The Deepwater Gets Dinged

Ever since I saw Petro-Canada (NYSE: PCZ  ) and Teck Cominco's oil sands budget running over back in September, I've been eyeing oil sands developments with caution. Royal Dutch Shell's (NYSE: RDS-A  ) (NYSE: RDS-B  ) delay of its Carmon Creek project last week is yet another example of an oil sands project that's probably unworkable at $50 oil.

Deepwater developments, in contrast, had generally been moving forward without a hitch. Until last week, that is.

Callon Petroleum (NYSE: CPE  ) has announced that it's suspending development at the Entrada field in the deepwater Gulf of Mexico. After buying out BP's (NYSE: BP  ) 80% interest last year, Callon had quickly moved to bring the field online by early 2009, in a move that would have doubled companywide production in the process. The company had spoken as recently as late September of how excited it was about the project. In fact, on the November conference call, the company noted that "although costs have increased, the project economics obviously are still very good."

In the brief press release, Callon cited increasing costs and declining commodity prices as reasons to suspend development. There was also mention of a need for the first development well to be sidetracked. Even if you don't speak oilpatch, that doesn't sound so good, does it? Partner Itochu, in its own project-suspension announcement, makes the drilling disappointment more explicit in its own release, when it notes that new information from the drilling program contributed to the decision.

Because this project sounds like it came up short on the reserves side, I'm not convinced that we can draw too strong a conclusion about the future of other, more robust deepwater developments. Perhaps most informative will be the fate of the Ocean Victory, a Diamond Offshore (NYSE: DO  ) rig that, without its Entrada engagement, now has nothing to do until it goes to work for Newfield Exploration (NYSE: NFX  ) in late March.

If the drilling contractor manages to promptly plug the gap in its schedule at an attractive dayrate, that will speak volumes about the ongoing demand for deepwater drilling assets.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.


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