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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