Study says offshore drilling industry forever changed after Gulf spill

A new analysis from the tax and advisory firm Grant Thornton concludes the BP oil spill and the political reaction to it could prompt consolidation in the offshore industry and reduce Gulf of Mexico oil production.

Tougher liability rules — though Congress hasn’t decided how much tougher — the increased insurance costs that come with them, higher penalties, tougher permitting requirements and other new rules will together change the landscape fundamentally, the company concludes.

{mosads}“As all of the costs associated with operating in the Gulf continue to rise, deepwater drilling will increasingly become the province of only the largest, most well-capitalized companies,” said Rob Moore, a director in Grant Thornton’s Corporate Advisory & Restructuring Services practice, in the report.

The report predicts that industry consolidation might be on tap if independent companies have a hard time getting permits or coping with higher costs of doing business in the Gulf. These companies or their Gulf assets could get gobbled up by industry behemoths like Chevron, ExxonMobil and Total if Congress greatly increases or removes liability limits.

But the big companies getting bigger could actually lead to less Gulf production, according to Grant Thornton. The big guys tend to focus on making new discoveries and producing in previously undeveloped areas, in contrast to independents that are “experts at maximizing production in older, more mature fields and finding reserves considered a low priority by larger companies,” the report states.

“Consolidation of Gulf oil and gas properties into fewer hands could actually result in a decline in Gulf production. Large, integrated oil and gas companies will now have even more properties to evaluate; consequently, mature fields and declining wells will likely not receive the attention needed to maximize the production of these fields.”

The report ends with a warning about handing a market advantage to big state-owned or state-controlled oil companies (called national oil companies, or NOCs).

“As U.S. policymakers contemplate regulatory changes in order to reduce the probability of another oil spill, they must understand the economic ramifications of enacting too much regulation. Excessively stringent regulation could result in drilling and operating costs increasing to the point it becomes uneconomical to drill in the deepwater Gulf. Eliminating or significantly reducing Gulf production would increase U.S. reliance on foreign oil and leave the U.S. even more dependent on OPEC countries and NOCs. Increasing the market share and influence of OPEC countries and NOCs may result in significantly higher oil prices — and far less price stability in world oil markets,” it states.