London, 22 June 2010

Hornbeck Offshore Services complains the deepwater drilling moratorium imposed by Interior Secretary Ken Salazar in the wake of the Macondo blowout is "arbitrary and capricious" and has attracted support in the form of an amicus curiae brief filed with the court by Louisiana Governor Bobby Jindal. In the short term, the moratorium has disrupted large parts of the offshore industry. But its effect is highly uneven, with BP , Shell and Anadarko worst affected operators because of the number and depth of their wells in the area. Other firms with mostly shallow-water exposure should see much less impact.

BP Dominates Gulf Production

BP accounted for almost one in every three barrels of oil produced in the Gulf of Mexico's Outer Continental Shelf (OCS) area between January 2009 and March 2010, according to leasing and production data published by the U.S. Interior Department's Minerals Management Service (MMS).

BP produced 234 million barrels of crude oil and condensate over 15 months, more than double the output of its nearest rivals Shell (110 million barrels) and Chevron (93 million), and far ahead of 10th placed Exxon Mobil (11 million barrels). For a full list of all producers with more than 1 million barrels of attributed oil production.

Gas output is more evenly distributed, with BP's production (222 billion cubic feet, 7.4 percent of the total) eclipsed by Shell (253 billion cubic feet), Chevron (269 billion) and Anadarko (300 billion). MMS does not identify shallow and deepwater production separately at the company level. For the industry as a whole, though, deepwater and ultra-deepwater oil production accounts for around 75 percent of the total in the Gulf, according to the Energy Information Administration, the statistical arm of the U.S. Department of Energy.

The production data confirm the Gulf's importance to BP, and equally BP's dominant position in the Gulf oil industry (if not gas).

Distribution of Well Depths

The deepwater moratorium will have a very uneven impact across the industry. Once again, BP is peculiarly exposed. In the 15 months to March 2010, BP submitted 59 new-well applications to MMS. Of those, 40 (68 percent) were for ultra-deepwater wells at depths greater than 5000 feet; 18 were for deepwater wells greater than 1000 feet; and just 1 was for a shallow well at less than 1000 feet.

Shell will also be hit hard, having submitted 61 applications, 42 of them for ultra-deepwater wells (69 percent), and the remaining 19 all in deepwater areas (31 percent).

In contrast, Chevron submitted 75 new-well applications, but only four were for ultra-deepwater wells (5 percent), while 13 were for deepwater (17 percent) and the remaining 58 (77 percent) were in shallow water areas. Exxon submitted just 22 applications, for only 6 ultra-deep and 2 deepwater wells.

The most prolific driller, Apache , submitted 118 applications, but almost all in shallow water. Only one was for a well in more than 1000 feet of water. McMoRan Exploration asked for 16 new wells, all in shallow water. Mariner Energy requested 43 new wells, 2 in ultra-deep and 15 in deepwater.

No company faces as much crippling damage as Anadarko itself, the junior partner in BP's ill-fated Macondo well. Anadarko submitted 25 new well requests, 23 of which were for ultra-deepwater wells and the remaining 2 for deepwater ones. For a list of applications and depths for selected producers.

The data presented slightly understate the moratorium's impact, since U.S. Department of the Interior has issued "a six-month suspension of all pending, current or approved offshore drilling operations of new deepwater wells in the Gulf of Mexico" in water exceeding 500 feet, so it will include some wells that would normally be classed as shallow water.

In contrast, the Deepwater Royalty Relief Act itself puts the threshold at 656 feet. Industry usage is generally 1000 feet for deepwater and 5000 feet for ultra-deepwater. By putting the moratorium threshold so low, the federal government has disrupted a wider range of drilling activity.

Policymakers may come under pressure to ease the ban by increasing the depth at which it begins, perhaps to 1000 feet or even deeper. In practice, there are only a relatively small number of wells in the 500-1000 feet range, so the impact of a partial depth liberalisation would not be very great.

Policymakers would need to raise the threshold to 2000 feet or more to exempt a substantial number of wells and (importantly) operators, if the U.S. District Court does not rule the ban unlawful in the meantime.

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