By Myra P. Saefong
Expectations for stricter U.S. offshore drilling regulations
following the massive oil spill in the Gulf of Mexico will drive
energy exploration firms to look elsewhere -- and Asia, with its
growing energy market, may be particularly tempting.
The oil spill disaster, which reports have referred to as the
worst oil spill in U.S. history, began with an explosion on the
Deepwater Horizon drilling rig operated by BP PLC (BP) on April 20
-- and the well it drilled has been leaking oil at an estimated
range of 12,000 to 25,000 barrels per day since, according to a
report from Platts.
In response, the U.S. government has placed a six-month hold on
deep-water offshore drilling until a review of offshore regulations
for deep wells is complete.
"If the deep drilling hold for U.S. waters continues the full
six months, at least some of these Gulf deep-water rigs will move
to other areas rather than sitting idle," said Charles Perry,
president of energy-consulting firm Perry Management.
The number of active rigs drilling for oil and natural gas in
the U.S. and Canada stood at 1,506 for the week ended June 4, with
the count down 29 rigs from the previous week, according to data
from Baker Hughes Inc. (BHI)
"Prime locations where [rigs] could find work include the South
China Sea, all through the waters of Malaysia, Australia and
Indonesia," he said, adding that some rigs might also go to the
Middle East and Nigeria.
There's also speculation that if these rigs do move, given that
quite a few of the larger rigs are leased on five-year contracts,
it will be at least six years before producers in the U.S. waters
can get them back, Perry said.
Price spike on tap?
In Asia's late morning trading Thursday, shares of regional oil
majors were mainly higher, finding some support from a more-than-3%
gain in oil futures prices in New York.
And more gains for oil prices may be on tap.
An extension on the U.S. drilling ban could eventually translate
to sharply higher oil prices, according to analysts at Mirae Asset
Securities, led by Gordon Kwan.
The drilling ban also covers wells currently drilling, not just
permitting for new wells, Kwan said in a note to clients this
week.
"This will affect oil scarcity down the road, while triggering
concerns about potential price spikes in the middle of the
hurricane and [U.S.] summer driving season," Kwan said.
In Hong Kong, shares of PetroChina Co. (PTR) were down 0.7%, and
China Petroleum & Chemical Corp. (SNP), or Sinopec, fell 0.5%,
but Cnooc Ltd. (CEO) added 1.1%, outperforming a 0.3% decline in
the Hang Seng.
Sinopec's stock in Shanghai lost 1.4%, with PetroChina down
0.2%, as the Shanghai Composite fell 0.8%.
In Tokyo, Japan Petroleum Exploration Co. (1662.TO) added 1.4%,
and Inpex Corp. (IPXHY) climbed 2.8%, with the Nikkei Stock Average
up 0.3%.
Sydney's S&P/ASX 200 index added 0.9% with Woodside
Petroleum Ltd. (WOPEF) adding 2.4% and Oil Search Ltd. (OSH.AU) up
3%.
Strategy change
The six-month moratorium on U.S. deep-water drilling is only a
small concern given the potential for longer-term or permanent
regulations on drilling in U.S. waters, analysts said.
"The big worry is that more stringent regulations are in the
offing, and some are even talking about outright bans," said Brian
Milne, Telvent DTN's refined fuels editor.
"Already, proposals to drill off Virginia and New Jersey are
seen ... dead in the water; while West Coast senators have a
proposal circulating that would permanently prohibit drilling off
that coast," he said.
"A ban on this exploration would definitely send drilling
activity to other parts of the world," he said, pointing out that
with the six-month moratorium of deep-water activity, 33
development projects have been forced to suspend operations.
The political risk of a future ban on deep-water drilling will
have some companies "strategizing" now where they should go to
drill, Milne said.
In the meantime, "some other countries have already stiffened
offshore regulations," said Perry, citing reports that the U.K.
announced inspection fees for offshore rigs would triple and that
there would be at least twice as many inspections.
Norway has halted all new deep-water oil drilling in the North
Sea until an inquiry is conducted into the cause of BP's oil leak,
according to a report Tuesday in the Telegraph.
China's stake
If rigs start to become available, China, with its daily rig
rental prices likely under pressure, would have a good opportunity
to capitalize on the situation, said Milne -- "whether drilling
through their national oil company or in a joint-venture
relationship."
Mirae Asset's Kwan said "it is difficult to say how many foreign
firms will find offshore China to be a more appealing place for
oil/gas exploration amidst much stiffer U.S. drilling regulations
and laborious permitting process."
However, "if more foreign firms do decide to come over, Cnooc
can take up to a 51% stake in their commercial oil/gas finds as a
production-sharing contract partner," he said.
And "although China's geological potential might not compare
well with countries like Brazil and Nigeria or the Middle East, the
fact that any oil/gas discovery will be much closer to a
fast-growing energy market will be tempting enough for many U.S.
oil explorers wanting to diversify overseas," Kwan said.
All in all, Milne said: "it's difficult to know for sure what
might come to pass, but these are real threats that could change
crude-oil production in the U.S. forever."