Last month we launched the long-awaited redesign of my paid advisory, The Energy Strategist. The new website features dynamically updated pricing and returns for the various model Portfolios, as well as details on my proprietary indexes and video of my appearances on Clean Skies TV.

But my favorite addition to the website is a chat feature that allows me to answer subscribers’ questions about energy-related stocks and trends in real time. These sessions also allow for a degree of interactivity that’s impossible to achieve through email.

I’ve already hosted two online chats since the site launched and look forward to holding more. Subscribers have enthused about this new feature, but I have to admit that part of my reason for requesting this capability was entirely selfish: Questions from subscribers give me a better idea of what’s worrying investors and which stocks and sectors are of the most interest. This input makes my job easier and ensures that The Energy Strategist is more responsive to subscribers’ needs.

Monday’s two-hour chat provided me with ample material for the next issue of my paid service, due out July 21. After fielding numerous questions about super-major oil companies–a topic I haven’t touched on for some time–I feel confident that readers will profit from my analysis of this group.

This installment of The Energy Letter will address two additional topics that cropped up repeatedly during my chat with subscribers: the sustainability of drilling activity targeting natural gas and the impact of the Obama administration’s moratorium on deepwater drilling in the Gulf of Mexico.

Drilling for Natural Gas

Readers often ask why US producers continue to drill aggressively in the Marcellus Shale, the Eagle Ford Shale and other unconventional plays when natural gas prices are at depressed levels. This activity is a bit of a conundrum. The US gas-directed rig count– the total number of rigs drilling for natural gas–has soared from around 750 rigs at the beginning of 2010 to 964 rigs despite lower gas prices.

In many cases, natural gas liquids (NGL) are the reason for this anomaly. Whereas dry natural gas consists almost entirely of methane, wet natural gas occurs naturally and contains additional hydrocarbons, including ethane, propane, butane, isobutane, and natural gasoline. Collectively these additives are known as NGLs.

Also, bear in mind that many natural gas wells also produce crude oil in varying quantities.

The value of a barrel of NGLs is more closely related to the value of a barrel of crude oil than it is to the price of natural gas; significant quantities of NGLs and oil incentivize production from wet gas wells and offer superior economics.

To put this number in context, some producers targeting NGL-rich fields earn more than $7 per thousand cubic feet of wet natural gas; a thousand cubic feet of dry gas is worth between $4.50 and $5. The Marcellus and Eagle Ford plays, two of the hottest unconventional fields, are extremely rich in NGLs.

Some subscribers have asked whether investors should be concerned about the recent drop in the price of NGLs. The graph below provides a closer look at this decline.

Source: Bloomberg

To create this graph, I looked at the prices of five common NGLs: ethane (36.5 percent of total volume), propane (31.8 percent), isobutane (6.2 percent), butane (11.2 percent) and natural gasoline (14.3 percent). Ethane and propane are the most common NGLs but are worth less than natural gasoline and butane.

As you can see, NGL prices topped out at around $55 a barrel earlier this year and have declined to roughly $40. Some of this weakness stems from the $10 drop in crude over the past three months, though it’s clear that NGL prices have underperformed oil. One reason for this weakness: Strong gas drilling activity and NGL production have bloated inventories of some liquids.

On average, a barrel of NGLs is worth 60 to 62 percent of a barrel of crude oil, but this ratio is near 53 percent. In other words, the price relationship between NGLs and oil has broken down a bit in recent weeks.

This development isn’t a major cause for concern.

First, the relationship between oil and NGL prices fluctuates a bit with the season; the correlation tends to increase in the first half of the year and fall thereafter–a product of the inventory cycle for propane and other NGLs. Weakness at this time of year isn’t unprecedented.

Second, NGL prices remain healthy, well within the $35 to $50 range that prevailed in the 2005-07 period. And demand for NGLs remains strong; it’s much cheaper to use ethane when manufacturing ethylene, the key building block for plastics, than it is to use naphtha, a derivative of crude oil.

The Deepwater Drilling Moratorium

In late May, the Obama administration announced a blanket six-month ban on drilling in Gulf of Mexico waters deeper than 500 feet. One month later, the courts struck down that moratorium, stating that the government failed to provide an acceptable rationale for the ban. In just two weeks the Dept of the Interior issued a revised ban on deepwater drilling, though investors should expect a renewed legal effort to block the moratorium.

With regulations governing drilling in the Gulf in a state of near-constant flux, many investors are confused about the ramifications for their investments.

Here’s a quick synopsis of the most salient points for investors.

