Deep Drilling Moratorium Impact on US Gulf Coast Economy Outlook - Houston Oil and Gas Drilling Industry Forecast

The Gulf Coast economy faces doom after Standard & Poor's oil and gas drilling company downgrades after the Gulf drilling ban. The US drilling moratorium is a threat to Gulf Coast jobs and the Gulf Coast economy. The US government has installed a deepwater drilling moratorium in response the Horizon Deepwater oil spill disaster. The spill is the largest oil spill in U.S. history, eclipsing the Exxon Valdez disaster. The disaster has affected marine wildlife and Gulf coast communities.

The downgrades will impact further in the region. The downgrades impact the going concerns of the affected businesses. There are whole communities existing on oil and gas industry employment, directly and indirectly. The Gulf Coast and the oil and gas industry are key components of an already fragile U.S. economy. The Energy Information Agency (EIA) on July 7 said 82,000 barrels per day of production (BPD) would be lost from the ban.  The EIA estimates total U.S. oil production at more than 5 million BPD.

S&P covered eight companies in the ratings report. The drilling companies are Anadarko, Seacor Holding, Hornbeck Offshore Services, Helix Energy Solutions Group, Hercules Offshore Inc, ATP Oil & Gas Corp and Transocean. Transocean was the operator of the Horizon Deepwater rig.

Standard and Poor’s announced that as a result of the halt on drilling in the Gulf of Mexico they have reviewed and downgraded the ratings of a number of drillers operated in the U.S. and the Gulf of Mexico. Specifically they also warned they it might cut its ratings on the largest US driller, Transocean. Transocean operated the Horizon deepwater rig that caused the oil disaster. They also revised the outlook on Horizon Deepwater partner Anadarko Petroleum to negative from stable.

S&P said in a statement. 'The negative rating actions are based on various concerns and possible operating disruptions for companies operating in the Gulf of Mexico due to the moratorium and the flow of oil from the well disaster.'

Rating Downgrades

The following actions were taken today by S&P. To understand the ratings please go here.

1. Transocean – Currently BBB-plus the third lowest investment-grade rating. S&P put Transocean on review for a possible downgrade.
2. Anadarko – Currently rated BBB-minus, the lowest investment-grade rating. S&P revised its outlook to negative from stable. This is an indication Andarko is likely to be cut to junk over the next one to two years.
3. PHI Inc – Currently B-plus which is four steps below investment grade. S&P put PHI Inc on review for a possible downgrade.
4. Seacor Holdings - Currently rated BBB-minus, the lowest investment-grade rating. S&P revised its outlook to negative from stable. This is an indication it is likely to be cut to junk over the next one to two years.
5. Hornbeck Offshore Services – S&P cut to B-plus, which is four steps below investment grade from BBB-minus.
6. Helix Energy Solutions Group – S&P cut to B, which is five steps below investment grade, from B-plus.
7. Hercules Offshore Inc – S&P cut to B-minus , which is six steps below investment grade, from B.
8. ATP Oil & Gas Corp – S&P cut to cut two notches to CCC-plus, which is seven steps below investment grade, from B.

S&P put a negative outlook on the four downgraded firms. This is an indication an additional downgrade may be likely over the next one to two years.

The US Government made an order to cease any ongoing deep sea drilling operations on Thursday, May 27, 2010. The order is for a six-month moratorium on drilling. The U.S. Government had already banned new offshore drilling in the Gulf of Mexico and the North Slope of Alaska. This ban was extended with the drilling moratorium.

The ban was originally for 30 days and has been extended to six months. The Government is investigating the cause of the Deepwater Horizon oil rig that exploded on April 20. All drilling in Gulf of Mexico wells in water over 500 feet is to shut down. There will be no new permits from being issued for any new deepwater drilling anywhere in US waters. Today the Norwegian Government also froze new deep sea drilling licenses in its waters.

The effect of the ban has severe ramifications for a US economy already facing a debilitating financial crisis. The Gulf Coast economy faces doom. The drilling financial crisis will not take much to fall into an economic contagion along the lines of the Greece Economic contagion. The oil and gas industry is a key component of the US economy. It is one of the largest employers and providers of income for the rest of America. Exxon, Americas largest company for example derives around 70% of its income from overseas. Something often missed when self-interested commentators denigrate big oil. As the saying goes, ‘be careful what you wish for.’

A CNN Money report projects approximately 46,000 jobs, will be lost from the ban. Louisiana Governor Bobby Jindal, wrote a letter to President Obama on June 2, 2010 saying ‘ prohibiting deepwater drilling could result in the loss of 6,000 jobs for Louisianans for this June alone.’ Jindal said 22 of the 33 deep water rigs that will lay idle from the ban are off the coast of Louisiana. The average employment per rig is 1,400 people.

The job losses to the Gulf community may be lasting and inflict structural change.  Speaking at a town hall meeting in Houston on July 7 concerned oil and gas figures voiced their concerns. In the competivive and oil industry and with world oil demand still potent oil workers are being moved to other oil rigs around the world.

Baker Hughes Inc CEO Chad Deaton said 'Short-term, we're relocating some of our people on the offshore rigs,' 'Fortunately, activity around the world is fairly strong.'

The drilling ban was ruled 'arbitrary and capricious' by a Federal judge last month. The Obama government appeal is coming up for hearing this week.

Houston has been one of the few strong cities in the U.S. economy however now that is at risk. U.S. Representative Pete Olson from Houston said 'The blanket moratorium on offshore drilling is the wrong decision,' 'The policy is hurting the entire Houston economy and increasing costs for all Americans.'

The Louisiana Mid-Continent Oil and Gas Association (LMOGA) lists 4,515 shallow-water wells in the Gulf of Mexico. The LMOGA reports that 80 percent of the Gulf’s oil comes from wells deeper than 1,000 feet. Thus deepwater drilling accounts for the majority of Louisiana oil production.

The cost to the communities will be severe. LMOGA has said rig workers weekly average pay of $1,804 a week. A significant proportion of this goes back into the Gulf Coast economy. The LMOGA estimates total wages lost for all 33 rigs could reach as high as $330 million each month. The effect of oil and gas drilling company downgrades after Gulf drilling ban will be devastating to the Gulf Coast economy which is facing economic doom. That is one-two punch to a region already facing ecological doom. Read that as a huge knock to the already fragile U.S. economy.