Economic Forecasts

U.S. Oil Output Down to a Trickle?

With permits to drill slowed down or in limbo, the Gulf's contribution is dwindling.

Domestic oil production faces a long-term decline in the wake of curtailed offshore drilling in the Gulf of Mexico, stemming from the BP oil spill last year. In four to five years, a loss of several hundred thousand barrels a day from the Gulf is likely, enough to significantly boost U.S. reliance on imported oil.

It's no surprise, really. New deepwater drilling has largely come to a standstill in the Gulf of Mexico. Despite the October end of the White House moratorium on deepwater drilling, not a single new permit has been issued for drilling in waters more than 500 feet deep. And even permits for shallow-water drilling are currently taking twice as long to complete -- roughly 60 days -- as before. The Bureau of Ocean Energy Management, Regulation and Enforcement -- the federal agency responsible for approving new drilling permits -- notes that, in the aftermath of the BP spill, new applications require increased scrutiny from regulators and can’t be rushed.

"Permits and reviews will be approved only when we are satisfied that all applicable regulatory requirements are met," says Nicholas Pardi, an agency spokesman. "Our priority remains, as it must, to ensure that oil and gas drilling is done in a safe and environmentally responsible manner."

Industry analysts say that enhanced scrutiny is creating costly uncertainties for the Gulf's offshore drilling industry.

Bob Fryklund, vice president of global exploration and production analysis with energy consultancy IHS, says the lack of deepwater permits has created a "state of flux," with drillers unsure how to proceed with projects that generally require five to seven years from start to finish. As a result, many large operators have exited the Gulf to pursue deepwater projects off the coasts of Brazil and West Africa. Fewer than half the rigs that worked in the Gulf before the BP spill remain.

Moreover, the bidding process for new-exploration leases is on a slow track. The last auction took place in early spring 2010. The next isn't scheduled until December of this year and will likely be postponed to 2012.

Dan Naatz, vice president of federal resources for the Independent Petroleum Association of America, which represents many of the small exploration companies working in the Gulf, describes the holdup in the leasing process as a significant threat to future production there. With as much as three-quarters of the region's untapped oil reserves believed to be in deep water, the delay in leasing could lead to a "production gap" as existing fields decline and there are no new finds that can be brought on line to replace them, he said.

IHS' Fryklund estimates lost production of 400,000 barrels of daily output by about 2016 if leasing and permitting don’t pick up soon. That equates to more than 7% of current output for the entire nation, which averaged about 5.3 million barrels per day in 2009.

Increased production in the Gulf was a major factor in the rise of domestic output in 2009 and 2010 after nearly 20 years of steady annual declines. One likely counterweight to the decline in Gulf oil production could be the Bakken Shale oil field in North Dakota and Montana. But that would take years to make up the difference.

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