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Land-Based Oil Projects Increase During Deep-Water Ban

Tim Watson
August 27, 2010

Energy firms are generating revenue by shifting workers and capital spending to land-based U.S. projects as the Obama administration continues to restrict deep-water drilling in the Gulf of Mexico.

The movement is strongest among service companies — those that provide project infrastructure and rig maintenance, for instance — whose income is largely dependent on active drilling projects. While an energy producer can sit on a shut-down rig while searching for long-term revenue, service companies don't have that luxury.

As Apache CEO Steven Farris says, "If we don't drill wells, they don't work."
Some companies that have benefited from increased land-based work since the moratorium went into effect on May 28:

•Oilfield services giant Halliburton credited increased land drilling for a $38 million rise in total drilling and evaluation income in the second quarter.

•Schlumberger, the biggest company in oilfield services, has moved 200 Gulf workers to land since May 28 and saw revenue from North American land operations grow 36% in the second quarter.

•Plains Exploration & Production Co. is exploring whether it can raise $1 billion to $2 billion from assets now used in its Gulf operations to bolster its Oklahoma, Texas, Louisiana, Arkansas and California land production sites.

Revenue from "aggressive" land-based natural gas exploration is more than making up for moratorium-related losses for many companies, Halliburton said this month.
Although industry activity naturally grows on land in the summer, the pace has accelerated in the past three months, says John Licata, chief commodity strategist for Blue Phoenix, an energy and metals consulting firm.

As of mid-August, active drilling rigs of the type most commonly used on land had increased 71% from the same time last year. Offshore Gulf rigs had decreased 33% in that period.

"Rather than take rigs and move them to the Middle East and certain parts of Africa, (energy firms) are looking to capture some opportunities here in the United States," Licata says. "They don't want to miss an opportunity."

The moratorium is scheduled to end on Nov. 30, although it could be lifted earlier.
But how offshore drilling will be regulated in the future is unknown, and the uncertainty could push producers, operators, and service companies into less-regulatedforeign waters. At least two of the 33 rigs in the Gulf before the BP accident have done that.

At issue are what incentives there will be for firms to stay in the rich waters of the Gulf rather than transfer operations elsewhere.

Deep-water oil and gas drilling is far more productive than land-based production, Farris says. The moratorium is delaying the start of many deep-water projects that will take three to five years to develop, diminishing potential production.

Depressed natural gas prices could further prompt energy companies to pursue foreign oil production. The U.S.' vast natural gas reserves and the revenue firms such as Halliburton have generated tapping them haven't convinced Apache there is enough market for a huge land-based investment. The profit margins that oil produces at 20 times the price of natural gas are much greater, Farris says.

However, Farris says, "It is an economic and environmental reality that this country is going to have to use more natural gas, whether we have the deep-water or don't have the deep-water. We use 19 million barrels (of oil) a day, and produce 5.3. Our (oil) production is going to continue to decline."

One sign that land-based projects have a healthy future: In April, Apache announced a merger agreement with Mariner Energy, a gas and oil exploration firm whose assets are concentrated in the Gulf and Texas.