Can Gulf of Mexico offshore drilling stay viable?

More questions are being raised now about the commercial prospects of oil exploration and production in the Gulf of Mexico, in the aftermath of Thursday’s explosion at an offshore Mariner Energy oil rig off the Louisiana coast.

The Gulf of Mexico oil producers and explorers are already grappling with the twin challenges of the Obama administration’s moratorium on deep water drilling following the Macondo oil spill, and the certain prospect of harsher regulatory constraints on drilling worked out in the US Congress.

Making matters worse, the explosion on Thursday has raised the chances that both these challenges will firm up as more inscrutable than before. There is already speculation that the government could enforce a freeze on shallow water drilling as well.

Though the Mariner Energy oil and gas platform is a shallow water exploration rig, the event has raised more questions about the safety of offshore drilling.

Like us on Facebook

According to analysts the government’s stand on the drilling moratorium will gain more credence following the incident, which took place near the site of the BP oil leak. On Wednesday, a federal judge ruled against the government's request to reject an industry plea seeking to overturn the moratorium. However, in the light of the new developments, the governments' case could pass muster, analysts have felt.

Oil industry has closed ranks in their fight against the moratorium, as well as the planned legislative action targeting offshore drilling which they say will kill jobs, cut output and affect firms’ profitability.

BP said on Friday it has spent $8 billion so far to meet various costs resulting from the disastrous fire in its deep water drilling platform in April.

A report by Energy Intelligence says the concerns of the oil industry go beyond the freeze on deep water drilling enforced by the government. While the industry frets over the chances of the government withholding new licenses even after the expiry of the freeze in November, they are more worried about the new regulatory climate taking shape, Energy Intelligence says.

"… Also of fundamental concern to the US oil industry is the possibility that offshore reform legislation before Congress could subject operators to unlimited liability for oil spills," says the report.

"The effect of such a move appears certain — small and medium-sized independents would find it difficult or impossible to obtain insurance policies covering them for bottomless damage in the US, which could force them out of the Gulf."

The industry is watching if the Senate will ratify a measure passed by the House of Representatives that would entirely lift an existing $75 million cap on economic damage claims for oil spills.

There is still hope that the results of the mid-term elections will force a change of direction.

“If this moratorium continues, or extremely difficult policies like unlimited liability go into effect, the Gulf would be a less desirable place to operate,” Energy Intelligence quoted Bruce Thompson, president of the American Exploration and Production Council, as saying.

There is also the explicit threat of an increased tax burden on oil firms making the Gulf oil investment less attractive for investors.

U.S. oil industry will be hit badly if Obama administration’s proposals to roll back several oil industry tax breaks get through the legislature. President Obama had proposed tax increases to the tune of $31 billion on oil companies in his first budget, and he raised tax proposals to $37 billion in last year’s budget.

However, the picture is not all too bleak for the Gulf of Mexico explorers as the U.S. offers unique advantages like political stability and a competitive bidding process, points out the report.

"The normally stable political climate and competitive bidding process are other factors in the US Gulf’s favor. By comparison, Brazil has large opportunities in its offshore frontier, but the government plans legislation that would give Petrobras a minimum 30 percent stake and operatorship of all strategic prospects in the subsalt region. Colombia has an attractive political climate these days, but its fields are considered small. In West Africa, oil firms face political uncertainty, with Nigeria debating tighter terms through a new petroleum bill."