Continued Drilling Delays to Negatively Impact Deepwater GOM

Policy advisers for the American Petroleum Institute (API) warned that continued delays for deepwater drilling permits in the Gulf of Mexico would negatively impact deepwater Gulf development as well as Gulf region jobs and the nation's energy security.

On the event of the President's State of the Union address, API policy advisors cited a Wood Mackenzie study released in December that found long-term Gulf of Mexico deepwater development could be seriously jeopardized if permitting timelines are extended. The study projects nearly one-third of U.S. deepwater production could be rendered uneconomic, which could significantly impact deepwater production, resulting in less energy production, less investment and less revenue to government.

"The potential harm is alarming," said Kyle Isakower, API's Vice President of Economic and Regulatory Policy. "We are talking about a transformation of the future relevance of deepwater Gulf development to U.S. domestic energy production – and a major threat to Gulf region jobs and to the nation's energy security. Based on the development impacts outlined by Wood Mackenzie, we believe as many as 125,000 jobs could be lost in 2015."

A slowdown in Gulf permitting has already cost jobs and will reduce Gulf oil and natural gas production and government revenue this year. Unless policymakers reverse course, 2011 could be the first year without a lease sale in the Gulf of Mexico since 1964.
As much as 680,000 barrels of oil equivalent Gulf production could be at risk in 2019, according to the study, which was sponsored by API. That's approximately equal to total current Alaska oil production, 12 percent of total current U.S. oil production, or about 34 percent of total current Gulf deepwater oil production.

On top of the production impacts, the Wood Mackenzie study projects as much as $70 billion in investment and $18 billion in revenue to government could be at risk (cumulatively from 2011 to 2022).

While the industry does understand for green energy, Isakower said, "We're calling on the administration to recognize the enormous contribution that the oil and gas industry makes to government revenues. We're ready to help revitalize economy with well-paying jobs for more Americans, but it can only be sustained if companies are allowed to do what they do best."

"We understand there will be the need for additional time for additional vetting in place," said Erik Milito, API director of upstream and industry operations. "We're not saying we should get back to the pre-Macondo pace of permitting and do business as if nothing ever happened. We don't support rubber stamping permits."

Wood Mackenzie study

The Wood Mackenzie study found the potential loss of commercial reserves from fields at risk was found to be substantial. In the Base Case, 10 fields or 1.9 billion barrels of oil equivalent (bnboe) of the 25 fields studied are already sub-economic and will be further at risk under additional development delays. A total of 13 and 17 fields out of 25 fall below the hurdle rate assumptions under the 1-year and 2-year delay scenarios, respectively. The total recoverable reserves attributable to investment falling below the hurdle rates from these two delay cases are 2.7 and 3.1 bnboe out of a total estimate of 5.1 bnboe for all 25 fields in this analysis. There is an estimated total of 12.8 bnboe of Gulf of Mexico deepwater reserves of which 7.7 billion boe is already online or underdevelopment plus 5.12 bnboe from the 25 probable fields.

The potential production volume of new fields that are already at risk in the Base Case reaches a maximum 340,000 boe/d in 2019. In the 1-year delay case, an additional 200,000 BOE/d of production is at risk beyond the Base Case for a total at risk volume of 540,000 BOE/d. In the 2-year delay case, an additional 340,000 BOE/d of production is at risk in 2019 for a total of 680,000 BOE/d. The total production volume at risk in 2019 for the 1-year and 2-year scenarios represents 27% and 34% of Base Case throughput for the year.

Over $43 billion of the potential $105 billion in investment spending from these 25 probable field developments over the next 20 years could already be at risk. Development delays of 1-year potentially increase this amount at risk by $16.5 billion to total investment at risk of $59.6 billion. A delay of 2 years increases potential investment at risk by $27.4 billion over the Base Case or a total of $70.5 billion at risk. The majority of the lost investments would occur from 2011-2020.

Some of the sub-economic fields identified in this analysis will still be developed, albeit with lower returns than initially planned mainly due to the sunk lease and exploration costs that have already been incurred. However, the analysis indicates that approximately two-thirds of known probable discoveries in the deepwater Gulf of Mexico could fall below our economic thresholds on a full-cycle basis if significant permitting delays occur.

