Politics and the Gulf of Mexico

Energy Strategist (06/01/2010)
"BP's Macondo play in the Gulf of Mexico has leaked oil for more than a month, and public frustration is growing.

From a political perspective, this presents a problem for the Obama administration. At first the public supported the President's reaction to the spill, but polls indicate that opinions are changing, and Obama's approval ratings have declined.

I devoted the entire May 5, 2010 issue of The Energy Strategist to the Macondo disaster and an analysis of the stocks most likely to be affected. As I noted then, I saw the potential for further extensions to the moratorium on granting new drilling permits and suspected that the government might cancel new Gulf of Mexico lease sales.

On May 27 President Obama did just that, extending the moratorium on new offshore well permits by a further six months and canceling two planned lease sales. But many analysts were surprised when the Administration announced that wells currently being drilled in water deeper than 500 feet deep will be halted as soon as it is safe for producers to stop operations. This mandate covers 33 wells currently being drilled, and, by extension, 33 deepwater rigs drilling those wells.

Because BP's so-called 'top-kill' operation failed to stanch the oil flow, I see little chance that the anti-deepwater rhetoric will calm down anytime soon. The moratorium could be extended beyond six months—a risk that becomes more likely the longer the well remains out of control.

The sector that's most likely to be negatively impacted by the moratorium is the offshore contract drillers. Most drilling contracts contain force majeure clauses that are triggered after drilling is interrupted for a certain period of time. Once triggered, the day-rates drop to a slightly reduced rate for a period, after which the producer has the right to cancel the contract."

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