Wednesday, October 27, 2010

While it may be some time before deepwater drilling resumes, the new ‘idle iron’ policy could create 13,000 jobs in the state over the next five years.

The lifting of the federal moratorium on deepwater drilling was a first step in resuming operations in the Gulf of Mexico, but there is still a long road ahead for the industry. Industry experts do not see that the lifting of the moratorium will have an immediate impact on U.S. oil production. Between the proposed tax incentive repeals that have loomed over the industry for a couple of years, to opposition to hydraulic fracturing, to the de facto ban on offshore drilling, it could be some time before Gulf production returns to levels reached prior to the moratorium.

Tough new safety rules will likely delay any new drilling permits from being issued until near the end of the year. Operators must prove they can meet all new safety regulations and reapply for permits before drilling can continue or commence.

When the moratorium was enacted, LEDA researchers calculated the potential impact on jobs in Lafayette. While the moratorium had the potential to jeopardize tens of thousands of jobs, fortunately we did not see those numbers materialize. Since May, when the moratorium was enacted, the Lafayette MSA (Lafayette and St. Martin parishes) briefly lost 200 oil and gas jobs but has since regained those 200 as of August.  Overall, the Lafayette MSA lost 1,000 jobs from May 2010 to August 2010. These losses are similar to those seen each summer (1,200 jobs lost between May and August 2009) based on cyclical employment patterns. Additionally, the Lafayette Parish unemployment rate did not spike more than it does during the summer months on any given year. The August 2010 unemployment rate was slightly lower than during the same time last year.

Two factors have aided in the retention of oil and gas jobs — activity in the Haynesville Shale play in northwest Louisiana and the decision to refurbish rigs instead of immediately engaging them in overseas contracts. Higher prices for natural gas have made ventures in the Haynesville Shale more appealing. In Lafayette Parish, the heavy concentration of service companies can provide their services just as easily for onshore activities as they do for offshore activities.

Industry professionals have also noted the importance of companies deciding to refurbish their rigs instead of engaging them in overseas contracts. When a rig moves, the jobs associated with the infrastructure usually move with it. Refurbishing the rigs has created new jobs that cushioned the blow from the moratorium. Given the new regulations placed on the industry focusing on safety, refurbishing rigs is one step to making drilling safer.

Although the industry has held its own since the moratorium, the recently released Louisiana Economic Outlook, prepared by economist Loren Scott, paints a dreary picture for the Lafayette MSA. He forecasts the Lafayette metro area losing 3,000 jobs in 2011 and another 800 in 2012; this on the heels of losing 5,600 jobs in 2009 and 2010 during the recession. He notes the moratorium and new stringent regulatory policies for the oil and gas industry as the reason for the decline in jobs over the next two years.

Among those new regulatory policies is what the industry is labeling the “Idle Iron” policy.  On Sept. 15, the U.S. Department of the Interior issued a notice to lessees requiring oil and gas companies operating in the Gulf of Mexico to dismantle nearly 650 production platforms not being used and permanently plug 3,500 non-producing wells. Companies will have three years from the effective date of Oct. 15 to permanently plug the wells and five years to dismantle the platforms. Going forward, platforms no longer used for operations for more than five years must be decommissioned, and wells not being used for more than three years must be permanently plugged.

There is a large price tag attached to the Idle Iron regulations; the total cost to dismantle and plug is $3.86 billion. Each platform will cost roughly $1.9 million to decommission, while each well will cost close to $750,000 to plug. In addition to the cost of conforming to the policy, the industry would lose potential future production revenues. Decommissioning infrastructure makes future development more costly because of the price tag associated with rebuilding the infrastructure on a lease to begin drilling again.

Despite the expenditures incurred by the policy, there is a distinct upside — jobs. In Louisiana alone it will add almost $6 billion to the Gross State Product and create nearly $1.8 billion in new income for Louisiana residents to decommission unused infrastructure.

Given the timeline to comply with the Idle Iron policy, the number of jobs created varies over time. It is estimated that in Louisiana more than 10,500 jobs will be supported during the first three years and another 2,300 jobs supported the following two years.  

It is unknown how much of the economic impact of the Idle Iron policy will be felt locally, but it is safe to say that Lafayette will get its share.  With the largest concentration of oil and gas service companies and proximity to the ports used in dismantling infrastructure, Lafayette is sure to reap the benefits of this expanded industry.

Gregg Gothreaux is president and chief executive officer of the Lafayette Economic Development Authority. To comment on this column, e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

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