Drillers Blister to Ramp Up Drilling in the Gulf
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
From a bird’s eye view, it doesn’t make sense to drill offshore in deep waters. The danger, coupled with massive costs and daunting regulations, should be enough to scare off even the bravest drillers. Further, why drill offshore when new extraction technologies allow drillers to tap rich onshore shale formations?
Simple. Deep-water drilling is wildly more profitable.
Oil extracted from deep waters can be shipped to Europe more readily than onshore oil, and it can be sold for Europe’s higher prices. Europe’s oil is priced at the Brent price, which is typically far higher than America’s. For example, when crude light oil fetched just above $92 per barrel last Friday, the Brent price pulled in above $111 per barrel.
Drillers are taking notice. The Gulf of Mexico region, home to BP’s (NYSE: BP) infamous Deepwater Horizon spill in 2010, has “more than 4,000 platforms pumping oil and gas from 35,000 wells through nearly 30,000 miles of pipelines,” The Wall Street Journal reports.
Hindrances
BP’s disaster has invited an onslaught of new regulations. The disaster, which killed 11 people, was the worst offshore spill in U.S. history. Once the leak occurred, the U.S. announced a six-month moratorium on all drilling in the region, giving regulators the chance to re-draft rules.
And re-draft they did. The new rules detail specific construction standards for building wells, include safety equipment standards, and mandate that drillers have quick access to a system to close off leaks.
The new regulations have certainly slowed lead time. Regulatory agencies now take an average of 150 days to process exploration and development plans, compared with 54 days pre-spill. But lagging regulators aren’t slowing the pace of drilling – the Gulf of Mexico has become more robust than ever.
Tidal Wave of Entrants
The Gulf area is booming. Plains Exploration & Production (NYSE: PXP), for example, bought $5.5 billion in assets from BP. In a move that has been rigorously questioned by analysts, Plains hopes to ignite its oil growth by drilling in an area where only the “big boys” work. In order to pull off the deal and enter the Gulf area, Plains sold natural gas assets and took on debt.
Like Plains, three other firms have jumped into the area. ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), and Royal Dutch Shell (NYSE: RDS-A) are vigorously drilling in the Deepwater Horizon area.
Exxon operates a major lease block approximately 250 miles south of Louisiana, and Chevron operates slightly east of Exxon. A lease block is a government-owned piece of land, leased to drillers. The U.S. government owns numerous lease blocks, and drillers apply for permits to drill on the land.
Exxon’s site, known as its Hadrian project, is expected to produce large profits for the firm, a Godsend during a time when natural gas prices are at their lows. Exxon is the largest producer of natural gas in the United States.
East of Hadrian you will find Chevron’s drill sites. Jack and St. Malo, as they are called, were started in 2011 and are also major deep-water projects. Chevron’s largest producing assets in the Gulf are its Blind Faith and Tahiti drill sites, reports the company’s website.
Northeast of Chevron’s sites, Shell operates its Stones site. The Stones site is also a major deep-water project. Earlier this year, Shell invested $403 million in exchange for a handful of more leases in the Gulf region, where it conducts 55% of its oil and gas production. In total, Shell has 423 licensed blocks in the Gulf of Mexico, the firm’s website says, but most of the blocks remain undeveloped.
Since BP’s oil spill in 2010, companies have been reluctant to jump back into the Gulf of Mexico, especially near the Deepwater Horizon site. With increased lead times and a conglomeration of new regulations to deal with, the hesitation certainly makes sense. But now times are different.
Natural gas prices are near historic lows and oil prices have risen steadily. Moreover, firms are jumping at the chance to sell their oil at the Brent price, which is markedly higher than the United States’ light crude price. Oil companies may have paused their leap back into deep-water drilling, but taking the plunge toward major profits was definitely worth the wait.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
