Wood Mackenzie's Analysis of the Extended 6 Month Gulf of Mexico Drilling Moratorium
HOUSTON, 17th September 2010 - In response to the ongoing oil spill in the deepwater Gulf of Mexico (GoM), a six-month drilling moratorium and new restrictions to licensing activities on the Outer Continental Shelf (OCS) were announced on 27th May 2010. Key details of the moratorium and licensing changes include:
- No new drilling will be allowed in water depths greater than 152 metres (500 feet) for six months, including sidetracks and bypasses of currently-drilling wells.
- Drilling on 33 wells will be suspended at the first safe stopping point.
- Workover activities, well completions, abandonment activities, interventions, and waterflood, gas injection, and disposal wells will not be affected.
- Drilling offshore Alaska will be postponed until at least 2011.
- Western GoM Lease Sale 215 and the proposed Virginia Lease Sale 220 have been cancelled.
- The three other remaining GoM lease sales in the 2007 – 2012 OCS Leasing Programme are subject to review.
- New standards for equipment and procedures will be implemented, with a focus on blowout preventers (BOPs), well control systems (fluid displacement procedures), casing and cementing.
Wood Mackenzie has completed an updated analysis of the effects of a six month drilling moratorium and the potential impact of tighter regulation and new practices. The findings of our analysis are:
- Production from the deepwater GoM will be 93,000 barrels of oil equivalent per day (boe/d) lower during 2011 due to the direct impacts of the six-month ban on drilling. If new regulations for equipment and procedures slow activity and delay projects after the moratorium expires, another 100,000 boe/d could be deferred from 2011 to later years. Combined, these production deferrals could reduce output from the deepwater GoM by as much as 10% in 2011.
- Some fields could end up having higher production in the near-term as a result of the moratorium. Operators may be able to keep some rigs busy performing workovers, recompletions, and other interventions on existing wells at maturing fields. These older fields will benefit from the availability of rigs to do what is usually considered to be low-priority work compared with drilling new wells.
- As a result of the Macondo oil spill and the six month moratorium, we now forecast total US liquids supply to average 7 million barrels a day (b/d) in 2011 - a downward revision of 155,000 b/d. Although this is a significant decrease for the GoM, the impact is less pronounced in terms of overall US production, with the downward revision representing 2.2% of output in 2011. To help put this into perspective, Hurricanes Katrina and Rita resulted in average losses of around 300,000 b/d in 2005, and some 160,000 b/d in 2006 respectively.
- Due to new regulations, drilling activity in the deepwater GoM could be slow to recover after the moratorium expires. If rigs and other equipment are moved out of the region, this delay in returning to pre-moratorium activity levels will be compounded. The combined effects of the moratorium, tightened drilling regulations, and delays in returning to pre-moratorium activity levels could push 340,000 boe/d of deepwater GoM production from 2015 to later years.
- Insurance costs have already risen sharply for deepwater operators, and enhancing safety regulations will increase costs further. If capital and operating costs were to increase by 20%, over US$11 billion in value would be eroded from existing deepwater GoM projects, and federal tax revenues from those fields would be reduced by more than US$5.4 billion.
- Further cause for concern is the potential for higher costs to marginalise new deepwater developments. This would cause production, reserves, and government revenues to be lost completely instead of just being deferred. We estimate that a 20% increase in costs could marginalise a number of existing discoveries, putting around 1.8 billion boe of reserves and US$7.6 billion in future government revenues at risk.
- Higher exploration costs in frontier areas of the Gulf of Mexico - which are already economically marginal - could dampen the exploration community's appetite for these areas, which form a vital part of the long-term production prospects in the region.
Importance of deepwater to explorers
- Deepwater has seen close to half of global exploration spend in recent years. The investment has been attracted by the large yet-to-find potential of deepwater plays coupled with the belief that discoveries can be developed at reasonable cost and with acceptable lead times.
Map showing the global distribution and yet-to find potential of deepwater basins
This map shows basins by Yet-to-Find Volumes, based on exploration 2010-2030 in plays located solely in deepwater (>400 metres).
- The industry's enthusiasm for deepwater reflects the new field volumes discovered. Since 2000, 40% of such reserves discovered have been in deepwater. These volumes have been added at an average Discovery Cost of US$0.79/boe which compares favourably with average Discovery Costs of US$1.48/boe for non-deepwater areas. Since 2006, with the emergence of Brazil's Santos Basin Pre-salt play, average deepwater discovery costs have been particularly competitive.
- The US Gulf of Mexico has been the most important deepwater region in terms of investment, accounting for around one-third of global deepwater exploration spend. Discovery costs here have been much higher, averaging US$3.13/boe over the decade. Explorers have been willing to target very deep and/or quite small prospects in the expectation that established deepwater infrastructure will facilitate development.