The results indicate the future of exploration in the Gulf of Mexico is very uncertain. Many high-risk and deep targets in the frontier and emerging plays may not be explored if only marginal returns are expected. Most of these types of targets were projected to provide much of the expected growth in the Gulf of Mexico. Significant increases in development costs, which were not part of this analysis, will further reduce the potential economic viability of the deepwater Gulf of Mexico.

"While regulatory changes and more detailed Application for Permit to Drill (APD) procedures are expected, our analysis isolates timing and suggests any policy that increases development time should be weighed carefully. Much of the deepwater Gulf of Mexico is marginal under a one and two year field start-up delay and further uncertainty increases the commercial risks of major projects in the deepwater," the study found.


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Woodrow | Jan. 31, 2011
Yep Lukas see you in Africa. Americas a lost cause, We let the NOBAMA generation have it. Hope you own a wind generator.

M Kamp | Jan. 31, 2011
Only when we are dependent on other nations will they realize what a huge mistake they have made in crippling our oil and gas industry. I still remember vividly the lines at gas stations in the 1970s. How soon they forget that we should never depend on anyone else but our own resources. They are playing right into the hands of international terrorist. Our once world leading position will be gone and people all across this nation will suffer when they are unable to afford the cost of everyday needs. Remember a great deal of products today are made from petroleum products as well as the fuel to transport food and medicines. The ripple effect will make this a problem for everyone, not just the oil and gas industry. Also the delay is only taking out the smaller locally owned companies first, as the big global companies are just moving their resources to other countries. Yeah, that's another stupid move...send our best workers out of the country along with our tax revenue. Wake up Washington and stop gambling with our future and well-being.

Gene Farley | Jan. 28, 2011
Whereas, people from all over North America, as well as worldwide, are somehow affected financially by this moratorium, it will prove devastating not only to the American economy, but, will also affect our global economy.

JBB | Jan. 28, 2011
Ive work all my life on boats. Have invested a ton of money on my own education and training to work in the oil industry-now no one is hiring! Lets get serious and get back to work!

rrusso | Jan. 27, 2011
Why would we expect anything different from a group of people in Washington who have been against offshore drilling since they took control (Democrats) the fact is the oil and gas industry in non-union, workers are US Citizens, If it were unionized and had plenty of minorities, we would be drilling.

bob | Jan. 26, 2011
John, The "error in judgment" happened to BP, but it could have been any of the other majors and was far more likely to happen to one of the many more independents in the Gulf. Having watched the industry for years it was only a matter of time before something of this significance occurred. At this point we are lucky it did happen to a company that had the resources to respond as BP has. BP America operates the same way that Shell US operates being Shell is a Dutch company. There are many companies that operate subsidiaries in other nations. Petrobras is a Brazilian company with a US office and do work in the Gulf. Total is French, BHP is Australian, and lets not forget our friends from China just gave Chesapeake several billion to drill out natural gas in South Texas.

Norbert Kreiner | Jan. 26, 2011
Yes, let the Saudis and other OPEC suppliers blackmail the US further on. Have we not learned anything from the past? These ignorant Law makers we have now who wallow in their fat bank accounts do not give a dime about the working people who will get affected fairly soon with 6 $ and more gas prices and being out of work. The problem is that the BOEM is made of inexperienced law makers who are operated by puppet strings from Obamas advisers who cannot see the disaster looming ahead. The industry is working flat out to improve the well control systems, etc. and spend millions on new designs and upgrades. How did the country become so ignorant and vote for what we have now??

john weaver | Jan. 26, 2011
There is no moratorium in the North Sea. The parliamentary report reads that UK has stricter exploration standards. If that is so, BP, being a UK company adheres to a lesser standard elsewhere? Why do we continue to politicize this error in judgment by one company and put our Oil and Gas Industry at risk? John Weaver

JJM | Jan. 26, 2011
Not to mention that further delays result in loss of experienced hands and resultant more greenhorns when drilling is allowed. Small businesses like ours cannot afford to keep our doors open thru much more delay.

Sedric | Jan. 26, 2011
I know our Govt. mean well and want to make sure drilling companies and all other companies follow safe work practice and compliance but they also, need to look at the jobs been lost and the impact this has on the Gulf Coast. There are companies out there losing work and good employees, also think about families losing there homes.

Lukas | Jan. 26, 2011
So we going to AFRICA :):):):)


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