Limited New OCS Horizons
Logging While Investing
OFS Weekly Analysis
39 pages, 31 exhibits
Link: sendspace.com
Excerpt:
Limited new OCS horizons. The Obama Administration's proposal
announced last week permits a prior authorized lease sale offshore Virginia
(50+ miles from the coast) as well as one off of Cook Inlet in Alaska to
proceed by 2012 and, in the 2012-1017 Outer Continental Shelf (OCS) plan,
opens a broad swath of the Eastern Gulf of Mexico (GoM) (125+ miles from
the coast). It also allows further study of the Mid and South Atlantic coasts
for hydrocarbon potential.
Proposal appears to seek some middle ground. The proposal is more
limited than that promoted by the prior administration or by the prior House
of Representatives, which in 2006 passed a bill that would have 1) allowed
drilling beyond 100 miles off the coast of every state; allowed drilling
between 50 and 100 miles unless a state opted to ban it; and banned drilling
within 50 miles unless a state opted to allow it; and 2) given 64-75% of
revenues to states for leases 3-12 miles from the shoreline. And the
Administration’s proposal does not pursue areas along the US West coast
and will remove several planned lease sales in Alaska (in Chukchi and
Beaufort Seas). But it would expand the territory available in the
Eastern GoM for leasing by 4x what was signed into law in the 2006 Gulf of
Mexico Energy Security Act.
Criticism from both sides of such middle ground and it is part of a
broader climate strategy; not clear if Congress will approve. The lay
press is reporting cries of "sell out" from environmentalists and "too little too
late" from Congressional representatives. Those advocating more offshore
drilling were already pushing against the Obama Administration's slowing
down of the proposed 2010-2015 OCS plan as it is "rebalanced" and
"redesigned" to address environmental protection concerns raised in the
courts. The New York Times is suggesting a Senate vote will (again) likely
include horse-trading around "revenue sharing", which would allot some
money to states with drilling off of their shores (although the proposed
drilling is in Federal waters). In the current OCS Plan, with its planned
license round off the coast of Virginia, there is no revenue sharing for the
state. The proposal is also part of the Administration’s broader energy and
climate change strategy and thus passage is presumably intertwined with
these “bigger” issues.
Hydrocarbon potential of Atlantic Coast not well understood. There were 35 wells
drilled in the Baltimore Canyon Trough roughly 100 miles south of Atlantic City, NJ from
1977-1984. Tests were conducted on five of these wells (all flowed gas and one flowed oil).
Exploratory wells were also drilled offshore New England, Georgia and Northeast Florida
in the same period. The U.S. MMS has estimated the Offshore Atlantic Continental Shelf
contains 37 trillion cubic feet of natural gas and 3.8 billion barrels of oil, although estimates
are acknowledged to be preliminary, and needing modern seismic analysis.
Seismic companies had submitted proposals to shoot the Atlantic coastline. The
Minerals Management Service (MMS) has listed seven seismic companies that have
submitted proposals to shoot (with 2-D, which indicates both the space to be covered and
that we are in earlier-stage identification of prospective areas). Seismic activity awaits an
Environmental Impact review by the MMS;nevertheless seismic would be the earliest
OFS beneficiaries of any opening up of lease areas.
If all goes well, we imagine drilling would commence in 2013 at the earliest. Again,
given cursory nature of 2-D seismic, we wouldn't be surprised if drilling waits until closer to
the middle of this decade, even if Congressional agreement related to the Administration's
proposals comes soon enough to incorporate them in the 2012-2017 OCS plan.
Our take on the group. We see enduring value in exposure to non-NAM markets —
and we look for signs of spending growth to emerge more strongly after mid-year —
which continues to steer our preferences — now nearer term and longer term — to
diversified services, land-based construction, and strongly free cash-flowing offshore
drillers. In diversified service large caps, HAL (top pick) and SLB appear well
positioned to outperform in the nearer term, particularly with 1Q10 caution already
being reflected in shares. We prefer NE among drillers. And in European OFS, we
favor the defensiveness (including versus expectations) and backlog outlook for
onshore-exposed names including PFC.L. |
