Lori Ann LaRocco conducts the following interview:
The Senate Energy and Natural Resources Committee kicked off their first hearing of the new Congress with one of the most controversial topics in the energy sphere: the safety of deep water drilling. The committee examined the report and recommendations issued by the National Commission on the BP (NYSE:BP) Deepwater Horizon Oil Spill and Offshore Drilling.
I decided to sit down and speak with Gary Luquette, President of Chevron’s North America Exploration and Production (NYSE:CVX) on his thoughts on the hearing and the impact the unofficial moratorium is having on the industry.
LL: Can you give me status update with this unofficial moratorium on the drilling in the Gulf?
GL: We have not been able to get any drilling permits. None have been issued for Deep Water. There have been a few in the shallow water. Individual companies and associations like the API (American Petroleum Institute) continually engage with the regulator, The Bureau of Ocean Energy Management and try to get clarity on what they will require to approve these permits. This has been going on for some time but it has intensified since the lifting of the moratorium in October.
LL: There is a ripple effect when it comes to the unofficial moratorium. How is this impacting employment?
GL: Absolutely. The data has been provided to the legislators and the regulators and it just hasn’t resonated like it should. I mean just look at the State of the Union Address. You look at where we are in the economy and unemployment rates continuing to be high—there is an opportunity, a very quick win, to get the oil and gas industry back to work. That would have a direct impact in the gulf coastal states but it goes beyond that.
We have service providers that come from all parts of the U.S. that have a role in the oil and gas industry in the Gulf of Mexico. We have been in this situation since May and the impact continues to drag on. Our read is they (the regulators) are not sure what they want. Every time we meet with them we find out new things.
LL: Do you feel they are making it up as they go along?
GL: “Making up” may not be a fair word but they are developing regulations on the fly.
LL: How many of your rigs have ceased working since the unofficial moratorium?
GL: Since the initial moratorium in May, we have had three deep water drill ships that were all long term contracts- go idle.
LL: How many jobs does that translate into?
GL: Its a multiplier effect. So if we have a crew that is 180, 200 employees but then you have the services that come and go and the companies that service those companies. You are talking about thousands of jobs for each one of these drill ships.
We have tried to keep so many of these people on the payroll. Because once you shut down, these people look for other work and we have learned in other boom and busts cycles, your ability to spring back is less and less because people find more guaranteed employment and get off of these cycles.
LL: How would you characterize the state of the industry in the Gulf right now?
GL: We are on life support right now and there is not a lot of time left. We have had a number of drill ships that have left the Gulf and have gone to other parts of the world. They are likely not to return in the short term and maybe not return at all.
The expertise associated with these operations are also being lost. People are frustrated and giving up. Companies can no longer pay these people without income.
If we can’t get relief in the very, very short term we are going to see a change where we start losing this capability. The ramifications on the U.S. in terms of lower production volumes will put more pressure on imports and expose us to a higher balance of payment issues, exposure to more OPEC issues, security and supply issues—it will just get worse.
LL: What was your reaction to the President’s State of the Union Speech?
GL: It’s hard not to take it personal Lori Ann because it is a slap in the face. When prices are right, yes oil companies make enormous profits but they turn around and they make enormous bets which are risky.
So while these companies make billions of dollars in profits what the President doesn’t go along to say however, is the reinvestment rate in this industry is higher compared to a lot of other U.S. industries like the banking industry and the pharmaceutical industry. You can go on and on.
The technology industry which he embraces as a part of his moving to a “greener” society—all of those industries when you look at what they make versus what they re-invest will not match the oil and gas industry. So it is game or a business of high stake bets, investments with no guarantees of returns and it takes big money to justify big bets. But you don’t get any of that in his remarks. The industry has been working very hard to address this issue with Congress.
LL: What did you think of the commission’s report on BP?
GL: The biggest negative for me is the fact they have characterized this as a systemic issue. In my 34 years in this industry I think it is very disingenuous. To suggest it is systemic and widespread and the next one is right around the corner I think is just wrong.
I don’t know if they missed it in all the interactions they had with the practitioners in the industry or whether they had an agenda or script that was written before they even started their work. But with all of our interactions there was clear evidence to the contrary and none of that ever came out. They will be called to task and justify some of their recommendations before Congress.
LL: The commission right now is being questioned by Congress, do you have faith they will make the right decisions with these hearings?
GL: Time will tell and I’m not quite sure Congress will assert itself into the national commission’s report and right the wrongs but I will say that the onus is on the industry to tell its story.
There is a new Congress and we need to make sure we connect the dots for them. We have to make the appropriate linkages between energy security and national security. And energy security and quality of life. With the billions of dollars invested in the oil and gas industry as well as its well paying jobs, tremendous tax base, royalty income not only for the federal government but for also the states, we need to tell our story.
Lori Ann LoRocco is a Senior Talent Producer at CNBC, and author of “Thriving in the New Economy:Lessons from Today’s Top Business Minds.”
Improve Your 2011 Financial Health: What Bubble? Commodities Have More Upside in 2011 >>