Tuesday, May 25, 2010

U.S. Deepwater Drilling's Future


Author: Toni Johnson, Staff Writer

2.Where does the United States get its oil?
3.What is driving the industry to pursue deepwater projects?
4.How safe is deepwater drilling?
5.How much of an impact will the Deepwater Horizon oil spill have on U.S. offshore drilling?

In an effort to prevent overdependence on oil imports, domestic oil production as a percentage of U.S. consumption has grown even as environmental concerns have prevented new exploration in places like the Arctic National Wildlife Refuge and along most U.S. coasts. The U.S. government's Energy Information Service (EIA) estimates that in the near term, most new U.S. oil production will be in the deep waters of the Gulf of Mexico. While the Obama administration had planned to open up new areas to oil and gas leasing off the coast of Virginia, in Alaska, and in the Gulf of Mexico, angering environmental advocates, the massive oil spill from the explosion of the Deepwater Horizon rig in April 2010 forced the administration to reconsider. The explosion killed eleven oil workers, sunk the rig, and is expected to have a lasting impact on the environment. Some industry experts fear the political fallout from the spill could halt new offshore drilling indefinitely, particularly in deepwater (depths greater than one thousand feet).
Where does the United States get its oil?
Fifty-one percent of U.S. oil consumption came from foreign sources in 2009, primarily Canada, Saudi Arabia, Venezuela, Nigeria, and Mexico, according to the EIA. The agency expects the percentage of imports to drop by a third--from more than 12 billion barrels a day in 2007 to about 8 billion by 2030--and assumes that oil consumption will remain relatively flat, with new demand largely met by alternative fuels and new domestic production.
A little less than half of U.S. oil consumption currently comes from domestic production, now at more than 5 million barrels a day. Oil production in the United States is largely concentrated in Texas, Alaska, California, Louisiana, and North Dakota. Offshore production from the Gulf of Mexico represents 30 percent of all U.S. crude production and more than 90 percent of all U.S. offshore production.
The EIA estimates "a vast majority" of projected increases in U.S. production in the near term will come from Gulf deepwater fields similar to the site of the Deepwater Horizon spill, which currently represent about 70 percent of all Gulf oil production. This share is expected to grow in the next few years. A 2009 U.S. Minerals Management Service (MMS) report forecasting production (PDF) in the Gulf of Mexico shows that as shallow-water production levels have fallen, deepwater production has taken up the slack.
What is driving the industry to pursue deepwater projects?
The upward trend in deepwater Gulf projects is mirrored around the world as oil companies look for new sources of production amid higher oil prices and growing global demand. Many older wells are experiencing production decline and new finds are often more expensive to extract and harder to refine, which some environmental and energy experts say heralds the end to cheap and easy oil (McClatchy). Production from unconventional sources such as oil sands is on the rise, and deepwater drilling is considered one of the last frontiers in oil exploration. Oil investment analyst D. Barry McKennitt said the only reason anyone is willing to drill in deepwater with the depths, temperatures, and other significant technical challenges is that other opportunities are closed. "They don't do it just for exercise," he said.
Drilling in deepwater and ultra-deepwater (depths of five thousand feet or more) just started becoming economically profitable and technically feasible on a large scale in the last decade, in part due to significantly higher oil prices. A 2009 report from the MMS (PDF) on deepwater in the Gulf of Mexico shows there were as many as thirty-six deepwater rigs in the Gulf in 2008, compared with just three in 1992. A third of the more than 130 mobile offshore drilling units (MODU) in operation worldwide in 2008 are located in the Gulf of Mexico. Gulf MODUs drilling five thousand feet or more--the depth of the Deepwater Horizon accident--represent more than half of all ultra-deepwater drilling operations globally, according to the MMS report.
In February 2010, Transocean Ltd, which contracts MODU rigs like Deepwater Horizon to oil companies, posted significant quarterly revenue from its ultra-deepwater rigs, while revenue from its shallow-water rigs declined. Nearly half Transocean's shallow-water rigs have been idle, while its ultra-deepwater rigs were booked through the end of the year. The oil industry publication RigZone, said the "rift in the rig market underscores how oil companies that are hard-pressed to find new oil reserves are still willing to spend big, as long as it's in such frontier regions as offshore Brazil, West Africa, and the deepwater U.S. Gulf of Mexico, where giant fields are thought to lie."
How safe is deepwater drilling?
