Smaller Oil Firms Fear Regulation Backlash In Gulf by JOHN BURNETT

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by JOHN BURNETT

The Gulf of Mexico is one of the world's major oil and gas provinces. The offshore industry was born here in 1947. It's close to the petro-capital of Houston. And, of course, it's in the backyard of the world's oil glutton.

But the Gulf is about to get less attractive to work in.

Tougher Regulations

After the BP calamity, operators know that more stringent regulations are on the way, which will raise their costs of drilling and completing a well. This will fall hardest on independent oil companies, which hold a majority of the mineral leases in the Gulf of Mexico, primarily on the continental shelf.

The majors produce most of the oil from deepwater wells, which can easily cost $100 million apiece.

"What will happen is regulators will build in even more redundancy," says Bruce Vincent, chairman of the Independent Petroleum Association of America (IPAA), which has almost 5,000 members. "You'll need more equipment. You'll need to have it inspected more often. You'll probably need more people on site — certainly higher qualified people — that will take more manpower. All of that will add cost and expense."

Vincent hastens to point out that his industry does not oppose additional regulation to prevent another deep-water disaster, but he says what's coming is going to be tough on independents.

'A Game-Changer'

In recent years, independents had already begun to pull out of the Gulf because their shallow-water properties are mature and depleting. The oil spill is expected to continue that trend.

Offshore operators are now looking at possibly higher liability. Last week, the Senate Environment and Public Works Committee approved legislation to eliminate the $75 million cap on damages that oil companies can be forced to pay for oil spills.

Industry insiders wonder if offshore drilling will become uninsurable for all but the super-majors and national oil companies.

"It's definitely a game-changer, no question about it," says Bob Tippee, editor of the Oil & Gas Journal. "The rules are going to change. The question is are the rules going to be constructive, or are they going to be so onerous that many companies will just choose to move their investment elsewhere?"

Uncertainty is the enemy of capital investment.

Coppied by 2010 NPR