Spill could lead to higher oil prices

Any tightening of regulations could boost deepwater exploration and development costs by about 10 per cent, to $25 a barrel, according to a recent Deutsche Bank analysis.
 
Accordingly, the investment bank raised its long-term equilibrium price of oil by $5 to $10 a barrel, citing tighter global regulation pushing up oil exploration and development costs.
 
RCM Director Christopher Wheaton sees oil hovering around $70 to $80 a barrel through year-end and climbing as high as $90 a barrel in 2011.   The price of oil for August delivery slid below $73 a barrel on Thursday on concerns about continued slowing in the global economy.

Regulatory costs
From extra equipment, higher-cost insurance, and expensive technology, to mandatory third-party inspections, costly delays, and shifting investments, analysts say the price tag of regulation will be stiff and not confined to the Gulf.
 
“There’s no doubt we’ll see increased regulation with time,” Wheaton said. The US Interior Department’s Minerals and Management Service “is already asking for more from companies,” he added. “You’ll see more complexity in equipments and certification.”
 
Before the spill, the Gulf of Mexico provided about 2 per cent of the world’s oil supply and a quarter of U.S. production, according to RCM. The region has been the fastest-growing for beleaguered BP PLC. Rivals Chevron Corp., Royal Dutch Shell, and Halliburton Co. also have significant Gulf exposure.
 
As debate rages in Washington over BP’s role in the spill, the impetus of stricter oversight is already affecting drillers.
 
The MMS now requires blowout preventors to be approved by third-party inspectors. Also in talks is a mandatory two-track drilling system, where a relief well runs alongside the primary one, tacking on billions of dollars to run each site.
 
“Adding relief wells that aren’t already in place will be costly,” said John Kingston, Platts Global director of News, “making some projects uneconomical and may slow the introduction of new oil.”
 
New rules won’t just mean new equipment. Since the April 20 Transocean rig explosion, politics and finger-pointing have put the pace at which drilling activity will normalize on the slow track.
 
Halliburton, which drew 16 per cent of its North American business from the Gulf of Mexico last year, said it expects a 12- to 24-month period before seeing 50 per cent of pre-incident drilling activity.

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