Analysts unimpressed by early lifting of deepwater drilling ban

Oil company stocks may have risen on the news that the Obama Administration was lifting the moratorium on deepwater drilling in the Gulf of Mexico, but analysts are not rushing to change their outlooks for these companies. The bottom line is that the decision does not mean it is business as usual for anyone operating in the Gulf of Mexico.

The administration has imposed new regulations, including those requiring outside auditors to certify blowout preventers are in working order. The companies must file a more comprehensive cleanup plan than in the past, with enforceable obligations that ensure that containment resources are available. And chief executives must certify that they have complied with all the new regulations.  Beyond that, the authorities plan to inspect rigs to ensure compliance before permitting them to get back to work.

The reality is that this will take time. The regulators were underfunded and undermanned before the disaster, and it is unlikely the extra funding granted last month to heighten oversight of offshore drilling – $25m – is going to drastically change things. 

The industry suspects that suits the government just fine, that it is not in any rush to get companies back out into the gulf. Some even speculate the lifting of the moratorium was a political move to give support to Democrats in the upcoming midterm elections. The industry has responded to the lifting of the moratorium with demands for more concrete steps. Jack Gerard, the chief executive of the American Petroleum Institute, the industry’s trade association, says:

While we are pleased that the Interior Department has lifted the deepwater moratorium, even more needs to be done to get American workers back on the job of exploring for, developing and producing the oil and natural gas to fuel our nation’s economy.

Without additional resources and a serious commitment by the government to process and approve permits and other requirements expeditiously, the moratorium will give way to a de facto moratorium, which will continue to cripple the already hard-hit Gulf region and cost more than 175,000 American jobs a year.

Regulators need to quickly put in place a system that allows companies that show their compliance with new standards to resume operations immediately.

Is this call from the industry likely to change anything? Many remain sceptical. Take this response from Tudor Pickering Holt, the energy investment and merchant bank, to the lifting of the moratorium:

Necessary first step in the process and certainly politics played a big part in the timing… had to happen well in front of midterm elections to get potential help in the polls/ballot box.

Now for the buzzkill. Permit approvals likely slower than the glacial pace of the shelf permits.  Lots of regulatory uncertainty remains, so hard to think there is a “coiled spring” of permits ready to be issued. Hard for industry to comply with what government wants when they state more regs are coming… Clear as mud.

As for the jump in driller stocks, it adds:

Good news is still good news, so natural reaction was for stocks to go up (average +4 per cent move in offshore drillers yesterday)… How long will the honeymoon last? Probably a little while longer.

Knew moratorium was going to be lifted but now the real hard part comes into play… how / when does the industry get back to work? The industry will definitely “figure it out” but uncertainty on permitting process / speed keeps us from rolling Gulf of Mexico deepwater contracts back into our 2011 estimates.

The view from Houston is that it could well be some time before drilling in the gulf gets back to pre-disaster levels.

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