July 30, 2010

The Gulf Coast has always indulged the power sector more than the rest of the country. Getting permission to build fossil-fired generation, as well as nuclear plants and LNG facilities, has been typically easier there than elsewhere.

The same is true for both deep and shallow water drilling for oil and gas in the Gulf of Mexico. After all, the region's economy is dependent on that industry. But the BP oil spill has changed some attitudes and forced some additional study. The Obama administration has thus proposed a new moratorium on drilling in the deep waters for oil while giving the less-risky shallow water natural gas developers some latitude.

Both groups are responding: Oil giants Chevron, ConocoPhillips, ExxonMobil and Shell are teaming to build a quick-response plan where producers will be able to respond to any crisis within a day and collect 100,000 barrels of spilled oil at depths of 10,000 feet. They are expecting the system to be operational within two years. Meantime, shallow water natural gas producers say that new, proposed ban on oil has also left them in the lurk.

The Obama administration's first ban in early May on offshore drilling was overturned by a federal judge, who called it overly broad. But U.S. Department of Interior has challenged that ruling while also proposing a new moratorium that it says is more specific. The administration, in fact, has pretty much said it is okay to drill in shallow waters but the reality is that natural gas producers can't get the necessary permits.

The Interior Department's new safety and environmental requirements have not been clearly outlined for those who drill in shallow water, says the Shallow Water Energy Security Coalition. As a result, more than 35 percent, or 28 shallow water rigs, in the Gulf of Mexico are resting while they await approval to operate, it says. Further delays would hurt economic activity and cause job loss.

"To date, and despite assurances from the White House and the Interior Department, about one-third of the shallow water fleet has been idled by the application of what can only be called a de facto moratorium," says Jim Noe, general counsel of Hercules Offshore. "Unless Interior changes course, and matches their action with their rhetoric, another third of the fleet will be idled and thousands more workers will be furloughed within the next few weeks."

Hold Tight

Hold tight, say critics, who argue that the federal government is in the midst of its study to determine future permitting practices. If those processes are cut short, the area would put in further danger. They say that the president has already taken the middle road and that its current moratorium that exempts shallow water drilling is a compromise.

Several environmental organizations have said that the previous one-size-fits-all approach to deepwater drilling permits is seriously flawed. For starters, some such as the Center for Biological Diversity, the Sierra Club and the Defenders of Wildlife are pointing out that the Gulf region generates billions from the tourist and seafood trades -- whole economic segments that have been devastated by this oil spill.

A third of the Gulf of Mexico, for instance, is under government-imposed fishery closures. Tourism, meanwhile, makes up about 46 percent of the economy in that region. Scholars at the University of Central Florida project a nearly $11 billion loss in tourism-related revenues in Florida alone, amounting to 195,000 jobs.

"The moratorium on drilling is crucial to ensure that safety and environmental measures are in place to prevent the next Deepwater Horizon oil spill," says Miyoko Sakashita, oceans director at the Center for Biological Diversity. "The industry attempt to overturn the moratorium is an unacceptable gamble with the fate of the Gulf coast's human and natural environment."

There's no simple solution: The Gulf region is dependent on tourism, seafood and the oil and gas industry for its livelihood. And it appears that the Obama administration has taken the most prudent tack by trying to improve the deepwater permitting process while "allowing" shallow water development to go forth.

To be clear, the administration's rewrite of the federal drilling ban is not exactly about the depth of the drilling. It is more about "drilling configurations and technologies." But that distinction has resulted in an effective ban on shallow water production, say members of Congress who live along the coastal region. They have asked the Interior Department to clarify the rules so that shallow water producers can rev up.

The live feed from the bottom of the Gulf floor explains a lot. Thick, smelly oil spewing to the earth's surface is a lot more problematic than the plumes of natural gas that are bursting forth at the same time. Both the oil and gas are found together during deepwater drilling. But it's really just the natural gas that is discovered at the shallow end.

"Shallow water operators must abide by all safety and environmental regulations, but without clear guidance on how to meet those standards, they are being forced to shut down operations or are facing application delays," says Senator Kay Bailey Hutchison, R-Texas. "(B)ureaucratic delays are becoming a de facto moratorium on shallow water drilling, and they are hurting Gulf Coast communities and endangering American jobs."

Understandably, the oil and gas industries want to get back to business. But the Obama administration has to take a more a cautious approach -- one that the respective sectors should appreciate, given that another serious accident would doom each. Getting the permitting process right is therefore more important than getting it restarted.

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