Since buying his first Gulf of Mexico properties in 1985, Tracy W. Krohn, chairman and chief executive officer of W&T Offshore Inc., has believed in the Gulf. He still does, even after suffering through five hurricanes in the past three years, a devastating worldwide economic upheaval, and a totally unexpected, federally imposed drilling moratorium after the fateful Macondo tra­gedy a year ago.

That’s not to say this petroleum engineer isn’t frustrated though, as clarity around the well-permitting process continues to be a challenge. He believes this stems from the Obama administration’s anti-oil agenda more than from regulatory snafus.

“Unlike every other country in the world, we won’t develop all of our natural resources,” he says. “It’s a failed policy. Every president since Nixon has pledged that the U.S. will become energy independent, but we haven’t done it yet. We can be energy independent.”

Krohn thinks the Gulf of Mexico will be part of the solution, even as the U.S. pursues other resources such as shale gas, coal, nuclear and renewables. On a corporate level, he sees lots of opportunity in the current situation. W&T has grown through acquisitions and drilling, now holding working interests in 67 fields in federal and state waters. Most of its daily production comes from wells it operates.

A year ago April, the company acquired three Outer Continental Shelf properties from Total E&P USA Inc. for $125 million in cash, including the Matterhorn tension-leg platform in Mississippi Canyon 243. Then last fall, it bought three deepwater producing fields from Shell Offshore Inc. for approximately $121.9 million, and assumed $18 million for the asset-retirement obligations associated with these properties for an implied purchase price of $1.75 per thousand cubic feet equivalent. (Closing on an additional field was still pending at press time.) Production from the fields acquired thus far from Shell is almost 25% oil and natural gas liquids while proved reserves are mostly natural gas.

The company’s 2011 capital budget of $310 million (not counting acquisitions) will come from cash flow. The plan includes 10 exploration and four development wells. Of those 14 wells, five are on the conventional shelf, one is in deepwater, two are on the deep shelf, and six are onshore.

Oil and Gas Investor met recently with Krohn to find out the status of his operations in the Gulf and what lies ahead for the beleaguered region.

?“One thing about this company is, we never give up.” Tracy W. Krohn, W&T Offshore Inc.

Investor: The market beat you up recently for your production guidance for 2011.

Krohn: We have to pay attention to the Street, but I don’t always understand it. I think production will be up higher than current guidance, but it’s a matter of timing on that fourth field from Shell and other potential acquisitions. The market did not understand the timing differences between effective and closing dates. This will show up as a reduction in cost as opposed to an increase in production.

We have a lot of natural gas production, sure, but our reserves are 47% oil and liquids. We replaced production last year and arrested our overall decline rate in the Gulf by doing re-entries and recompletions. And by the way, we paid a special dividend in December of $47 million. We are returning value to investors.

The reality is, if you look at a shale play onshore and you go from 50 wells to 100 wells on a particular patch of land, it seems to matter that you increased reserves, and not whether you are making money.

We replaced reserves and production last year, without taking on any new debt or selling any equity that would’ve diluted shareholders—and we did it in a basin that was off limits most of the year. Is there anybody else out there replacing reserves like we did?

Is anybody in a shale play out there really making money, when you count your sunk costs, your land, your royalties and taxes, and by the way, doing it in a place you aren’t even allowed to drill?

Investor: The Bureau of Ocean Energy Management, Enforcement and Regulation’s new requirements for submitting exploration and development plans, and its new safety requirements, are hitting you hard?

Krohn: We are in the process of filing for new wells, but you can’t file until you get your exploration plan approved first, and that’s what is taking time.

What’s holding up the permits is variable. At first it was all about the blowout preventers (BOPs). Then it was the spill scenario. Then it was, do you have enough containment equipment? It’s all being delayed incrementally and we’re not being fed the whole story at once. If you drill a well one foot below the depth of any well that’s already been drilled on a block, do you need to do a whole new supplemental EIS (environmental impact statement)? I don’t know. There are so many uncertainties.

I don’t have an issue with the employees in the government, they are working very hard. But they are afraid to make a decision for fear they’ll get slapped. I blame the administration. I think there is an intent to delay. But it’s beginning to have an effect on the economy, and that’s when the political will to develop our resources may change.

Investor: What opportunity do you see in all of this?

Krohn: Nobody knows what the rules are and they keep changing. It’s quite subjective. The next problem to come will be handling all the offshore lease expirations, if you are not allowed to drill them.

The opportunity for us is that, you know, we’ve been doing this for many years and we’ve weathered every storm, literally and figuratively, from hurricanes to this moratorium. One thing about this company is, we never give up. We bought our first properties in 1985 so I’ve been to the dance already. I’ve seen the cycles.

Investor: Do you foresee more acquisitions then?

Krohn: Clearly. Absolutely. We’re working on two now. It’s driven by the economics. We never cared if it was oil or gas; what should matter is making money. At the end of the day you are going to have the cycles in commodities. We began buying in deepwater even before Macondo. Companies will continue to drill out there and high-grade their portfolios. And these shale assets are so capital-intensive, they’ll need to sell some offshore assets to get the capital.

The contrarian in me thinks what we ought to be doing is buying natural gas reserves. We take the lead from smart companies like ExxonMobil. They bought gas. Statoil did. The Chinese did. BHP did. These companies are taking the long view, the 25-year view, not five years.

Investor: Why the onshore assets you’ve bought?

Krohn: We started that before Macondo also. We started to see the economics were favorable, that they’d compare. We recognized companies had to sell assets to feed their shale habit. Our onshore production isn’t much at this point, but we’d like to grow it. We’re drilling a well in southeast Texas now. I finally learned never to say never.

Investor: What could change the industry’s frustrations around permitting?

Krohn: What’s going to change this is economic necessity, so longer term I’m optimistic. Administrations come and go…but this BOEMRE is the only government agency that creates revenue except for the IRS. We’re positioning the company to survive. There will be more regs, more taxation, more insurance requirements, higher costs.

Investor: Are there any new rules you think we should have?

Krohn: We should make it a posted requirement that you can’t open the BOP except in a certain manner. If you are taking a kick in well pressure, there are protocols around that. These best practices should be rules. I can’t warrant that human error won’t ever happen again. You can have all the rules, the right equipment and regulations, but you can’t fix stupid.

I think over time, permitting has to rationalize, once you start to see a production decline. I have comfort as a CEO that this country is still going to need oil and gas.

If everybody in New York City had to plug in their car, the grid couldn’t handle it! You need oil and gas, you need coal, you need nuclear and wind and solar. You need it all. But look at the wording in NTL-10, and they basically say, “We don’t need to worry about this because we can always import the oil we need.”