There is an unwritten rule in the oil industry that companies do not criticise one another. And for more than a month, as BP’s oil spill in the Gulf of Mexico has grown, the majors have stuck to that rule despite warnings from industry analysts. Indeed, since a BP-contracted oil rig exploded April 20, killing 11 and starting what has turned into the US’ biggest-ever spill, the oil industry has said almost nothing. Even the PR campaign it had launched in recent years to raise the industry’s profile and gain access to new areas has been put on hold as it has retreated.
But was this really the right approach? Ken Medlock, energy expert at Rice University, warned in an interview in the days following the accident it was important for the industry to break its rule and speak out:
If they want to be able to continue to operate and expand operations in that part of the world, they’re going to have to say something.
But the industry did not listen – until his prediction came true. Last week the Obama administration extended the moratorium on all new deepwater drilling in the Gulf for six months, calling a halt to drilling on 33 rigs. ExxonMobil, the US’ biggest oil company, had been building its position there and has had to delay plans to drill an exploration well and a production well, which were scheduled to begin the week of May 10. Chevron stopped one deepwater well during the original moratorium and is in the process of stopping operations at another. It also has had to rethink two additional deepwater exploration wells planned for this year. Royal Dutch Shell is suspending activity on two of its offshore wells and postponing plans to drill another this summer, and Statoil said this it was preparing to stop drilling its two GoM deepwater prospects.
The majors with the most exposure to the Gulf – Chevron and Shell, in addition to BP – which analysts say all get roughly 10 per cent of their production from the area – have seen a selloff in their stocks in recent days, as uncertainty builds over whether the moratorium will be extended and the impact it will have across the sector. Garfield Miller, president of Aegis Energy Advisors, said in an interview that the extent of the selloff in the majors, at least, has been unwarranted:
You’re getting a little sense of apocalyptic thinking.
But according to industry sources, the moratorium may be worse than it seems on the surface. One major questioned what companies were expected to do with all the equipment, employees, infrastructure they have put in place in the long-term planning that it takes to drill all these wells. Each rig has at least two supply boats and each platform averages 180 to 280 employees for two, two-week shifts. He considered the moratorium a bigger mess than those outside the industry might think.
The majors worry that six months may turn into one or more years. That they will be faced with leaving a deepwater rig, at a cost of $500,000 per day, idle in the Gulf or sending it to someplace like Brazil or Africa. The travel time could take a month and then there is the question of having it sit by for however long it takes to get permits in those places for projects normally planned well in advance. On top of that, these rigs could sign multiyear contracts in those places, delaying a return to the Gulf, leaving the majors with the prospect of leases they have paid for expiring before they have had a chance to drill.
Paul Cheng, senior equity oil analyst at Barclays Capital, said if Congress gets involved in rewriting regulations for operating in the Gulf, the moratorium could easily run two to three years. Moody’s Investors Service said in a report:
We believe regulation is going to increase, resulting in longer permitting processes and higher compliance costs for onshore and offshore drillers and related offshore service providers. Most of these costs will ultimately be passed through to producers.
Chevron and Shell have been the most vocal in their responses, issuing statements implying they should not be included in the moratorium. Chevron’s stressed that safety and the environment were its “core values”, insisting “Chevron’s drilling operations are safe.” Shell finds not only its deepwater Gulf drilling plans put on hold but its $3bn investment to look for oil in Alaska at risk as the Obama Administration also postponed consideration of Shell’s proposal to drill up to five exploration wells in the Arctic this summer. Its statement:
We remain confident in our drilling expertise, which is built upon a foundation of redundant safety systems and company global standards.
But John Hofmeister, who is former president of Shell Oil and author of a new book called, “Why We Hate The Oil Companies: Straight Talk From An Energy Insider”, believes the industry should have seized the opportunity from the start to educate the public about how rare such accidents are and how crucial it is that the industry continue to extend its reach in the Gulf. He said in an interview:
A serious accident has occurred, but we still have to produce oil. It’s impossible to eliminate risk in the hydrocarbon world, just as it’s impossible to guarantee there won’t be another plane crash.
But with oil washing into the marshes and onto the shores of the Gulf Coast, the time for listening for some, it seems, is over. The public wants the leak stopped and the oil contained. Until that happens, any protestations from the industry that they should not be cut off from new drilling in the deepwater is likely to fall on deaf ears. For now, at least, the companies may have missed their opportunity to differentiate themselves.
