May 7, 2010 – Is a Nuclear Winter Coming for the Offshore Oil Industry?

Featured Trades: (BP), (RIG)

3) Is a Nuclear Winter Coming for the Offshore Oil Industry? Besides developing some great gas wells costing $1/MCF when it was selling for $2, the fruit of my four years of wildcatting in the Barnet shale was many great relationships in the energy industry. Over the years, I have not been wanting for great steaks at Nick & Sam's in Dallas (thanks Billy Bob), skyboxes at Dallas Cowboys games, (thanks Jim Bob), and personally signed 8 X 10 glossy photographs of George W. Bush (thanks Rufus). Not only have these good old boys kept me in touch with the goings on in the hydrocarbon industry, they have also provided insights that help me understand the world at large. I have to tell you that the grumblings coming out of the oil patch these days are not happy ones. British Petroleum's (BP) loss of the Deepwater Horizon could well do for the offshore oil industry what Three Mile Island did for nuclear energy. At the very least, regulations are going to get tougher, inspections more rigorous, and taxes higher. The Oil Spill Liability Trust Fund, which is funded by an eight cent per barrel tax, is going to have to be replenished with higher fees. It will also raise the production cost of what is already the world's most expensive oil, now around $80/barrel. The Senate is almost certain to raise the liability limit for these projects from $75 million to as much as $10 billion.  A populist wave could revive cap & trade, which until last week, was thought dead on arrival. It didn't help that BP was a notorious 'green washer,' with its $300 million budget for alternative energy going entirely into advertising. The big oil companies have to be asking themselves if these ultra high risk, high return projects are really it. The industry really could have done without this. Companies like Transocean (RIG), which owned the hapless Deepwater Horizon, will do alright, because they already lease the bulk of their rigs outside of the US. But for the rest of us, this will mean more expensive gas at the pump.