State of Suspension

By: Penny Font | 08/01/2010

When 10/12 went to press in early July, the corridor’s promising future was in peril.
The region, which experienced accelerated growth and economic prosperity after Hurricane Katrina and managed to weather a national recession, faced a new disaster in the BP oil spill and the federal reaction that followed.

Even as oil lapped at the coast and stained the marshes, a six-month federal moratorium on deepwater drilling—meant to prevent disaster—threatened to wreak even more of it economically.

“The effects of the moratorium will undoubtedly be felt for many years to come and will eventually reach every industry in some way,” says St. Tammany Parish President Kevin Davis. “The resilience of Louisianans will be unmercifully tested as we struggle to recover.”

President Barack Obama declared the moratorium after the Deepwater Horizon oil rig exploded April 20, killing 11 workers and starting a leak that has spewed millions of gallons of oil into the Gulf of Mexico. He has insisted that if a White House commission and the Interior Department can find ways to safeguard deepwater oil and gas operations sooner, he will be willing to end the ban. However, the commission wasn’t scheduled to even begin meeting until mid-July, and its co-chairman has already said it will be next year before any recommendations will emerge.

Both events carry deep, long-term ramifications for the corridor, home to much of Louisiana’s oil and gas industry as well as the thousands of people, businesses, government agencies, retail, restaurants and real estate interests that depend on it for their livelihoods. Many of them are just now back on precarious financial footing, still recovering from hurricanes Katrina and Rita or from riding out the recession.

In the short-term, the Louisiana Mid-Continent Oil and Gas Association estimates that each of the operating Gulf rigs affected by the moratorium—and another five that had planned to begin operations before the end of the year—typically would employ between 800 and 1,400 workers with an average weekly wage of $1,804.
That translates into lost income totaling between $150 million and $300 million for every month drilling is idle for those workers alone. At press time, it was still unclear whether BP would be liable for job losses during the moratorium, although the White House was insisting impacted rig workers could file claims.

But that doesn’t even begin to touch on the ripple effects in the corridor’s economy, the fate of which is—for better or for worse—inextricably intertwined with the success or failure of the oil and gas industry.

Just how intertwined? South Louisiana economist Loren Scott says that every job lost in oil and gas extraction translates into 3.9 jobs lost in other sectors. Total potential loss: 30,000. Those industries—including tourism, health care, retail and manufacturing, to name a few—account for $210 billion.

“It’s not going to just impact oil exploration people and service companies,” Scott says. “All of those people who won’t have jobs won’t be able to spend money in movie theaters and grocery stores. Retail, restaurants, hospitals, government—all of them are going to be hit by this. It’s not going to be very discriminating in who it hurts. The outlook is pretty grim to me.”

Most troubling was the realization that the longer deepwater drilling in the Gulf is shuttered, the more likely firms are to pack up and take it elsewhere, to places like Brazil or South Africa. Several companies—including Cobalt and Anadarko—had already invoked force majeure provisions in their contracts, signaling the damage. Anadarko announced in early June that it was shutting down three exploratory drilling rigs, all off the coast near Cameron Parish. The company told its shareholders it would move the operations from the Gulf to other areas of its “global portfolio” so it could meet annual production goals.
Long-term agreements with foreign countries could mean years before current drilling levels return to the Gulf.

“Each month that the work of the commission is delayed,” Louisiana Economic Development Secretary Stephen Moret says, “we expect additional energy companies to move existing deepwater rigs to other parts of the world and/or to plan new deepwater drilling capacity for other parts of the world in lieu of the Gulf—further extending and expanding job losses in Louisiana.”

Samuel Giberga, senior vice president and general counsel for Hornbeck Offshore Services, the Covington firm that filed suit against the moratorium, says he’s convinced rigs will move overseas. His company could move its vessels that serve the industry, but few of the 1,300 employees. Rigs in foreign countries likely will be staffed with non-U.S. workers.

