Heightened safety and environmental concerns in the wake of BP's Gulf of Mexico oil spill are threatening to impact offshore drilling around the world, despite a Louisiana judge overturning the US's six-month moratorium on deepwater drilling this week. The Obama administration is appealing the decision and there are rumours the moratorium could be extended by 12 to 18 months if successfully reinstated.
Permits in Alaska have already been suspended, which will delay Royal Dutch Shell's plans to drill in Chukchi this year. Norway has announced that its 21st licensing round will not award any deepwater blocks until the investigation into the cause of the Deepwater Horizon explosion is complete. Cairn Energy has received all necessary approvals to drill two wells in Greenland starting next month, and whilst the government there has made no official announcements, any reaction to events in the Gulf could prove disruptive given the short weather window available.
Deepwater insurance costs will inevitably increase and there have been calls to increase the liability limit from $75m (£51m) to $10bn per well. This would probably drive out all but the oil majors from the Gulf of Mexico and also lead to a downturn in drilling in shallower waters, which would have a knock-on effect on oil services companies.
The oil price has trended sharply down since the Macondo blowout in April, but the US moratorium on deepwater drilling could yet have a material impact on oil supply and provide longer term upward price pressure. While deepwater wells usually flow strongly at the outset (as unfortunately demonstrated by BP's struggles to contain the Macondo leak), they often decline steeply, which requires a lot of extra drilling to maintain output.
Analysts at Macquarie estimate that deepwater production contributed around 1.3m barrels per day (bopd) out of total Gulf of Mexico oil flows of 1.7m bopd in the first quarter of 2010. Of the 33 wells where drilling was suspended, 25 were development wells that would have contributed new production within the next few years or months. The American Petroleum Institute estimates production will decline by between 80,000bopd and 130,000bopd through to 2015, which leads the Macquarie analysts to conclude that the oil price could once again breach $100 a barrel in 2012-13.