Despite recent court rulings, a moratorium is effectively in place on deepwater drilling in the Gulf, and this ban will hold until at least the end of November. More likely than not, the moratorium will extend far beyond November, affecting drilling the region until the second half of 2011. This policy will have major consequences for deepwater-focused contract drillers such as Transocean (NYSE: RIG) and Noble Corp (NYSE: NE).

Secretary of the Interior Ken Salazar unveiled a new drilling policy designed to address some of the issues Judge Feldman pointed out in his ruling that lifted the moratorium. The new moratorium is similar to the original ban and, arguably, slightly worse for the industry.

The initial moratorium prohibited drilling in waters deeper than 500 feet. Although the new ban doesn’t mention depth, it does ban drilling that involves the use of subsea blowout preventers (BOP) or BOPs installed on floating production platforms. All deepwater wells are drilled with floating production platforms and use subsea BOPs; the new policy is still a blanket ban on deepwater drilling.

Even worse, some shallow-water wells are drilled with floating rigs; the ban will affect, on the margin, a handful of shallow-water developments. The only real difference between the original ban and the new policy is that the government appears to offer a bit more explanation and justification for the policy.

The new moratorium extends through the end of November but allows for new drilling before that time, if operators can prove they’ve addressed safety issues.

This back and forth is basically meaningless. No one doubts that the ban ultimately will be extended, pending the government’s investigation of safety practices; regulators are unlikely to conclude that drilling is safe before the moratorium expires.

Oil and gas firms undoubtedly will challenge the new policy in the courts. Because the “new” moratorium closely resembles its predecessor, I don’t know why the court would rule differently this time around. Then again, I’m not a lawyer; I’m sure there are plenty of arguments to be made.

Legal and political theater aside, the impact on the contract-drilling industry is the same.

Diamond Offshore (NYSE: DO) recently announced that it’s moving a second rig out of the US Gulf of Mexico. The rig had been under contract with Murphy Oil Corp (NYSE: MUR) for a day rate of $510,000 through mid-February 2012. The rig is now en route to the Republic of Congo where it will work for the same operator. The deal also involves an additional one-year commitment in the Gulf of Mexico, once Murphy is able to obtain permits and meet safety regulations.

The entire deal, including the contract in the Congo and the Gulf of Mexico extension, is worth a maximum of $234 million. Consider that the original agreement would have been worth closer to $300 million, and that sum would have been contractually guaranteed. The new deal is clearly inferior; Ocean Confidence would have been unable to command a higher day rate in the open market.

Another major contract driller, Noble Corp, announced a renegotiated deal covering one of its deepwater rigs in June.  Noble Corp’s Noble Clyde Boudreaux is a deepwater semisubmersible rig capable of drilling in waters up to 10,000 feet deep. The rig was contracted to Noble Energy (NYSE: NBL) to drill in the US Gulf of Mexico for a day-rate of about $600,000 through November 2011. (Note that Noble Corp is a contract driller and Noble Energy is a producer; despite having similar names, the two companies aren’t related).

Noble Energy likely threatened to enforce its force majeure contract with Noble Corp; this clause gives operators an out if forces beyond their control halt drilling in the Gulf for a prolonged period. Obviously, the producer doesn’t want to pay a guaranteed $600,000 per day to the driller if it can’t use the rig.

But Noble Corp and Noble Energy reached a compromise. Under the terms of the deal, the rig will sit idle in the Gulf until December at a reduced rate of $145,000 per day. This period can be extended if both parties agree to do so after December. In addition, both parties have agreed to negotiate a new contract at a day-rate of around $397,000 once the moratorium expires.

This deal is interesting for a number of reasons. First, it’s obvious that Noble Corp never would have entered into such an agreement if management thought that the firm could negotiate a new contract somewhere else in the world at a better day-rate. If all 33 rigs affected by the moratorium leave the Gulf, it would create a supply glut that would take at least a few years to resolve. Noble Corp’s management understands this challenge, instead opting to negotiate a lower day-rate than to take its chances elsewhere.

Second, this announcement indicates the scope of the financial and economic impact of the US drilling moratorium. Noble Corp will take a big hit on its day-rate for a prolonged period, and once the moratorium is lifted, the new contract will be at a much lower rate than before the spill.

Not all contracts will be renegotiated in this manner. Some operators have chosen to invoke force majeure clauses, and contract drillers will challenge these moves in court. Deepwater drillers with exposure to the Gulf will suffer from lower day-rates.

What’s particularly frustrating is the common perception that Gulf drilling can be turned on and off like a light switch. Once rigs and personnel leave the Gulf, returning this equipment and know-how to the region will not be an easy matter.

And the government likely will issue much stricter regulations governing the equipment and safety procedures in the Gulf; meeting these new requirements will involve considerable time and investment.