The Way I See It: Offshore oil from moratoria areas: A gusher? Or too little, too late?

The Way I See It
Offshore oil from moratoria areas: A gusher? Or too little, too late?

BY KYRIACOS ZYGOURAKIS
Special to the Rice News

We’ve all seen the commercial where the legendary oilman T. Boone Pickens warns that we ”cannot drill ourselves out of this energy crisis.”

At the same time, the proponents of ”drill here and now” are pressuring Congress to lift the ban on offshore drilling in the moratoria areas of our outer continental shelf (OCS). And an increasing majority of Americans, according to recent polls, believe the price of gasoline will go down if we start drilling in areas that are currently off-limits.

	KYRIACOS ZYGOURAKIS

Who is right? Let’s look at the facts and decide.

The first thing we should realize is that the congressional moratoria on offshore drilling affect only a fraction of our presumed OCS oil resources. Reports published by the Department of Energy and the Minerals Management Service show that 78 percent of our undiscovered offshore oil (about 66 billion barrels) is in areas currently open to leasing and development. Only 22 percent of our undiscovered offshore oil (about 19 billion barrels) is in OCS areas protected by moratoria.

Using data from fields in the western Gulf of Mexico with similar water depth and size, a 2007 DOE report estimated that production from the banned OCS areas would start in 2017 and reach 200,000 barrels per day in 2030, providing enough oil to meet just 1.6 percent of the total U.S. needs between 2012 and 2030.

Can this additional domestic oil lead to lower gasoline prices? ”No,” said the DOE report emphatically. ”… Because oil prices are determined on the international market, any impact on average wellhead prices is expected to be insignificant.”

Would a more optimistic assessment of potential OCS oil production reach a different conclusion? In its 2007 report ”Hard Truths About Energy,” the National Petroleum Council (NPC) estimated that the OCS moratoria areas may add nearly 2.8 billion barrels of new oil between 2007 and 2025, with production peaking at 1 million barrels per day in 2025.

In 2007, the United States consumed 21 million barrels of oil per day.  If we assume for a moment that U.S. consumption will remain constant (despite increases in population and gross domestic product), we will need 136 billion barrels of oil between 2007 and 2025. The 2.8 billion barrels produced from banned OCS areas will meet just 2 percent of these needs. Even when peak production is reached in 2025, the extra 1 million barrels will not meet even 5 percent of our daily needs. 

In a free market, where the price of oil is determined by global supply and demand, the new OCS oil won’t be enough to boost the supply and lower the price at the pump.

A more detailed analysis, with a dynamic model and production profiles based on the NPC estimates, led us to the same conclusion. There is simply not enough oil in the OCS moratoria to reverse the inexorable decline in U.S. oil production and bolster the security of our energy supply.  Most of the new OCS oil will merely offset production losses from the depletion of existing fields.  And, it is far from certain that all the oil we discover will be economically recoverable.

The ”fine print” in the previously mentioned reports adds significant uncertainty to the published estimates of OCS oil. Since the often-quoted amounts of undiscovered oil are mean statistical estimates, we really have only a 50-50 chance that an area will eventually yield the estimated amount of oil. But even the estimates themselves for the off-limits OCS areas may be suspect, as noted in the NPC report, because most of the available exploration data is very old.

The importance of uncertainty becomes painfully clear when we consider what happened with the Mukluk project in the Alaska OCS. Fueled by reports that an area in the Beaufort Sea might contain up to 10 billion barrels of recoverable oil, the industry spent more than $1.6 billion to buy leases and drill the Mukluk well in the early 1980s. However, the drillers were disappointed. Plugged and abandoned in 1984, Mukluk is still considered the most expensive dry hole ever drilled.

From the standpoint of the U.S. consumer, drilling for oil in the banned areas of the OCS does not seem to make a lot of business sense — and that’s even before we start accounting for potential environmental costs.

The fight over drilling diverts our attention from the immediate need to develop a forward-looking, science-based and balanced energy policy that focuses on demand reduction and alternatives.

–Kyriacos Zygourakis is the A.J. Hartsook Professor in Chemical and Biomolecular Engineering at Rice University. See his full report on drilling in the OCS at http://www.energybulletin.net/node/46195.