Hornbeck told investors in a conference call that several of its vessels were involved in oil-spill relief efforts.

“But that’s not an industry,” Giberga adds. “If we have to move, we’re going to have to start letting people go.”

Another emerging problem is insurance. Scott says a number of liability providers already have raised rates on deepwater drilling by as much as 50% and on shallow drilling by 25%. Congress is also considering raising liability limits from $75 million to $10 billion.

“A number of deepwater drilling projects are going to be declared non-economical to drill,” Scott says. “And the independents aren’t going to be able to operate because they don’t have deep enough pockets to drill.”

A widely cited GNO Inc. preliminary assessment of the potential economic impact of the moratorium is more dire than the oil spill itself. In the best case scenario, Louisiana and its parishes stand to lose nearly $172 million in revenues. Worst case? More than $782 million.

GNO Inc. President & CEO Michael Hecht says simply that “the economic impact could be devastating. An ecological tragedy could turn into an economic calamity.” Among the initial findings for potential impact of the moratorium, which were to be revised after 10/12 went to press:

  • The loss of 22,000 direct and indirect jobs.
  • $8 million to $15 million per month in lost tax revenues to state and parish governments, possibly surpassing $700 million.
  • $660,000 to $830,000 per month in lost MMS royalties, possibly exceeding $40 million.
  • $39 million in other losses, including tolls for the new bridge on La. 1 leading to Port Fourchon.
  • Anywhere between $50 million to $3.3 billion lost by fisheries.
  • $25 million to $1.7 billion in losses to the tourism industry, which centers on fishing, hunting and eco-tourism, as well as untold damage to the Louisiana brand.
  • $10 million to $100 million in losses for shipping and transportation, as well as chemical manufacturing.

But Ewell Smith, executive director of the Louisiana Seafood Promotion and Marketing Board, says those numbers don’t take into account the impact beyond the corridor and Louisiana.

“The ripple effect will not only be felt across our state; it will be profound across this nation as Louisiana provides 30% of the nation’s domestic seafood and we also provide 30% of the nation’s oil and gas,” Smith says. “The BP oil gusher is incredibly tragic, but a moratorium is catastrophic as well.”

Of all the communities along the 10/12 corridor, Lafayette perhaps stands to lose the most, given that 40% of its gross domestic product is tied to oil and gas. The Lafayette Economic Development Authority estimates that during the coming year the moratorium could result in the loss of more than 7,700 direct and indirect jobs, which translates into more than $446 million in wages and income.

But even the City of New Orleans is already pondering whether it might lose its ability to provide public services as a result of the disaster, if conventions cancel, companies pack up, restaurants close down and people move.

The city council is mulling its options around the Oil Pollution Act, which requires the responsible party to cover “net loss of taxes” related to property damage. It isn’t clear just what that means. BP has established a $20 billion escrow account for claims.

At press time, community leaders all along the corridor were fighting hard for an end to the moratorium. A rally was planned in the Cajundome at the end of July, and Gov. Bobby Jindal sent a delegation to Washington in mid-June.

In a letter to the co-chairs of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling and Interior Secretary Ken Salazar, Moret insisted the moratorium is “causing unnecessary hardship to thousands of hardworking Louisiana workers.”

And Louisiana Sen. Mary Landrieu wiped away tears as she pleaded on the Senate floor over the summer for a compromise. “There is more oil than there are rigs able to drill,” she says. “They cannot and will not sit idly in the Gulf of Mexico while we sit and decide what to do. They will leave and not come back.”

But most felt their pleas were largely ignored. Scott, who was part of the delegation to the Capitol, described those with whom the delegation met as “very pleasant. They said they felt our pain. But there was no indication they were going to hurry up.”

Obama has publicly acknowledged the strain, but defended the moratorium. “I know this creates difficulty for the people who work on these rigs,” he has said, “but for the sake of their safety, and for the sake of the entire region, we need to know the facts before we allow deepwater drilling to continue.”