The long-term effects of April’s Gulf of Mexico oil spill and resulting deepwater drilling moratorium remain uncertain.
Beyond the immediate impacts, the ripple effect of the oil spill could have long-term economic implications – hurting consumer spending and decreasing sales tax and oil and gas royalties for Gulf States. This broader impact is what concerns Lee Eagan, president and CEO of industrial distributor Oliver H. Van Horn Co., New Orleans, LA. “The whole Gulf Coast is affected,” he says.
While some distributors have reported an uptick in business related to the cleanup, most expect longer-term negative impacts region-wide. How the government and other organizations respond will play a big part in how the oil and gas industry, related businesses and the region emerge from this disaster.
Impact on Drilling
For many distributors in the region, the future depends on whether the moratorium on deepwater drilling remains in place. If it does, it could result in losing all 33 active deepwater Gulf rigs to other areas of the world.
And, “once they leave, they don’t come back,” due to the long-term contracts they will establish off the coast of Africa or Brazil, says Eric Smith, associate director of the Tulane Energy Institute, a part of Tulane University in New Orleans, LA.
In fact, some experts say banning deepwater drilling would be paramount to shutting down production in the Gulf, as the capacity for exploration and production in shallow water is limited. “The only growth business in the Gulf of Mexico is in the deep water,” Smith says.
According to the Louisiana Mid-Continent Oil & Gas Association, in 2009 80 percent of the Gulf’s oil and 45 percent of its natural gas came from operations in deep water, defined in the association’s report as more than 1,000 feet of water.
If the moratorium were to stick, it could result in the loss of tens of thousands of jobs, according to some estimates.
Gases, welding supplies and safety product distributor Gas and Supply Co., Baton Rouge, LA, tells MDM: “If drilling rigs and work boats move to other parts of the world such as Brazil or Africa, some of the work to outfit the rigs or build the boats would continue in the yards of existing U.S. customers.
“However, most of the rigs utilized in the deep water have not been produced in the U.S. In most cases the crews for these rigs or support vehicles would come from the local country and therefore the MRO, safety and other products supplied by Gas and Supply and other suppliers would be lost.”
That said, it’s possible that a ruling July 8 (after this issue went to press) will allow drilling to continue; if challenged by the government, further action at the Supreme Court level would not happen until at least the fourth quarter of the year, Smith says.
“That’s long enough to drill a well or two,” he says, so many of the companies would stay put at least until then despite the long-term uncertainty.
Beyond the moratorium, the long-term impact of the oil spill depends on whether the U.S. is careful to institute regulations in response to this disaster that don’t turn energy companies off on doing business in the Gulf of Mexico. Some of the largest global and even national companies have options for drilling globally.
But independents that focus their entire operations in the Gulf may find that new regulations or laws make it prohibitively expensive to continue doing business, Smith says.
For example, one proposal would get rid of the cap on oil company liabilities for oil spill damages – a significant increase from the previous $75 million cap. This proposal passed the Senate’s Environment and Public Works Committee at the end of June. Other proposals are in the works that could tighten rules on offshore drilling.
Short-Term Oil Spill Effects
The more immediate effects of the oil spill are clearer. There has already been a chain reaction – from the fishermen, to the seafood processors, to the restaurants, and so on. Tourism and related industries have been severely hurt. Interestingly, tourism has been hurt even in areas where oil has not hit. Hotels and other businesses in these areas are fighting the perception that the entire Gulf Coast has been affected.
Aside from hotels, people who own condos they rent for most of the year are seeing cancelation after cancelation; if this trend continues, it does not bode well for the Gulf Coast real estate markets.
“There’s going to be a whole lot of tears. These people bought these condos based on being able to rent the units. There are very few rentals going on now,” says Peter Ricchiuti, assistant dean of the Tulane University A.B. Freeman School of Business in New Orleans. “It was a soft market going in, and now it’s going to be abysmal.”
On the seafood front, supply has tightened, but again, not entirely due to oil contamination, though that has certainly hurt sales of Gulf seafood nationwide and caused at least temporary closures of regional seafood processors and distributors. A Time Magazine article said that while up to 70 percent of Louisiana’s coastline at the time of the report was open to fishing, shrimpers, oystermen and fishermen were working on cleanup instead – a much more lucrative opportunity for some.
Foodservice distributors, such as Performance Food Group, as featured in the Miami Herald recently, have shifted supplies of seafood to be more heavily weighted toward imports. Larger distributors may have the competitive edge in this case as they may have better resources to source globally.
Meanwhile, some industrial distributors are seeing an uptick in parts of their business that are directly related to oil and gas. Gas and Supply reports that the impact of the oil spill and the moratorium (if it holds) may not have a strong negative impact on its business based on what it has heard from current customers in the oil and gas industry.
In the near term, Gas and Supply said it may actually see an increase in business in some areas due to demand for service and repair work related to ships coming in from the oil-drenched Gulf.
The distributor has also sold some safety equipment and supplies to customers or contractors working for BP and other companies in the cleanup effort.
Over the next year or so, there may be an increase in service and repair work related to customers’ wanting to upgrade their rigs in light of the BP disaster. Or government regulations may require companies to upgrade to meet new standards. But, Smith says, while this is likely, the “industry is notoriously conservative about trying new things,” which may slow investment in newer technologies.
It All Depends …
In the end, the extent of the impact of the oil spill depends on many factors. An oil spill off the U.S. coast of this magnitude is unprecedented; distributors and other businesses in the region are keeping a close eye on events as they unfold. Uncertainty seems to be the order of the day.
nd many say the long-term impact on industry depends on how the government responds. As Greater New Orleans Inc., a regional economic development agency, said in a report on the potential economic impacts of the oil spill: “The largest portion of the negative economic impacts may be caused by regulatory response, not the event itself.”