With all of the negative news spilling out of the Gulf of Mexico recently, including failed “junk-shots”, wildlife soiled with oil, closed fishing grounds, and pictures of tar-balls starting to hit the Florida coast, we thought it would be a good idea to consider how the future of offshore oil production in the Gulf of Mexico might change going forward.
Why would we want to drill for oil in the Gulf of Mexico anyway? Can’t we just buy more oil from foreign countries?
For the last ten years 40% of the world’s oil discoveries outside of the U.S. have occurred in deepwater drilling. During 2009, oil production from the federal waters of the Gulf of Mexico totaled about 1.6 million barrels/day, and accounted for 31% of U.S. oil production. The U.S. Energy Department forecasts that by the year 2035 offshore oil production from the lower 48 states will increase by over 80% and account for approximately 38% of U.S. oil production. Additionally, production from the federal Gulf of Mexico accounted for 11% of total domestic marketed natural gas production.
Yes, we could just prohibit drilling for oil in the Gulf of Mexico going forward; this would eliminate the environmental risk of blown-out deepwater wells spilling oil into the Gulf waters. But the cost in terms of our trade deficit would be huge. Assuming a $75/barrel oil price that results from a permanent drilling moratorium and which would eventually cause U.S. oil production from the Gulf to cease, and that we would need to replace the lost domestic oil production with imported crude oil, the increase to our trade deficit would total nearly $44B annually. Every barrel of oil that we do not produce in the U.S. is a barrel that we need to import.
In terms of employment, we could say goodbye to the jobs of the 100+ people who work on each drilling rig. Add to that the oil services supply chain, which includes helicopters, supply boats, caterers, equipment manufacturers, etc., etc. The Minerals Management Service estimates that offshore operations provide direct employment of 150,000 jobs. No doubt countries that already have ongoing offshore drilling activity would benefit from a permanent ban on deepwater drilling in the Gulf of Mexico. If such a ban were to occur, you could expect an exodus of floating drilling rigs (and jobs) out of the Gulf of Mexico and towards offshore West Africa, the North Sea, and offshore Brazil.
The deepwater Gulf of Mexico is one of the few oil-rich basins in the world that is open to investment by the major oil companies and smaller independents, that is near existing infrastructure, and that offers a stable tax regime. In fact, Apache Energy recently agreed to acquire Mariner Energy, one of the leading independent oil and gas exploration and production companies in the Gulf of Mexico, precisely because of Mariner’s exploration prospects in the deepwater Gulf of Mexico. Apache believes that the Gulf of Mexico offers significant growth potential in a world class basin. Advanced seismic technology has significantly increased success potential and growth in deepwater infrastructure has reduced development costs.
Given that the environmental and economic costs of this oil spill already exceed those of the Exxon Valdez, we can expect more federal government regulation of offshore drilling in those areas outlined above. Additionally, it is increasingly likely that it will be at least a year before the government permits deepwater drilling of any kind to resume. Because the oil and gas from the Gulf are an integral part of our nation’s energy supplies, the interruption in its operation will put additional pressure—and create additional opportunities—in on shore reserves. As you know, we have written extensively about the opportunity we see in natural gas, and this unfortunate disaster in the Gulf will no doubt elevate the prospects of these gas reserves so that they become more central to any future U.S. energy policy.
James G. Tatakis
Assistant VP, Research