The oil industry says that deepwater drilling is environmentally safe. Rayola Dougher, a senior economic advisor for the American Petroleum Institute, says that after years of deepwater drilling without a major incident, the industry thought it had spill-prevention under control. "We had two back-to-back storms of the century and that said to us this system really worked," Dougher said of 2005 hurricanes Katrina and Rita. "We lost some platforms but had no major [spill] events." Yet Dougher and other industry insiders are at a loss to explain the catastrophic failures in redundant safety procedures designed to protect against high-pressure blowouts like the one that caused the Deepwater Horizon explosion.
While the environmental damage caused by the Deepwater Horizon spill is ongoing, it will be hard to quantify because it is so far out in the Gulf. But environmental advocates have long warned about the potential for catastrophic spills from offshore drilling and consider deepwater drilling safety assurances particularly weak. And while the extraction technology that makes deepwater projects possible is state of the art, cleanup technologies lag decades behind. David Pettit, a lawyer with the environmental group National Resources Defense Council, says the booms, hay bales, and dispersants being used on the 2010 spill are the same methods used to clean up the Santa Barbara oil spill of 1969. "This is a huge and costly experiment to see what will happen in the Gulf," Pettit said.
The United States has a number of environmental laws to ensure the safety of drilling operations. However, according to reports, the MMS, in charge of regulating oil and gas leasing, has failed to follow through on many of those regulations. The agency has also been criticized for grossly underestimating the dangers of spills from deepwater drilling in its own environmental reviews and for failing to ensure that safety equipment worked properly. The 2010 spill outstripped a 2007 MMS worst-case scenario estimate in the first day alone, Pettit said.
Some environmental advocates are also raising concerns about BP's Atlantis project in the Gulf, which--at depths of more than seven thousand feet--is one of the deepest offshore drilling operations in the world. In a 2009 letter to the MMS, advocates sounded an alarm, arguing the project posed potentially immediate and "catastrophic harm" PDF to the water of the Gulf and its marine life. One Texas-based environmental group is warning that Atlantis has the "same safety deficiencies" (Texas Tribune) as Deepwater Horizon.
How much of an impact will the Deepwater Horizon oil spill have on U.S. offshore drilling?
The Deepwater Horizon spill raised oversight questions and highlighted recent changes in U.S. energy policy. In March 2010, the Obama administration said it would open more U.S. waters to offshore drilling, ending a decades-long moratorium. After the oil spill, however, the administration halted new leasing in the Gulf and elsewhere. An initial report on the spill investigation is expected soon.
"The Deepwater Horizon crisis has shifted the political conversation from seeking opportunity to avoiding risk," reports Bloomberg News in a May 2010 article, which says the real question is whether the "blowout was a fluke in an otherwise safe system or an indication of more trouble to come." A few analysts even contend the oil spill could become a deepwater version of Three Mile Island, the 1979 accident that brought an end to nuclear power plant construction in the United States, and from which the industry has yet to recover.
Some oil industry experts argue that shallow-water drilling in the Gulf and the Arctic (LAT) should not be halted in the fallout from the spill. But the increasing number of regulatory lapses by the MMS that have come to light will likely intensify scrutiny on all U.S. drilling operations. The spill has also exposed a "gap in international law" (NYT), focused largely on spills from oil tankers because they cross international waters. The U.S. State Department has already sent notices to Cuba, the Bahamas, Mexico, and the Marshall Islands about the potential oil slicks headed their way as required under the Cartagena Convention, a regional treaty that outlines cooperation for environmental events in the Caribbean.
MMS is being restructured and U.S. lawmakers are weighing changes to liability rules for oil spills--currently capped at $75 million under the 1990 Oil Pollution Act, a response to Alaska's1989 Exxon Valdez tanker spill--increasing the cap to $10 billion. The American Petroleum Institute, the oil industry's trade association, opposes the proposed cap, saying it would make it extremely difficult to insure wells and would force small and medium-size operators out of the market. According to an industry memo (PDF), "self-insurance" would become the norm, in which case only those companies that could show $100 billion in shareholder equity--basically industry's the largest operators--would be able to participate.
And some environmental and energy experts say the focus needs to shift from expanding drilling to development of alternative transportation fuels and vehicles. "Ultimately, U.S. vulnerability because of oil consumption is only going to be addressed through large efforts on the consumption side," argues CFR Senior Fellow Michael Levi.

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