Guarded optimism greets US leasing plan

May 20, 2010

The oil & gas industry and analysts greeted President Obama’s offshore drilling plan as a step in the right direction. But subsequent events surrounding the Deepwater Horizon disaster (see Heavy losses in Horizon tragedy ) could complicate matters. Russell McCulley reports.

Reaction to the US president’s plan started coming in shortly after the administration rolled out details of the Minerals Management Service’s proposed 2012-2017 leasing program in late March. The scheme would open to drilling vast stretches of the US Outer Continental Shelf previously off limits to oil & gas exploration, including the Atlantic coast from Georgia to Delaware, parts of Alaska and a portion of the eastern Gulf of Mexico offshore Florida. But it leaves in place drilling bans offshore New England, the West Coast and protected areas off the Alaskan shore.

The MMS is scheduled to hold a lease sale offshore Virginia in 2012, which was included in a 2007-2012 lease plan introduced by the Bush administration. It was unclear how a temporary ban on new offshore drilling, announced by the Obama administration in the immediate wake of the Horizon oil spill, would affect the Virginia sale. The White House said no new drilling would be authorized until investigators determined the cause of the 20 April explosion and fire that sank the Transocean semi and spilled thousands of barrels of oil into the Gulf of Mexico.

While some lawmakers are calling for harsher measures, the current moratorium would have little, if any, effect on other areas under consideration for expanded drilling because any new E&P activity would be at least five years off. Moreover, the new five-year plan must undergo several months of environmental impact reviews and public hearings before adoption, said MMS director Liz Birnbaum. But initial responses from the oil & gas industry have largely been favorable, she said.

‘I thought the reaction was pretty positive,’ Birnbaum told OE before delivering a speech at the Global Marine Renewable Energy Conference in Seattle in April. Birnbaum cautioned, however, that easing the ban on drilling would in itself do little to decrease America’s dependence on imported oil, certainly in the short term, and said the administration will continue to explore alternative energy resources and promote efficiency and conservation.

Shell president Marvin Odum, during a conference call announcing the startup of production at the deepwater Gulf of Mexico Perdido development, called the administration’s proposal ‘a significant and important step forward’.

Odum noted Shell’s ‘string of exploration successes’ in the deepwater Gulf of Mexico and said the company would examine potential in the eastern Gulf. He also said the company has conducted extensive research in Alaska and that lifting the drilling ban could clear the way for exploratory operations in the Chukchi Sea. ‘This is actually good news for us in Alaska,’ he said.

The National Ocean Industries Association was among the first to respond to the MMS proposal, saying in a release that the organization’s members were ‘very pleased’ with the decision to expand offshore drilling but expressing disappointment that much of the US coast will remain inaccessible under the plan.

‘If the proposed areas ultimately end up being leased, it will represent the most significant increase in access to domestic energy from our oceans in decades,’ said NOIA president Randall Luthi, who preceded Birnbaum as MMS director. ‘Today’s plan is a good start to secure reliable and increased access to areas of the OCS where vital energy resources may lie.’

The group said it was disappointed that some areas, including Alaska’s Bristol Bay, had been set aside for protection under the plan.

‘We are never happy to see sales removed from plans, and are disappointed that sales in Alaska included in the remaining years of the 2007- 2012 plan will not take place as scheduled,’ Luthi said. ‘Although we are pleased that these areas are included in the 2012-2017 proposed plan, delayed sales equal delayed energy, jobs and revenue urgently needed to fuel our struggling economy.’

The association also took issue with the extension of prohibitions on drilling in easily accessed reserves offshore California and the shallow water Eastern Gulf of Mexico and complained that the plan did not address revenue sharing among coastal states or federal funding for environmental analyses that must be done before seismic exploration gets underway.

The 31 March announcement ‘is not the finish line,’ Luthi said. ‘Additional rounds of review and permitting are required before any new leasing is authorized. It is, however, a step in the right direction to recognizing the need for greater domestic energy production. The key will be to actually finish the process in a timely manner.’

US Interior secretary Ken Salazar sought to preempt charges that the plan is too restrictive. ‘The plan we are proposing calls for four more lease sales in the Gulf of Mexico by 2012 and, in the years beyond, would open up two-thirds of the oil and gas resources in the Eastern Gulf while protecting Florida’s coast and critical military training areas,’ Salazar said. ‘Our efforts to strategically open new areas in the Eastern Gulf would represent the largest expansion of our nation’s available offshore oil and gas supplies in three decades.’

The MMS estimates that the eight planning areas under consideration for leasing under the 2012-2017 program could contain 39-63 billion barrels of recoverable oil and 168-294tcf of natural gas.

Energy analysts Douglas-Westwood noted that additional production from the areas in question would probably represent less than 1% of global output, and therefore have little, if any, impact on oil prices. Still, the proposal sends a positive signal, said Douglas-Westwood US managing director Steven Kopits.

‘The permitting of increased offshore drilling has symbolic importance as it suggests a more positive stance by the Obama administration towards the oil and gas sector, which has felt marginalized during the administration’s first year,’ Kopits said. ‘It acknowledges the need for oil and moves the administration closer to a view of oil as an increasingly scarce, expensive and strategically vital resource.’

IHS Cambridge Energy Research Associates cautioned that under the best conditions, production from the Atlantic OCS would not come for at least seven years. The company said the US Atlantic coast could hold some 3.8 billion barrels of oil and 137tcf of natural gas based on existing seismic data.

‘At this point, though, any resource estimate for the intriguing US Atlantic Continental Shelf is very preliminary,’ said IHS Cera VP Pete Stark.

‘A firmer estimate will not be available until the critical modern geophysical analyses and test results from new exploratory wells are known.’ OE



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