Drilling deals dive past oil-spill calamity

June 28, 2010

Crisis? What crisis? The oil industry showed no signs on Monday of being cowed by BP’s ongoing woes and the resulting Gulf of Mexico drilling freeze. Noble Corp’s $4 billion rig rental deal with Royal Dutch Shell and its $2.2 billion all-cash acquisition of Frontier Drilling look like ballsy but not reckless votes of confidence in deepwater exploration.

Oil executives are generally hard to intimidate. Even so, their relatively sanguine response to the ongoing Macondo disaster looks surprising. Noble’s announcement is the clearest sign yet of the mentality. Of course, the company wanted to find some use for $850 million of cash burning a hole in its pocket. But rather than return it to shareholders, Noble is doubling up its bet on deep-sea drilling with Frontier, or FDR Holdings, whose flagship assets are two spanking new ultra-deepwater rigs due to be finished this year. They’ll be able to drill at twice the depth of BP’s ill-fated well.

Shell’s statement is even more emphatic. It’s one thing to sign 10-year contracts on two ultra-deepwater drill ships. Even most pessimists expect exploration to continue in other deepwater meccas Brazil and West Africa. But it’s another thing to lock in long-term capacity in the Gulf of Mexico, which Shell is also doing. Since the Anglo-Dutch giant is second only to BP as a Gulf producer, it’s a confident statement about the prospects for normality to return.

Noble’s deals further reinforce the growing conviction that the Macondo fiasco was caused by BP negligence rather than an industry-wide technical snag. If deep-sea drilling is fundamentally safe when wells are drilled to best standards, it will be easier to justify a resumption of activity.

Perhaps even more telling is that the shaky climate doesn’t appear to have secured Noble a discount on FDR. At 75 percent of the replacement cost for the rigs, Tudor Pickering analysts reckon the price is in line with industry valuations. Even as oil keeps flooding into the Gulf of Mexico, deep-sea drilling seems to be moving closer to business as usual.

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