Smaller Oil Firms Fear Regulation Backlash In Gulf

The Deepwater Horizon disaster may lead to a re-mapping of oil production and exploration in the Gulf of Mexico. Smaller oil companies say the additional expense created by increased oversight may force them to look for business elsewhere.

The Gulf of Mexico is one of the world's major oil and gas provinces. The offshore industry was born here in 1947. It's close to the petro-capital of Houston. And, of course, it's in the backyard of the world's oil glutton.

But the Gulf is about to get less attractive to work in.

Tougher Regulations

After the BP calamity, operators know that more stringent regulations are on the way, which will raise their costs of drilling and completing a well. This will fall hardest on independent oil companies, which hold a majority of the mineral leases in the Gulf of Mexico, primarily on the continental shelf.

The majors produce most of the oil from deepwater wells, which can easily cost $100 million apiece.

"What will happen is regulators will build in even more redundancy," says Bruce Vincent, chairman of the Independent Petroleum Association of America (IPAA), which has almost 5,000 members. "You'll need more equipment. You'll need to have it inspected more often. You'll probably need more people on site -- certainly higher qualified people -- that will take more manpower. All of that will add cost and expense."

Vincent hastens to point out that his industry does not oppose additional regulation to prevent another deep-water disaster, but he says what's coming is going to be tough on independents.

'A Game-Changer'

In recent years, independents had already begun to pull out of the Gulf because their shallow-water properties are mature and depleting. The oil spill is expected to continue that trend.

Offshore operators are now looking at possibly higher liability. Last week, the Senate Environment and Public Works Committee approved legislation to eliminate the $75 million cap on damages that oil companies can be forced to pay for oil spills.

Industry insiders wonder if offshore drilling will become uninsurable for all but the super-majors and national oil companies.

"It's definitely a game-changer, no question about it," says Bob Tippee, editor of the Oil & Gas Journal. "The rules are going to change. The question is are the rules going to be constructive, or are they going to be so onerous that many companies will just choose to move their investment elsewhere?"

Uncertainty is the enemy of capital investment.

Reallocation

One of the companies that is already shifting its focus away from the gulf is Houston-based Swift Energy, which drills wells onshore and in the shallow waters of Louisiana and Texas. The company president is Bruce H. Vincent, the chairman of IPAA.

"We've reallocated some of our higher risk capital that we were looking at spending in the inland waters in Louisiana, and we've reallocated it primarily to an operation we have in South Texas, where we're exploiting the Eagle Ford Shale," Vincent says.

The Eagle Ford Shale is one of the hottest plays in the country because it contains not just natural gas, but oil.

Swift Energy spends $5 to $9 million to drill a well in shale, a formation that requires high-pressure water fracturing and horizontal drilling to recover hydrocarbons. But that compares to $20 to $40 million for a shallow-water well in the Gulf.

An Oil Bonanza

Today, oil companies big and small are scrambling to buy up mineral leases in the Eagle Ford, which extends 250 miles across arid South Texas.

Ben Prause, the Dewitt County Judge in South Texas, says the shale boom has enabled his county to lower taxes, improve roads and rent vacant buildings downtown.

"The hotels, all of them, seem to be crowded ... cafes and service stations, too," Prause says. "There's been lot of leases. The bonuses they pay for three-year leases have soared as high as $2,500 an acre."

Experts say other shale formations around the country that contain not just gas, but oil, will become more popular as the Gulf disaster drags on. These include the Bakken Shale in North Dakota and Montana and the Niobrara Shale in Colorado.

One man's oil spill is another man's bonanza.

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