There May Be Oil Offshore, But…

Oil and gas firms covet U.S. offshore reserves, but with oil prices so volatile it's unclear how much would be tappedor where it would end up

Breaking with an 18-year ban imposed by his father, President George W. Bush recently lifted an executive order prohibiting oil exploration in U.S. coastal waters. With that act, Bush said on July 15 at a Rose Garden news conference, "the only thing standing between the American people and these vast oil resources is action from the U.S. Congress." Meanwhile, an organization led by former U.S. House Speaker Newt Gingrich, American Solutions, is promoting a "Drill Here. Drill Now. Pay Less." campaign, collecting more than 1 million signatures to petition Congress to "act immediately to lower gasoline prices" by allowing exploration off America's coasts.

Told in political sound bites, the message is simple: Many people believe the U.S. has walled off a vast gold mine of oil in coastal areas that could be tapped to lower prices. "We have reserves that aren't being explored or developed, and this environment of high energy prices presents a great opportunity," says Charles Davidson, CEO of Houston-based Noble Energy (NBL), an oil and natural gas producer. He says it "would be a great win for the country" if Congress follows Bush's lead and lifts the ban.

The reality, as usual, is far more complicated. Drilling in the now-restricted areas would require years of extensive seismic research before a single rig could operate. Even then, companies would not embark on such massive projects unless the profitability were clear. What's more, the federal Energy Information Administration estimates that access to new U.S. deposits would not significantly affect overall domestic production for 22 years.

Still, the extreme crimp of high fuel prices has mobilized efforts to expand U.S. oil production. "If the ban is lifted, more studies can be done to find out where the best resources are," says Cathy Landry, a spokeswoman for the American Petroleum Institute. "Every day we wait is a day further from more oil production. We need to get started."

Enough to Make Us Energy-Independent?

How much oil and natural gas is there offshore? No one really knows. According to estimates from the Interior Dept.'s Minerals Management Service (MMS), the U.S. has roughly 18 billion undiscovered and technically recoverable bbl. of oil and 76 trillion cubic feet of natural gas. Eric Potter, associate director of the Bureau of Economic Geology at the University of Texas at Austin, says that if these areas are opened up now, by 2025, 1 million additional bbl. per day could potentially be added to the market. Using International Energy Agency demand forecasts, by 2030 this production would equal less than 5% of U.S. daily consumption, and less than 1% of global daily consumption. "It would certainly help," says Potter. "But it won't make us energy-independent."

Still, lifting the ban is politically popular among Americans desperate for action on soaring energy costs. Almost three-quarters of American adults "strongly" or "mildly" favored increased drilling for oil and natural gas in offshore water, according to a CNN/Opinion Research poll conducted on June 26-29, higher than in previous polling.

Potential Hot Spots

The oil-services industry is capitalizing on the political momentum, targeting several coveted areas where it wants the freedom to explore. One is the eastern Gulf of Mexico off the coast of Florida, where the MMS says about 3 billion bbl. of oil could be recovered. This area, which includes the natural gas-rich Destin Dome 30 miles from Pensacola, could prove most accessible because of existing equipment in other parts of the Gulf. In addition, there's the currently off-limits Atlantic coastline's estimated 3.8 billion recoverable bbl., and a potential 10 billion recoverable bbl.

lie beneath currently off-limits Pacific waters.

The oil industry has been pressing lawmakers for access. The National Ocean Industries Assn. (NOIA), which represents 300 companies engaged in offshore oil and gas drilling, spent $200,000 in the first quarter, according to a disclosure form filed in the House. The group, whose members include drilling giants Diamond Offshore Drilling (DO) and Halliburton (HAL), used the money to press for lifting the offshore oil ban and on a variety of other issues. NOIA also includes companies that would more immediately benefit from more access: seismic exploration companies including CGGVeritas, WesternGeco, a subsidiary of oil-services firm Schlumberger PGS Geophysical.

Other industry groups eagerly support such a switch. "At today's [oil] price levels, there is lots of interest in offshore areas," says William Whitsitt, president of the American Exploration & Production Council, a trade group for independent oil companies including Devon Energy (DVN), Noble Energy, and Apache (APA). The American Petroleum Institute (API) also supports lifting the ban.

No Guarantee to Drill

But while companies and their lobbyists are gunning for access, there's no guarantee they'd ultimately produce more fossil fuels. First, seismic exploration data have not been updated for more than a quarter century, and extensive testing would be required before companies made decisions on capital allocations. And any oil that is recovered would go into the global marketplace—not directly into U.S. consumers' cars. (The API counters that new supplies anywhere would help to lower overall consumer prices.)

Democratic lawmakers are raising such arguments to oppose new production in coastal areas. They point to MMS data showing that 83% of the area now leased by energy companies in the Outer Continental Shelf is not producing energy. While there are 2,200 producing leases in that space, an additional 6,300 are nonproducing. Democrats have proposed the "Drill Act," which they say would spur exploration on already available lands in Alaska, the West, and the western Gulf of Mexico. "There may be good and sufficient reasons why the companies that lease this land are not producing oil from it, but I believe we need to ensure that there is diligent development of existing leases," Senator Jeff Bingaman (D-N.M.), chair of the Senate Energy & Natural Resources Committee, told the Senate on July 16.

Noble Energy's Davidson disputes the notion that companies are intentionally not drilling on leased areas, citing the complexities of obtaining the proper government permits and seismic research. Also, wells selected for drilling may come up dry because of faulty data. "Energy companies are trying to pursue every idea we can," says Davidson. "I find the idea that leases are lying fallow a real stretch."

Conservative Companies

Meanwhile, some prominent politicians are beginning to support the idea of coastal drilling—or at least some aspects of it. Senator Kent Conrad (D-N.D.), for instance, says he supports more oil drilling in the Gulf of Mexico but has not committed to domestic offshore drilling elsewhere. In June, Governor Charlie Crist (R-Fla.) reversed his long opposition to drilling off the state's coast, citing the financial pain high prices are inflicting.

With oil prices extremely volatile, companies are being conservative (, 3/20/08) on their capital spending, fearful of an abrupt end to the bullish run. The uncertainty was highlighted the week of July 11-18, when crude oil futures tumbled (, 7/17/08) more than 12%, to settle at $128.88 on July 18 from a July 11 record high above $147.

If the oil ever does flow from U.S. coastal areas, its ultimate destination offers another wrinkle to the issue. Crude oil sloshes around a vast global marketplace, where energy producers aim to secure the best price. That means U.S.-sourced crude could be sold anywhere a consumer is willing to pay more. Former Vice-President Al Gore, who opposes lifting the moratorium, raised that point at a July 17 news conference on energy policy. "You take an oil deposit right off the coast of California—that's more likely to be sold to China,— said Gore.

Join a debate about drilling in the Arctic National Wildlife Refuge.

Before it's here, it's on the Bloomberg Terminal.