Oil Firms, Rig Owners Navigate Drilling Moratorium
Storms in the Gulf of Mexico are forcing BP to temporarily halt drilling a relief well. The well is the final step in what has been a three-month effort to stop oil from gushing into the Gulf.
On Wednesday, a federal judge in New Orleans is scheduled to hear arguments over whether the government's moratorium on deep-water drilling in the Gulf is legal. The six-month moratorium has cast uncertainty on the entire Gulf oil industry -- and what could it mean for the businesses that operate drilling rigs and the people who work on them.
Deep-water drilling rigs are huge, expensive vessels -- up to 1,000 feet long with price tags in the several-hundred-million-dollar range. And every day, they cost hundreds of thousands of dollars to operate.
"Yeah, we're talking big dollar signs here," says Rob MacKenzie, an oil industry analyst for FBR Capital Markets.
The rigs are owned by companies including Transocean and Diamond Offshore -- which then lease them to BP, Chevron and other oil companies. These are long-term contracts that guarantee the rig owner will get paid figures like $400,000 or $500,000 a day -- no matter what.
About 30 rigs are sitting idle now because of the moratorium on deep-water drilling. But the rig owners and their oil company partners are anything but idle. MacKenzie says they're scrambling, negotiating, trying to figure out what to do with these very expensive rigs.
"On one hand, you're looking at having no work in the U.S. Gulf of Mexico," he says. "On the other hand, you stand to make some money by moving it elsewhere."
Some oil companies have renegotiated their contracts to lower rates, while others are looking to move the rigs to other parts of the world. So far, just two rigs have actually left. They're headed for drilling sites off of Egypt and the Democratic Republic of Congo.
"You already have leases waiting on rigs in West Africa and Brazil and places like that, so you can sit there and say, 'Well, speed this one up, slow that one down, and move the rig and keep working,' " says Eric Smith, associate director of the Tulane Energy Institute.
In a way, these massive rigs are like commodities in a pretty small global market. There are fewer than 300 of them around the world.
"There's a constant flux in the market depending on the supply and demand of rigs. What we've done is we've all of a sudden dumped a whole bunch of rigs on the market who are available, at the right price," says Ken Arnold, a consultant to the oil and gas industry.
According to the firm ODS-Petrodata, day rates on new rig contracts are down since the Gulf oil spill, which began with a rig explosion April 20. The market was getting soft even before the spill. But Arnold says now it's definitely a buyers' market.
MacKenzie says that hurts the rig owners.
"This moratorium is going to harm the profitability of all of the deep-water drilling contractors around the world," he says.
That's because of the lower day rates. But he says there's a human cost, too.
"Perhaps one of the more tragic effects is the impact on jobs of rig workers in the U.S.," he says. "As these rigs leave for other markets, some or most of the jobs don't go with them."
What's uncertain at this point is whether those two rigs that have left the Gulf are the start of an exodus -- or just part of the routine movements of an industry that goes where the work is.