It's no surprise that the federal government plans to create some tough new safety rules for offshore drilling operations in the aftermath of the April 20 Deepwater Horizon explosion. The Department of the Interior has reviewed currently safety procedures, and Interior Secretary Ken Salazar plans to deliver a report to President Obama any day now. Word is that Salazar will recommend immediate "significant enhancements" for offshore oil and gas drilling, including more rigorous and frequent inspections.
The report could also pave the way for the administration to ease its temporary ban on approving new offshore drilling permits, at least when it comes to applications to produce oil and gas in less than 1,000 feet of water. The current moratorium on new drilling in deeper water is likely to remain in place.
The White House implemented the temporary ban on new offshore drilling in April after oil began pouring into the Gulf of Mexico from a BP well about 40 miles off the Louisiana coast. Now, more than five weeks since the explosion that triggered the spill, the president is taking a more visible role in damage control amid mounting criticism that his administration has given BP too much leeway in fighting the leak.
As this is being written, BP is attempting to staunch the flow of crude by injecting drilling mud into the hole and subsequently cementing it in. However, no one knows whether or not this effort will work because of the high pressure and near freezing temperature at this depth (about 5,000 feet below the surface). The procedure will make use of tubes already on the blowout preventer to get near the well at the bottom of the BOP. The company hopes the heavy drilling mud will reverse the well's outward flow and push the oil back down. To accomplish this, BP says it has 30,000 hydraulic horsepower of pumping capacity at its disposal.
If the mud alone doesn't work, BP says it may inject "bridging material," which could include golf balls or pieces of tires that would be pushed up into the BOP by the oil and gas flowing out of the well. The plan is that this material would get stuck in the BOP and impede the flow enough to allow the mud to halt the flow enough to allow the well to be plugged with cement.
A key question deriving from the implementation of draconian new rules on offshore drilling is — who will pay the price and who will benefit?
Financial giant Morgan Stanley recently assembled a team of experts to discuss the implications of the disaster and new offshore drilling regulations. The experts said they see potential regulation deriving from the accident as a positive for the drilling equipment industry, as drilling rigs may require more redundancy of equipment as well as more frequent servicing and replacement of equipment. On the drilling side, they expect established offshore drillers with the newest deepwater units to benefit as demand for their rigs is likely to increase. Those with older fleets and higher exposure to the Gulf of Mexico are more likely to be disadvantaged.
Industry-wide implications may be a long-term positive for equipment manufacturers and somewhat mixed for offshore drillers, depending on where they are operating. Any restriction on shipping lanes in the Gulf of Mexico could trigger a congestion-like effect on tanker rates. The spill could also spur tighter tanker regulation in US waters and could help accelerate the ban on single-hull vessels in the US. This would make the long-term supply outlook for tankers more favorable.
Other beneficiaries could be the onshore oil and gas industry, which would have to ramp up drilling and production of oil and natural gas if offshore regulations resulted in significantly reduced production from the Gulf of Mexico. Shale drillers might receive a needed economic boost if commodity prices rise in the wake of any curtailment in offshore activity.
Finally, the administration's carrot-and-stick approach to various forms of energy production might favor renewable and alternative energy providers, especially if wind generation companies, solar power producers, ethanol refiners, and biofuels companies get extra incentives, while petroleum producers — the offshore ones anyway — are administered a swift kick to the behind.
Raymond James analysts recently noted that the companies involved in the disaster were all highly regarded in the industry for their respective operating abilities, service, and equipment. All in all, they commented, the industry is bracing for the fallout from the disaster with a renewed focus on manufacturing and service excellence.
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