Partisan rhetoric has been quick to blame political barriers for a drag in Gulf of Mexico (GOM) deepwater drilling permits, but a Sept. 7 analysis by FBR Capital Markets says those sentiments just do not float. Instead, the firm indicates the bottleneck in the GOM is the result of the increased work required in the permit-issuing process and a limited amount of bureaucratic resources needed to make such issuances.

As a result, FBR expects a continued slow recovery of the deepwater permitting rate.

The analysis also contends that the Gulf drilling moratorium that went into effect after the Macondo blowout on April 20, 2010, had a major impact on the permitting cycle. Historically the permitting backlog is three times the rig count, and the post-Macondo moratorium essentially wiped out that ratio. Thus, according to the analysis, the permitting pace would need to increase significantly to rebuild the backlog to maintain the current count of 20 rigs.

The U.S. Department of the Interior on Feb. 28, 2011, approved the first deepwater drilling permit since the BP spill in the Gulf. The permit was granted to Noble Energy to resume drilling in 6,500 feet of water off the coast of Louisiana.

FBR's proprietary analysis of Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) deepwater drilling permit approvals and other regulatory filings "leave us convinced that the current deepwater GOM active rig count of 20 is unsustainable at the current pace of permit approvals," said lead analyst Robert MacKenzie. "Furthermore, unless the pace of permit approvals increases, we would expect between eight and 20 additional rigs to depart the deepwater GOM, in addition to the 12 that have already left or are committed to leave. Eight assumes that the pace of permitting picks up to support the current rig count while 20 assumes today's pace of permit approval persists."

To support the current active rig count of 20, the backlog of permits approved but not yet completed needed to be roughly 60 at the end of August, the analysis stated. However, the number was only 30.

Since the moratorium, a large number of deepwater rigs have remained active in the GOM doing completions, workovers or drilling the few wells that have been permitted, the analysis reported. "While we have no data on exactly how much non-drilling backlog remains, it's clearly being worked through rapidly with an active rig count that's roughly double what the backlog of drilling permits would seem to support," MacKenzie said.

"Another 10 rigs departing the U.S. GOM would represent 4% of the global marketed deepwater rig fleet of 253, and should be enough to limit potential day-rate increases. Between now and mid 2012, another seven deepwater rigs in the GOM are scheduled to finish their contracts, and there is always the potential for sublets under existing contracts or one of more of the three cold-stacked rigs to leave," he said, adding that this would be a headwind for deepwater drillers like Diamond Offshore and would seem to make the jackup-heavy drillers such as Rowan, Noble and Ensco more attractive to investors.

FBR expects to see a step-up in the permitting pace from an average of three unique applications for permits to drill -- including one new well from March through May -- to an average of eight unique wells -- including four of which are new -- from June through August.

While BOMRE has taken steps to smooth the permitting process, including a recent symposium for operators and providing new tools to help companies submit applications, the analysis indicates that there is no quick fix for getting the pace of GOM drilling back online.

"Even a 20% monthly improvement in permitting pace at a 2:1 backlog still implies only a rig count of 22 by year-end. Also, we still see structural headwinds -- hiring and funding constraints, potential safety and permitting legislation, pending drilling safety regulation revisions and ongoing environmental litigation," MacKenzie added.

Contact the author, Mike Madere, at mmadere@hartenergy.com.