Beyond the cleanup: Implications of the oil spill on deepwater exploration and production

This spring’s Gulf of Mexico oil spill was one of the worst environmental disasters in U.S. history and an unprecedented crisis for the companies that operate in the area. The spill will change the landscape for energy exploration and production (E&P) companies going forward. Companies must now grapple with increased costs of drilling and working in the Gulf. Natural market forces, such as the repricing of risk by insurance and capital providers, will drive some of these rising costs. Pending changes in regulation — with proposed unlimited liability and steep civil and criminal penalties — will place additional financial burdens on E&P companies. The implications of the April 2010 oil spill on deepwater exploration and production explores the various financial, economic, market and regulatory ramifications of the spill.

According to Moody’s Investors Service, the repricing of risk could increase the cost of insuring a drilling rig by 50 percent, translating into higher day rates on these drilling rigs. Due to these mounting expenses, in conjunction with pending regulatory changes, some fear that smaller companies will be shut out of the industry altogether. In addition, a new provision in the CLEAR Act raises civil penalties in the event of a violation from $20,000 per day to $75,000 or even $150,000 per day and raises criminal penalties from $100,000 to $10 million. Regulators will need to institute changes that will deter future catastrophes without drastically reducing Gulf production and thus, potentially increasing U.S. reliance on foreign oil. Read The implications of the April 2010 oil spill on deepwater exploration and production to learn more >>