but it will hit ExxonMobil especially strongly because the company has based its investing strategy on natural gas in general and liquefied natural gas in particular.
What’s changed since, say, March 2010 when ExxonMobil announced that it will increase capital spending by 4% in 2010 to almost $28 billion in a big bet on natural gas on top of its purchase of U.S. natural gas producer XTO Energy for $28 billion?
Deciding which company pays what in the Gulf disaster just got a little harder
A setback today for Anadarko Petroleum (APC) in its efforts to get out from under the costs of the Deepwater Horizon disaster. The company is a 25% partner with majority stakeholder BP (BP) and minority partner Mitsui (10%) in the Macondo well that continues to spew oil into the waters of the Gulf of Mexico.
Anadarko will be on the hook for a share of the costs proportionate to its ownership in the project—unless a court finds BP guilty of gross negligence in the design and/or operation of the well. With BP putting $20 billion into escrow to cover claims, the negligence/no negligence question is of intense interest to the $18 billion (market capitalization) Anadarko and its investors.
The distribution of costs will also have a huge effect on which companies can afford to keep exploring in the Gulf. If Anadarko winds up picking up its 25% share of the costs, it will deter smaller oil companies from operating in the region. And that will mean that the globe’s biggest oil companies will be able to buy assets in the Gulf at very reasonable prices. (For more on how the Deepwater Horizon disaster will reshuffle oil assets in the Gulf see my post http://jubakpicks.com/2010/06/24/oil-company-buyers-and-sellers-in-the-deepwater-gulf-of-mexico-after-bp/ )
The task of winning a finding of gross negligence against BP got a little harder today, June 30, when both BP and Anadarko confirmed to the Financial Times that Anadarko was aware of the design choices that contributed so much to the disaster.
And now the spill in the Gulf is changing oil drilling in Norway–the effects really are global
The ripples from the Deepwater Horizon disaster in the Gulf of Mexico have reached Norway.
Norwegian opponents to opening the fragile ecosystems around the Lofoten Island with their critical spawning grounds for cod to oil drilling are arguing that Norway needs to delay any decision until the country fully considers the lessons from uncontrolled oil release off the coast of Louisiana.
The oil industry estimates that there are 1.3 billion barrels of oil in the reserves around the islands. Production from those reserves will help offset declining production from Norway’s mature North Sea fields.
The Gulf oil spill is so bad that maybe, just maybe, energy legislation is alive again
You knew this was coming once BP (BP) admitted that the top kill effort to stop the flow of oil in the Gulf of Mexico had failed.
On Tuesday June 1 U.S. Attorney General announced that the Justice Department has opened a civil and criminal investigation into BP and other companies involved in the Deepwater Horizon disaster. Holder’s announcement came just hours after President Barack Obama promised in a 10-minute White House address to prosecute any parties found to have broken the law.
What comes next? More politicians who can tell which way the wind is blowing and feel that they need to do something before the storm blows them away. I think the need to be seen doing something might even result in action in Washington to move the country away, even if only so slightly, from its dependence on oil.
Stranger things have happened when politicians are running scared.
There’s no quick end in sight to the flow into the Gulf. BP doesn’t have a real solution—the oil company is next going to try a new version of the containment dome that failed to work before the top kill failed to work. And the truth is that the federal government is completely dependent on the oil company and its service and drilling contractors for any equipment that might stop the flow.
But that hasn’t stopped the buildup of political pressure on the Obama administration and other elected officials in Washington to do something—or at least to sound like it is doing something. So an angry President Obama, sounding like a prosecutor himself, said “My solemn pledge is that we will bring those responsible to justice.”
