6/24/2010
By Conley Turner, Research Analyst

It was clear that that the Obama administration was ready and prepared for a fight.  The response by the White House to the ruling against the six-month moratorium on deep-water drilling was almost immediate. An official administration official stated that the government would request that the presiding judge in the matter suspend his temporary restraining order.  Should that prove to be unsuccessful, then a stay would be sought before the U.S. Court of Appeals for the 5th Circuit.  

The ruling by Judge Martin L. C. Feldman of Federal District Court stated that the ban "seems to assume that because one rig failed and although no one yet fully knows why, all companies and rigs drilling new wells over 500 feet also universally present an imminent danger."  The ruling also indicated that the ban would cause "immediate and irreparable harm to businesses" along the Gulf Coast.

The Obama administration imposed the suspension on deepwater drilling for six months in order to conduct a thorough investigation of the Deepwater Horizon accident.  Even to this point, the reason behind the doomed rig blowing up and sinking in 5,000 feet of water is yet to be known or even understood.   The administration has articulated that it is trying to ensure that other drilling operations on in the region were not at similar risk.  Responding to the ruling, Department of Interior Secretary Ken Salazar indicated that a new order will be issued in the coming days.  The language of this new moratorium it was conveyed would clarify any confusion and be adjusted where appropriate.

The administration's point of view is not altogether unfounded.  In the recently conducted congressional hearings on the spill, the CEO of BP asserted that there were other company owned wells that share the characteristics of the now infamous Maconda well. He also articulated that BP these wells which number in the thousands were drilled in the same manner as the current gusher.  Without sufficient evidence to prove otherwise, it can only be inferred that other operators have the potential to be as problematic as Maconda.

As matter of perspective, the Louisiana Mid-Continent Oil and Gas Association has indicated that there are currently 4,515 shallow water wells in the Gulf region. The drilling ban does not affect these or the other 591 deepwater Gulf wells in the region.  In fact, the ban has suspended drilling on only 33 exploratory wells and halted the approval of any new permits for drilling in water deeper than 500 feet.  The suit was filed by Hornbeck Offshore Services of Covington on the premise the drilling ban causing a loss of business and imposing severe distress to the company and the industry.  The fact that the oil spill itself is causing hardships only serves to exacerbate an already horrible situation. As it stands, approximately 40, 000 oil related jobs in the Gulf Region are currently in limbo.  Each day the rigs remain idle translates into losses of between $8.25 million and $16.5 million per day according to the association.  Lost wages amount to between $165 and $330 million per month for all 33 platforms.

Even with the judge's decision, it is unlikely that there will be resumption in activity on these idle rigs.  As with any legal wrangling, no action is likely to be undertaken until a final resolution has been reached.  Companies are unlikely to incur the high costs of moving workers and equipment to those rigs under these conditions.   Also complicating matters is the fact that the Minerals Management Service (MMS) has not been issuing permits for new oil and gas drilling in the region.
The exploration companies that contract these drillers could chose to invoke force majeure provisions and cancel contracts since this unforeseen ban is causing a disruption in their business plans.  Should this happen, rig operators are likely to simply leave the region indefinitely for other areas instead of remaining idle.  These areas include but are not limited to the coastal waters of Brazil and West Africa where there is a significant amount of drilling activity.

A possible winner in the current situation is Ensco Plc. The company currently has eight jackup rigs in the U.S. Gulf of Mexico with two in the general area of the oil spill.  None of Ensco's deepwater rigs operate in the area so there are no concerns in that regard.   With all of Ensco's rigs in the region being contracted and operational, there is no impact to its financial performance. Nonetheless, the developments related to the oil spill and evolving government legislation are being followed very closely and the company has the option of moving those assets to other jackup markets if it comes to that.

In any event, the US court of appeals fifth circuit will likely need to review the case very soon  as the judges are scheduled to go on vacation in the coming days.  The U.S. Supreme Court leaves soon after that for three months so time is of the essence.  Should no resolution be reached in the near future, rig operators will not likely stay in place.  Meanwhile, the industry and the people of the Gulf region watch and wait with great anticipation.

Conley Turner
Wall Street Strategies