US Government Gulf Drilling Halt Delays $1.6 Billion-$2.9 Billion In Spending -Study

Between $1.6 billion and $2.9 billion worth of drilling in the Gulf of Mexico will be delayed by the federal government's temporary halt on new permits following the Deepwater Horizon disaster, according to a report by energy consultancy Wood Mackenzie.

Earlier this month, the U.S. Department of the Interior said it would issue no new drilling permits until at least May 28, the deadline for the initial report on the accident that unleashed a massive oil leak that continues to threaten the Gulf Coast. Oil and gas producers are concerned that the moratorium could be extended and impinge on future drilling plans in the Gulf, which provides about 30% of the oil and 12% of the natural gas consumed in the U.S.

If the moratorium on new permits were to be extended to six months, about 80,000 barrels of oil equivalent per day, or 4% of projected 2011 oil and gas output would be deferred, the Edinburgh, Scotland-based consulting firm wrote.

Wood Mackenzie said the development of several existing oil discoveries in the area could also be jeopardized by delays and substantial cost increases resulting from stricter safety regulations expected to follow last month's fatal burning and sinking of Transocean Ltd.'s (RIG) Deepwater Horizon rig, which BP PLC (BP) was leasing. These delays and higher costs could defer as much as 19%, or 350,000 barrels of oil equivalent a day, of projected deepwater Gulf production in 2015 and 2016.

An extension of the drilling moratorium would lead to longer drill times, raising both exploration- and development-well costs. A 10% increase in overall capital expenditure would drop the internal rate of return--a measure used by companies to compare profitability of investments--of Gulf of Mexico oil discoveries to 15% or less. This would put several of them close to, or below, the profitability rates required to proceed with a project, according to the report.

"Since development drilling costs can be up to 70% of total capital expenditure, the impact on overall project economics could be detrimental to the extent that it throws into question the viability of a number of projects, both large and small," says Julie Wilson, Wood Mackenzie's analyst for the Gulf of Mexico and author of the study.

The report estimates that seven out of 13 current discoveries in the deepwater Gulf of Mexico could be rendered uneconomic to develop if the government extends the offshore drilling ban to six months, putting $7.6 billion in future government revenues at risk. The report doesn't specify the names of the discoveries.

Extending the drilling ban could also force oil-services companies to move equipment, including drilling rigs priced at up to $500,000 a day, out of the Gulf to keep them gainfully employed, according to the report. "If this happens, bringing equipment back to the Gulf of Mexico could take time, so there could be a drag effect on new drilling," Wilson said.

-By Isabel Ordonez, Dow Jones Newswires; 713.547.9207; isabel.ordonez@dowjones.com

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