While engineers from countries and companies across the globe discuss Plan B for containing BP’s gushing oil well, traders are focused on the effect this will have on the supply of oil and gas.
As the Chart of the Day in today’s issue of The Schork Reportillustrates, drilling platforms are clustered closer to the coast, and while the Deepwater Horizon platform was distant from any nearby rigs, the spill has spread to a large number of rigs on both sides of the Mississippi river delta.
Many of the rigs shown by Bloomberg have been dismantled or disabled. According to Baker Hughes’ latest weekly data, there are 50 off-shore rigs operating in North America, and of these there are currently 20 offshore or inland water rigs operating as of May 7th, 2010, with the off-shore rigs operating at an average water depth of 1,808 feet.
The largest cluster is formed inside the Mineral Management Services’ (MMS) Mississippi Canyon Area, where seven rigs operate with an average water depth of 3,291 feet.
Of these, 45% are drilling for gas and the other 55% for oil. A similar split follows for trajectory, with vertical rigs accounting for 40% of the total while the rest are directional.
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According to Baker Hughes, rigs in the Gulf of Mexico are not being affected by the spill. While the total offshore rig count was down by 2, from 52 to 50, both rigs came from Texas, well away from the oil spill. Off-shore rigs in Louisiana stand at 43, unchanged week-on-week but down from 45 on April 23rd. The lack of further shut-offs last week, when the spill had reached and stuck around key refinery areas, implies that operators do not see the spill as a potential risk, and we have yet to hear any word on the grapevine of further shut-ins.
In the longer term, offshore rigs in Louisiana are down 2.3% year-on-year and 40.0% below the 2004-08 timestep. On a global level, rig operators are reacting as they can be expected to, natural gas rig counts grew at the start of the year in anticipation of the cold winter, peaking at 244 in February, but have fallen as prices stalled and collapsed in the following months.
On the other hand, strong crude oil prices brought oil rigs in April to an annual high of 808, 8.02% above 2009. Russia does not report its rig counts to Baker Hughes, but the global level jibes with reports of crude production in Russia hitting post-Soviet highs and natural gas production plunging to its lowest point in years.
Keep in mind that Gazprom, Russia’s state-controlled gas company, is the largest producer of natural gas in the world. The firm saw strong earnings in Q4 2009, but if it pulls back production due to lower natural gas prices, Europe will likely be forced to bid the ICE natty contract higher.
Domestically, we do not see the Deepwater Horizon spill having a tangible effect on energy supplies in the short term.
Operators are not idling offshore rigs and oil and gas are being pumped to shore via pipe-line. This fact, combined with continued strength in natty production, leaves us very wary of being bullish in the Henry Hub. In the longer term, the spill has severely crippled President Obama’s plans for expanded offshore drilling. The federal government has already placed a moratorium on all new rig permits until the end of May.
Rumblings have begun to grow about an energy shortage, which helped push the crude contract for December 2018 above $100.00. Until we see something concrete, here at The Schork Reportwe are unwilling to trade this rumor in either direction. Besides, to use another quote from Keynes, “In the long run, we’re all dead.”
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.