Study outlines economic impact of independents in gulf

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 23 -- Excluding independent producers from the deepwater Gulf of Mexico would eliminate 265,000 jobs and $106 billion in federal, state, and local tax revenue by 2020, a new study by IHS Global Insight in Lexington, Mass., concluded. If independents left the gulf completely, 300,000 jobs and $147 billion in taxes in the region would be lost over 10 years, it added.

“Our analysis demonstrates that the independents are responsible for a substantial amount of oil and gas production in the gulf and contribute substantially to the economies of Gulf Coast states, counties, and communities,” said James Diffley, group managing director of US Regional Economics at IHS Global Insight and the report’s lead author.

“By 2020, we project that the independents’ contribution will have risen to 60% of the total from offshore oil and gas activity in the gulf,” he told reporters during a July 22 teleconference as the report, “The Economic Impact of the Gulf of Mexico Offshore Oil & Natural Gas Industry & the Role of the Independents,” was released. It is available online at www.ihsglobalinsight.com/gulfoileconomicimpact.

The study was commissioned by Cobalt International Energy Inc., a Houston independent with assets in the gulf and off West Africa. “Policies which have the effect of excluding independents from the gulf would shrink offshore activity, threaten hundreds of thousands of jobs, and result in billions of dollars of lost economic activity,” said Joseph H. Bryant, the company’s president.

“According to the analysis, in 2009, independents operating in the gulf accounted for more than 200,000 jobs, $38 billion in economic benefits, and $10 billion in federal and state revenue and royalty payments,” he continued. “There were 121,000 jobs generated by independents in the deepwater gulf alone.”

Larger losses
Actual federal tax losses would be larger because the economic analysis covered only Louisiana, Texas, Mississippi, and Alabama and not revenue impacts on income earned elsewhere in the US from manufacturing and investment activities related to the gulf, the report said.

This resulting “vacuum” would be filled only “marginally” by the majors, it said. “The loss of the independents could actually precipitate an overall decline in activities because of the integration between majors and independents. Because of the scale of the independents’ involvement in the gulf, including the deepwater, their exclusion would likely lead to ‘a significant shrinkage in offshore oil and gas activity…and a dilution of the US technological and industry leadership.’ This would mean a significant decline in oil output from what otherwise would be the ‘growth engine’ of domestic US oil production.”

Samuel H. Gillespie, general counsel and executive vice-president, Cobalt International, said the company commissioned the study because of federal legislative proposals following the Apr. 20 Macondo well blowout and resulting oil spill, which effectively could raise liability limits so high that independents would not be able to get insurance to continue operating in the gulf.

“Views have been voiced that the only people drilling in the deepwater should be companies with balance sheets so large they can self-insure even for events as large and tragic as the Deepwater Horizon spill,” Gillespie said during the teleconference. “We wanted to get facts from a credible source about the value smaller companies bring to the gulf.”

The US Senate Environment and Public Works Committee passed a measure on June 30 that would make offshore oil spill liability under the 1990 Oil Pollution Act unlimited for responsible parties. The approved measure was an amended version of a bill offered on June 3 by Sen. Robert Menendez (D-NJ) that would have raised the liability limit to $10 billion from $75 million. US Rep. Rush J. Holt’s (D-NJ) similar bill passed the House Transportation and Infrastructure Committee on July 2.

Full participants
Gillespie said the new report outlines the integration of independents into the gulf’s oil and gas operations. “If you look at the leases there, in both shallow and deep water, the vast majority are operated by independents. They are producing well over a third of the reserves,” he noted.

“While an independent was a partner in the Macondo well, there are many situations where independents are operators and majors are nonoperating partners,” the Cobalt International official said, adding, “The report itself lays out this integration between independents and majors that exists across the gulf. It’s that integration which should be maintained as an important value to the gulf and the nation as a whole.”

The report pointed out that in the deepwater gulf, independents have taken an average of over 70% of the farmed-out acreage from the majors over the last 10 years and now operate nearly 3 billion boe that the majors originally discovered. It said independents’ share of deepwater gulf exploration and development drilling has steadily grown from less than 15% in 1998 to more than 50% in 4 of the last 7 years.

“While the growth in total drilling is impressive, the independents’ role in exploration is even more so,” it continued. “Independents have drilled, as operators, over half of the total exploration wells in the deepwater gulf for the past 10 years. With a success rate of 29%, their skill in discovery is on a par with the major’s 32% deepwater [gulf] success rate.”

Independents also contribute to bringing new volumes on stream, the report added. “Although the volumes of hydrocarbons currently under production operated by majors is more than double that operated by independents, the volumes that are currently being appraised or being developed are roughly equal (4.2 billion boe for independents vs. 4.4 billion boe for majors) indicate the independents are catching up and may well exceed the impact of the majors in the future,” it said.

“The study demonstrates the significant contribution and important role of independents in the Gulf of Mexico offshore oil and gas industry, both today and in the future when measured in jobs, economic value and government revenue,” said Diffley. “The offshore gulf also plays a huge part in the nation's energy security and is a leading contributor to the economic vitality of the four-state gulf region.”

Contact Nick Snow at nicks@pennwell.com.

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