Oil Industry Faces `1,000-Year Flood' as Gulf Spill Puts Halt to Drilling

Energy companies are scrambling to cope with the extension of a deep-water drilling ban, a situation many never foresaw before BP Plc’s oil well began spewing crude into the Gulf of Mexico last month.

President Barack Obama yesterday said the suspension is being lengthened by six months and work on 33 exploratory wells will be halted. The decision follows an April 20 rig explosion that killed 11 workers and sent oil from BP’s Macondo well gushing toward the U.S. coast.

Companies can’t plan for an event such as the extended moratorium, said Gene Shiels, a spokesman for oilfield-services provider Baker Hughes Inc., based in Houston. The industry may move personnel and equipment to other markets, such as Brazil and West Africa, and may see job losses, he said.

“The spill is like the 1,000-year flood: it’s the worst- case scenario,” said Brian Youngberg, an analyst with Edward Jones in St. Louis. “It’s hard to prepare for those extreme situations like that.”

Obama also dropped plans to open waters off the coast of Virginia to drilling, canceled a lease sale in the Gulf, and suspended the permitting process for Royal Dutch Shell Plc’s planned wells off of Arctic Alaska. He said new safety rules will be imposed on offshore drilling.

Operations in waters less than 500 feet (152 meters) deep are exempted, U.S. Interior Secretary Ken Salazar said yesterday.

Not Carrying Expenses

“You’re probably not going to sit there 60, 90 days and just carry all these expenses,” Shiels said. “You’re going to move people, you’re going to move equipment and there may unfortunately be some layoffs if this thing goes on long enough.”

Transocean Ltd., the Geneva-based owner of the Deepwater Horizon rig that exploded last month, said today that it’s working with customers on how to deal with the drilling stoppage.

“This is all sort of happening on the fly,” Gregory Panagos, vice president of investor relations and communications at Transocean, said on a conference call with analysts and investors. “We have to be careful to stay away from rumors or speculation about how this might be implemented because nobody knows.”

Force Majeure

Steven Newman, Transocean’s chief executive officer, said the company’s 14 Gulf rigs have force majeure provisions, which can be declared in cases where causes are beyond a company’s control.

The halt could “exacerbate” the need for financing at Houston-based Pride International Inc., the U.S. oil and natural-gas driller with equipment from India to Africa, said Adam Miller, an analyst at Fitch Ratings in Chicago. Pride is happy with the progress in its construction program, said Kate Perez, a company spokeswoman.

Miller said some rigs might be sent to regions outside the Gulf.

“You’re really seeing a very unusual accident in a very large market for these rigs,” Miller said. “The combination of those two is what’s creating the problems, and certainly now that it’s entered kind of the political realm, that’s where you get additional uncertainty.”

Federal leases in the Gulf of Mexico are forecast to produce 1.76 million barrels a day of oil in 2011, 32 percent of total domestic output, the Energy Department said May 11 in its Short-Term Energy Outlook.

Grind to Halt

U.S. oil output may be cut by 160,000 barrels a day next year as a result of the ban, according to Deutsche Bank AG. A one-year delay to deep-water projects would reduce global supplies by 500,000 barrels a day between 2013 and 2017, Sanford C. Bernstein said.

“The impact is most likely going to be a significant decrease in activity, and we just don’t know if it’s going to happen this week, next week, or over the course of a month,” said Ian Macpherson, a vice president at Simmons & Co. in London. “It looks like deep-water drilling is going to essentially grind to a halt.”

In the longer term, “more burdensome” regulations may make it tougher for smaller operators to work in the deep water, Macpherson said.

Shell has five wells affected by Obama’s call to halt drilling at 33 exploratory locations. Eni SpA, based in Rome, and Houston-based Marathon Oil Corp. and Anadarko Petroleum Corp. each are shown as having three, according to an official with the Minerals Management Service who asked not to be identified discussing the specific companies.

Reviewing Decision

Bill Tanner, a spokesman for London-based Shell, said the company is reviewing the president’s moratorium decision. At Anadarko, John Christiansen, a spokesman, said the company’s “deep and diverse global portfolio” provides flexibility. Eni didn’t answer a phone call seeking comment.

Marathon Oil, the fourth-largest U.S. energy producer, will stop drilling at its Innsbruck prospect in the Gulf, according to Lee Warren, a company spokeswoman. “We’ll work as directed to safely, temporarily abandon that well,” she said.

Norway’s Statoil ASA is evaluating what to do with two exploration wells in the Gulf, Kjersti Torgersen, a company spokeswoman, said. The moratorium won’t be an obstacle for the company’s U.S. business in the long run, she said.

“In the short term, yes, it will obviously have a financial effect on us, but we want to work together with the government to see how we can solve this and hopefully come back to drilling as soon as possible,” Torgersen said.

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net.

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