From MS this morning:
"We expect the market to continue to re-assess the longer-term viability of the deepwater Gulf of Mexico, post-Macondo. The message from Washington is clear - the status quo is not an option. For the E&Ps we see two key issues to be resolved. I) Liability cap under a revised OPA (oil pollution act). We would not be surprised to see an initial move to $10 Bn liability cap industry-wide. The implications here could be extremely negative for the independents, effectively making the industry un-insurable, in our view. While downward revisions are likely as changes are clarified, the first move is likely to be severe.
II) Future regulatory & cost burden. While still in flux, we expect an era of increased regulation from a new and emboldened offshore regulator.
We believe these changes will hurt the relative position of deepwater vs. other upstream projects. Under the current cost, royalty and development timeline, we see a ~100 mmboe discovery today at a PV of ~$8.50/bbl. Increasing operating costs by 25% over the life of the prospect to account for additional regulatory burdens reduces this PV by ~13%. More significantly, an additional 2-year delay between discovery and first production (to account for additional oversight) reduces this PV by 17%. (see Ex 1 within). Assuming exploration is insurable under a $10 Bn liability cap, premiums will significantly reduce the upside from success. We see average 30% cut to value in a P50 (50% chance of success) case (Ex 2).
Industry discussions confirm widespread uncertainty. Our discussions confirm that players see increasing levels of regulation of well design, casing, cementing and significantly heightened testing of BoPs. We've also heard expectations for the deepwater to become the domain of fewer players, with likely fewer partners in order to control risks. The liability cap is likely the most significant near-term hurdle that will influence the potential for a widespread return to the deepwater, particularly amongst the E&Ps (Ex 3)." |
