Capstone Energy Services


Oil Companies Warn of Costly Delays From Government Shutdown

February 28th, 2011

WASHINGTON (Down Jones) – Oil and gas company executives are warning of costly delays and disruptions if a budget stalemate forces government offices to shut down.

With funds for the federal government set to expire March 4, Congress is wrangling over a new budget plan. If they fail to reach agreement by next Friday, federal agencies could be forced to close.

Oil and gas companies, which have to obtain government permits to operate, say a government shutdown could force them to suspend ongoing projects and would postpone the approval of new projects.

Even a one-week or two-week shutdown could sideline a drilling project for months, said Jim Noe, senior vice president and general counsel for Hercules Offshore Inc., a Houston-based offshore drilling company.

“You have to carefully choreograph drilling operations,” Mr. Noe said. “You have to secure a drilling rig and engineers, caterers and tug boats. And you can’t just stop the music on the permitting.”

Swift Energy Co. President Bruce Vincent said a shutdown would be particularly difficult for companies that need to seek permit changes midway through a project. That could happen if the well geology turns out to be different than assumed or if a drilling technique needs to be amended.

In those cases, companies need quick approval from the government, Mr. Vincent said.

“It’s going to be very expensive for operators in that position,” he said. “If there’s a shutdown on Monday and you need to change plans Tuesday, then you’re going to have to sit by.”

Spokespeople at the Interior Department declined to comment on the potential impacts of a government shutdown. If the government were to shut down, it would happen at a particularly challenging time for the oil and gas industry. Activity in the Gulf of Mexico has already slowed down because of measures taken by the Interior Department in the wake of the Deepwater Horizon oil spill.

Tighter standards and a moratorium on deepwater drilling, for example, created a backlog of permit applications. Greater scrutiny of shallow-water drilling, meanwhile, resulted in fewer permits for those operators.

Seahawk Drilling Inc. was forced to file a bankruptcy earlier this year and the company partly blamed the slow down in shallow-water permitting for its situation.

Republicans and Gulf Coast Democrats have pressed the department to speed up the pace of permit approvals. They are applying more pressure these days as turmoil in Libya prompt concerns over global oil supplies and fuel an increase in oil and gas prices.

A shutdown “could be a significant distraction at a time when oil prices and geopolitical risk are amplifying pressure to resume deepwater permitting,” said an analyst with FBR Capital Markets in a note Friday.

So far, the White House and congressional leaders have indicated they want to avoid a shutdown, and energy-industry representatives consider a long-term disruption in government services to be a slim possibility.

As the parties try to avoid a shutdown by reaching an agreement on the budget, energy policy has been a key sticking point. The Obama administration has proposed more funding to boost low-carbon energy sources, but Republicans have responded by voting to cut many of the same programs the president wants to expand.

The last time a budget impasse forced a government shutdown was in 1995 and 1996.

A former Interior Department official who served during that time said the agency held on to personnel to review emergency permit changes.

“If you were drilling and you needed to modify your program, we still had people on duty to respond to those requests,” said Elmer Danenberger, former chief of offshore regulatory programs. “But that wasn’t staffed at full levels.”

The department also staffed inspectors, although in fewer numbers than usual, said Mr. Danenberger, who retired in 2010. The department fully halted the development of new rules, research and geologic assessments.

The 1995 shutdown “wasn’t long enough, I think, to cause any significant problems,” he said. But that was a “much different scenario in that we didn’t have a moratorium before and a backlog of permitting.”


By Tennille Tracy and Ryan Tracy

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