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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.

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How serious is the drilling retrenchment in the Gulf? As of mid-December, 23 rigs were drilling in deep water, compared with 52 just before the Deepwater Horizon rig exploded in late April, according to data at the Louisiana Department of Natural Resources. In addition, two permits for new deep-water wells are approved and three are pending, reports the US Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), the agency that has replaced the discredited Minerals Management Service. Ten permits have been returned to the applicants for further work.

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BOEMRE's reorganization of the permit process and the time operators will need to comply with stricter regulations will probably mean a decline in domestic output of crude oil this year, say analysts. Deep-water drilling in the Gulf accounts for about 1.25 million barrels of oil a day – or about one-quarter of America's domestic crude oil production. The Gulf contribution is expected to drop a bit, by about 180,000 barrels a day, in 2011, says the US Energy Information Administration.

Of course, drilling in shallower water is unabated, and BOEMRE has issued permits for 26 new wells in Gulf waters less than 500 feet deep since June 8, with 35 permits pending.

BOEMRE director Michael Bromwich denies his agency is "slow-walking" the deep-water permit process. In an address at an oil and gas industry conference in New Orleans last month, he acknowledged that "progress in processing permits has been slower than industry would like."

However, Mr. Bromwich said, BOEMRE is undertaking "the most aggressive and comprehensive reform of offshore oil and gas regulation and oversight in US history," and it "will not cut corners in the permit review process." Permits will be approved, he said, "only when we are satisfied that all applicable regulatory requirements are met."

Reinforcing that perspective is the presidential commission investigating the cause of the Gulf spill. It found that three companies – BP, Transocean, and Halliburton – cut corners to save time and money during operations to close the exploratory Macondo well.

But there's clearly tension between BOEMRE's intent to right the regulatory ship and those who worry the agency will make no allowances for risks inherent in deep-water drilling.

"Drilling for oil is a very risky business," says John Bambey, general manager of Energy Logistics, a Houston company that provides dockside services for drilling vessels along the Louisiana coast. BOEMRE "wants to come in and have a whole bunch of assurances, but they can only be assured so much." As a result, he says, the agency is kicking back the permit applications of oil operators, asking for more safety guarantees.

For some, stricter regulation has an upside.

At Johnny's Propeller Shop in Morgan City, La., where blacksmiths wield sledgehammers and torches to pound out dents in huge boat propellers, business is perking up. Manager Mike Mire says most of the business shifted to tugboat repairs during the moratorium, but he expects repairs on oil-rig support vessels will be in full swing by March.

Repair shops like his will "benefit in the long run because the [permitting] rules are going to be strict," he says. "[In the past], if you had damage to your boat and wanted to be in compliance, [regulators] would look the other way and sign off on it," he says. "Now, everybody is going to be held accountable and everything needs to be fixed."

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