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On Gulf Coast, nail-biting over future of domestic oil drilling

Stricter deep-water drilling regulations mean Gulf Coast waters are likely to yield less oil this year. Energy firms may shift attention abroad.

By / staff writer / January 11, 2011

Workers made repairs at Johnny’s Propeller Shop in Morgan City, La., Nov 4. Its manager hopes tough new rules on boat safety bring work.

Melanie Stetson Freeman/Staff

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Amelia, La.

Three months have come and gone since the Obama administration lifted the moratorium on deep-water drilling for oil and gas, but there hasn't exactly been a stampede back to the Gulf of Mexico to sink wells into the ocean depths.

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It's harder now to meet the government's terms for offshore drilling in deep water, after last year's mammoth oil spill laid bare deficiencies in emergency planning and oversight. Only two permits for new wells have been issued since the moratorium ended on Oct. 12.

That worries people whose livelihoods depend on a robust schedule for drilling in the Gulf – people like Ray Walters.

Walking the dusty back lot of his manufacturing business in coastal Amelia, La., Mr. Walters pauses and rests his hand on one of four state-of-the-art oil skimmers built on order for the State of Mississippi. The vessels were meant to collect spilled oil in the Gulf, but once the Macondo well was capped and the oil stopped gushing, his contract was voided and he was only partially paid.

The spill and the subsequent drilling moratorium have had an adverse effect from which his company has not recovered. Before the moratorium began on May 28, "we were up to 37 [employees working] two 12-hour shifts. Since [the moratorium was issued] we're back to five people and barely maintaining. I don't think it'll ever get back to where it was," he says.

His uncertainty about the future reverberates through towns along the Louisiana coast. Their economies pegged, directly or indirectly, to offshore drilling, the locals are carefully watching the oil industry response to the US government's reshuffling of the regulatory regimen. Their big worry is that stricter drilling rules will be worse than the moratorium, creating such a financial burden that oil firms will not commit to long-term projects in the deep-water Gulf.

The new federal rules have indeed led to a wait-and-see situation for operators, as they assess higher costs for insurance, equipment maintenance, purchases of new technology, and other factors, says Michelle Foss, chief energy economist at the University of Houston.

"This is an enormous dilemma for all operating [oil and gas] companies, all of their backers and investors and shareholders," she says. "If [operators] can't see through the fog to see where things are heading and feel confident about it, they're going to start cutting back, and that's what everyone [in the region] is dreading."

The oil and gas industry has long been central to Louisiana's economy. In 2009, the state reaped $1.1 billion in revenue from taxes and royalties. The concern is that energy companies will pull up anchor and seek wells elsewhere in the world, such as Bolivia or Egypt, where they perceive the regulatory climate to be friendlier to their interests.

Ms. Foss, for one, sees that as a real possibility.

"The folks outside the US are not fools. They know they can take advantage of the situation right now and increase business in their own territorial waters while we struggle," she says.

Britain, for instance, has granted more than 100 exploration licenses for new drilling near the Shetland Islands, where now only four wells exist. About 160 miles north of the islands, Chevron is drilling a well that is 1,000 feet deeper than BP's blown Macondo well.

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