Spill’s Toll on Oil Output Grows Clearer

Daily News Article — Posted on April 21, 2011

(by Angel Gonzalez, The Wall Street Journal, WSJ.com) HOUSTON – One year after the BP PLC oil spill, Gulf of Mexico energy output is beginning to show the impact of the Obama administration’s 10-month freeze on deep-water drilling.

Offshore oil production, most of which comes from the Gulf, is expected to average 1.55 million barrels a day this year, down 13% from 2010, according to the U.S. Energy Information Administration.

Following the April 20, 2010, blast on the Deepwater Horizon drilling rig operated by BP and the subsequent oil spill, the Obama administration stopped awarding permits for deep-water drilling until late February [2011].

The drilling suspension, along with a new, slower permitting process, will result in the loss this year of about 375,000 barrels of oil a day, according to energy consultancy Wood Mackenzie. That is roughly equivalent to one-third of the production in Libya that remains shut down because of political turmoil there.

The setback for the Gulf’s oil and natural-gas fortunes underscores the importance of what are known as development wells in maintaining production. Such wells are drilled in already discovered deep-water reservoirs to extract more oil and natural gas or stem output declines.

“None of those wells have been brought on-line; that’s why we’re seeing the big drop-off,” said Matt Snyder, an analyst with Wood Mackenzie.

The Gulf slump contrasted with booming activity on dry land. Spurred by pricey oil, crude-oil production last year in the U.S. reached its highest level since 2004, driven mainly by producers tapping oilfields in Texas, California and North Dakota. This year, overall U.S. crude-oil and natural-gas production is expected to fall, in part because of the Gulf slump.

The decline in Gulf production highlights the difficulties faced by U.S. energy regulators. After the Deepwater Horizon explosion and ensuing spill, they were charged with ensuring a similar incident doesn’t happen again. Meanwhile, they face a mandate, stated last month by President Barack Obama amid surging oil prices, to help reduce U.S. oil imports by one-third in about a decade. Much of the oil that should allow the U.S. to meet that objective comes from the deep-water Gulf.

Crude-oil prices in New York neared $113 a barrel earlier this month, 33% higher than at the time of the Deepwater Horizon explosion.

Nowhere is the production drop-off more evident than in the fields operated by UK-based BP, which before last April’s disaster had scored an astounding series of discoveries in the Gulf. Those successes, combined with the start-up of several projects, made BP the region’s largest energy producer, surpassing Gulf pioneer and long-time leader Royal Dutch Shell PLC.

BP’s Gulf production now stands at about 300,000 barrels equivalent of oil and natural gas a day, down from more than 400,000 before the spill, according to a company spokesman.

Other producers have also seen output declines, though less severe.

Chevron Corp. said it produced about 260,000 barrels of oil and natural gas a day from the Gulf in 2010, in both shallow and deep water, and estimated the drilling pause cost the company 10,000 to 15,000 barrels a day in production.

Shell, which pumped 220,000 barrels of oil equivalent a day from the Gulf in 2010, estimated it lost 10,000 barrels a day because of the moratorium. During an earnings conference call in February, an executive said Shell expected to produce 50,000 fewer barrels of oil equivalent a day from the Gulf in 2011 than it had projected prior to the spill.

The legal and financial consequences of the spill threaten BP’s role as the Gulf’s deep-water leader, according to industry observers. The company is one of the biggest leaseholders in the Gulf, with more than 600 deep-water blocks. But some producers might be wary of forming partnerships with the oil giant amid uncertainty about how it will be treated by regulators, said Dan Pickering, co-president of Tudor, Pickering, Holt & Co, a Houston-based merchant and investment bank focused on energy.

“BP’s profile will absolutely be lower,” Mr. Pickering said.

BP vows to hang in there. At a presentation in February, BP Chief Executive Bob Dudley said the company plans to have four development rigs and one exploration rig resume work in the Gulf this year.

“We remain solidly committed to doing business in the United States. We have a good business there with good prospects, and we will meet our commitments in the U.S.,” Mr. Dudley said.

Background

Commentary: "Obama Blames Everyone but Himself for High Gas Prices" (from americanthinker.com)
The president's energy non-policy of funding solar, wind, and [other] power while doing everything to prevent opening new oil fields to exploration and development is not to blame for high gas prices, says the president.

AFP:

"It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said at a campaign-style event not far from Washington.

"The problem is, is that oil is sold on these world markets, and speculators and people make various bets, and they say, 'you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply,'" he said.

"'So we're going to bet that oil is going to go up real high.' And that spikes up prices significantly," said the president, who recently launched his reelection campaign.

His comments came as oil prices rallied in New York, rebounding from the previous day's heavy losses as a weaker dollar boosted demand for dollar-priced commodities.

[...]

"We're now in a position where we can investigate if there's unfair speculation. We're going to be monitoring gas stations to make sure there isn't any price gouging that's taking advantage of consumers," promised Obama.

"But the truth is that it is a world commodity, and when prices spike up like this there aren't a lot of short-term solutions. What we have are medium- and long-term solutions," he said.

There would have been "short term solutions" if, one of Obama's first acts as president would have been to open up every available oil field for drilling.

And perhaps the president wants to define "unfair speculation?" Oil, as a commodity, is extremely sensitive to supply and demand. Most analysts believe that "speculation" might add a 10% premium to a barrel of oil but no more. The president is also misinformed about the supply of oil on the world market. As economic recovery proceeds (everywhere but America), demand is going up fast while players like Libya have had to cut back exports significantly. There is no gap between supply and demand, but that's a tenuous situation. It won't take much for demand to outstrip supply to the point that actual shortages occur.