Crude Awakening

Anyone who thinks the president, governor or any court can force BP to pay for the economic fallout from a government-imposed moratorium — one a federal judge in New Orleans calls ‘arbitrary’ and ‘capricious’ — has another think coming.

Wednesday, June 30, 2010
By Leslie Turk

Arbitrary. Capricious.

That’s what a federal judge in New Orleans last week called the government-imposed moratorium on deepwater drilling projects in the Gulf of Mexico, confirming what many of us believe was the Obama administration’s knee-jerk reaction to the Deepwater Horizon explosion and massive oil spill.

U.S. District Judge Martin Feldman’s June 22 decision effectively overturned the six-month moratorium on new drilling permits in depths of 500 feet or more, a government ban that also halted work on 33 exploratory wells. The White House quickly noted it would appeal and announced it is reworking the moratorium, hoping a new version will pass legal muster. Feldman, whose reversal rate is among the lowest in the Eastern District of the state, refused to stay his decision while the administration prepares its appeal.

Led by Hornbeck Offshore Services and supported by Gov. Bobby Jindal’s friend of the court brief, a group of companies that provide services to offshore drilling rigs asked the federal court for a preliminary injunction blocking the moratorium. They successfully built a case for how the government, which assumed that because one rig failed, all companies doing deepwater drilling pose an imminent danger, set up a scenario of devastation for the economies of the Gulf Coast region.

Perhaps most compelling in their argument is the fact that anyone who thinks embattled BP is going to pay for the ripple effects of a White House policy decision is in for a crude awakening.
Despite assurances from Interior Secretary Ken Salazar to U.S. Sen. Mary Landrieu in a June 9 Senate Energy and Natural Resources Committee hearing that BP would pay for oilfield workers’ losses from the ban (after she pressed him on why he went against the recommendation of eight experts in imposing the moratorium), the energy giant appears to have successfully argued it isn’t responsible for the collateral economic damage. On this issue, close observers of the moratorium believe, BP has the stronger case.

Two weeks ago, in a White House meeting between top BP officials and the president, BP agreed to earmark $20 billion to fund cleanup costs and lost wages to fishermen and others out of work and promised an additional $100 million for Gulf workers idled by the drilling moratorium. It’s a deal structured to limit the company’s exposure to claims from the moratorium, as the $100 million won’t come close to covering the losses, not even in this community.

Lafayette Economic Development Authority President and CEO Gregg Gothreaux says in oil-dependent Lafayette alone, over the next year the ban could result in more than 7,700 direct and indirect jobs lost, roughly $466.7 million in wages and income. The numbers are based on 79 wells affected by the moratorium off Louisiana’s waters and an average of 230 direct workers per deepwater well. Those workers’ average pay is $1,912 per week. Factor in the indirect jobs — from the service companies that are the lifeblood of Acadiana’s economy — and the picture comes into focus. “Oil and gas activity accounts for over 40 percent of our Lafayette GDP,” he says. “That number is much higher in Acadiana. The moratorium could eliminate an important part of our economy over the next year.”

Acknowledging the numbers present a worst-case scenario, Gothreaux stipulates that as the recovery continues, it is likely that many people who lose jobs, specifically in the energy industry, may find work elsewhere, “in other locales where the rigs will be deployed [likely out of the country, where they could go under contract for years], and in other sectors of the economy, which will mitigate some of the negative impact on the labor force.”

“We’re in a pickle,” says Brady Como, executive vice president of Broussard-based Delmar Systems, where the sign outside the corporate headquarters reads: “Mr. Obama you should not eliminate our jobs.” Como, whose privately held company supplies anchor handling crews and mooring equipment to the worldwide offshore oil industry, knows those jobs may never return.
Within days of the White House meeting between President Obama and BP’s top brass, The Wall Street Journal reported that behind the scenes, according to people on both sides of the negotiations, BP effectively pushed back on the issue of losses from the moratorium. “BP successfully argued it shouldn’t be liable for most of the broader economic distress caused by the president’s six-month moratorium on deep-water drilling in the Gulf of Mexico,” the WSJ noted.

Gov. Jindal also confirms that BP said last week it will not pay moratorium losses beyond the $100 million, which he says will only cover a few weeks of lost wages.

The moratorium hit at a time when the industry was still recovering from the destruction caused by four hurricanes in the past five years, a point Badger Oil’s Paul Hilliard drove home to CNBC’s Squawk Box last week. But this is much more distressing. When the storms dissipated, the industry took its licks from higher operating and insurance costs but immediately went back to work. Today, “the industry is driving in a fog,” Hilliard said. “This BP thing is as helpful as a heart attack. It’s a bleeping mess.”

Despite Feldman’s ruling, work has stopped.

An entire deepwater industry continues to be held hostage because one company decided to use six centralizers — rather than the 12 recommended by cement contractor Halliburton — to ensure the casing ran down the center of the well bore, skipped crucial tests and maintenance, replaced drilling mud with sea water. The processes are in place to prevent such tragedies, but BP ignored warnings to expedite completion of a well six weeks behind schedule, with calamitous results.

And even though the administration’s own subsequent inspections of deepwater rigs turned up no similar safety problems, the moratorium was put into place May 28.

Thirteen of the 33 affected deepwater exploratory rigs were moored or anchored, and Delmar was working on 12 them for companies like ENI Petroleum, Shell, Marathon and Anadarko.

“We’re moving No. 9 right now,” Como says. “All of those are coming to the beach to be idled, or stacked. Some will be brought to shallow water. This started two weeks ago. We’re busy, but in 90 days, when I’m finished picking up all the mooring systems and all the rigs are finished, we’ll be dead stop. Our business is strictly mooring and anchoring rigs, and when those rigs aren’t working, they don’t need our service. I’ll have periods where I’ll be pushing my folks internationally and doing things to try to keep them busy,” he continues. “[It will be the] first time in the 42-year history of this company that we will be just about shut down until the moratorium is lifted. We’re going to do our best to hold onto people, but if we don’t have rigs to moor, how long can we go?”

Como says 200 of Delmar’s 300 employees are involved in deepwater offshore work, and about 90 percent of that is Gulf activity. And Delmar may be one of the lucky ones. At least it has work now.
But what about the hundreds of local service companies whose revenues are already drying up?

“I tell you what,” Como says, “people here don’t have a clue. It will really impact Lafayette, and even worse, it’s going to impact state government. Think about the state budget and the condition it’s in even before this. It’ll turn this place upside down.”

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