Offshore Drilling and the Houston Office Market

The Impact of the Offshore Drilling Moratorium

The Energy Industry is in a battle with the Obama Administration to resume deepwater drilling in the Gulf of Mexico. In Houston, there is a concern over what impact the drilling ban will have on our economy and among commercial real estate professionals, property owners and tenants, questions remain on how it will influence the office market and the timing of any recovery in market fundamentals.

“The moratorium will cost the Gulf Coast region jobs, money, and economic development. In fact, the moratorium could be more costly than the oil spill itself.” says economist, Joseph R. Mason, PhD, Louisiana State University.

Dr. Mason’s report: “The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region” estimates the moratorium will see a loss of 8,000 jobs and $500 million in lost wages in the Gulf Coast in the first six months and Texas will see a decrease of approximately 2,492 jobs.

What’s the impact on the Houston Office Sector?

The moratorium has affected 18 firms active with deepwater rigs in the Gulf and 16 of those firms have a significant presence in Houston. The consensus opinion is that when drilling resumes, the industry will operate under stricter regulations and closer federal government oversight.

Houston is the energy capital of the world and its economy all though more diversified than years past is heavily dependent on the Oil and Gas sector. Many of Houston’s largest office tenants are from the Energy industry including; Exxon-Mobil, Shell, Chevron, B.P. and Anadarko to name just a few, and even if there actual corporate headquarters are not located in Houston, their offshore operations are based in the Bayou City. The offshore exploration and drilling industry is heavily concentrated in Houston and it extends beyond the exploration companies to the drilling contractors, equipment manufacturers and engineering companies who design, build, supply and operate the drilling platforms.

The consensus is the large energy companies will survive the moratorium without significant damage. However for smaller mid-level operators, suppliers and small level service providers who are primarily dependent on the industry, six months or more without that revenue could result in a much more serious or even grave impact.

Prior to the B.P. incident, the Obama Administration was widely considered to be receptive to opening up additional U.S. waters for exploration and drilling. That’s clearly off the table now. Drilling in the Gulf at some point will return, but likely under a different economic structure. So for the Houston office market which needs job growth to improve market fundamentals, a sector of the economy (offshore exploration and drilling) which prior to the B.P. incident was a potential growth industry, now has some level of uncertainty.

In my opinion, over the long-term, I don’t believe the B.P. disaster in the Gulf will ultimately result in a severe blow to the fundamentals of the Houston office market. The Energy industry will survive the storm and the Gulf of Mexico is not the only place we drill for oil and gas. However, the drilling moratorium does further delay any recovery of the office market which has yet to show any significant signs of improvement since it began its decline in the 1st quarter of 2008.

There are three scenarios for the drilling moratorium:

Drilling resumes after the moratorium expires in November
The moratorium could be extended for another period (another 6 months or year)
Drilling could be halted in the Gulf permanently

The prospect of ending drilling in the Gulf is highly unlikely. Most Americans oppose the offshore deepwater drilling ban. However, until drilling resumes, it will serve as a drag on the Houston economy, offsetting job growth in other economic sectors and further delaying recovery of the Houston office market. I think it is important to note that Dr. Mason’s study is a projection. Who really knows how accurate it will turn out to be in reality. One thing is for sure, when there is uncertainty in the economy, companies typically do not tend to hire employees, and job growth is the sole factor that will cause the office market to begin a sustained trend of improvement. The state of the national economy is inflicting more pain on the Houston office market than the drilling moratorium at this point, but shrinking the Gulf’s offshore drilling business will not help matters.

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