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U.S. Deepwater Drilling's Future

Author: Toni Johnson
Updated: January 11, 2011

Introduction

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 accident, which killed eleven oil workers, sunk the rig, and led to a five-month effort to secure the well, has had significant economic and environmental effects on the region. It has also opened up a host of issues as lawmakers, the industry, and environmental advocates grapple with finding the right balance between regulatory oversight and incentives for new energy exploration.

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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?

Crisis Guide: Climate Change 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. More than 20 percent of the 169* mobile offshore drilling units (MODU) in operation worldwide in 2008 are located in the Gulf of Mexico. Gulf MODUs capable of drilling five thousand feet or more--the depth of the Deepwater Horizon accident--represent roughly a third 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.

An estimated 4.9 million barrels (206 million gallons) [CNN] of crude oil gushed into the Gulf from the Deepwater Horizon accident until the broken well was capped in July 2010, nearly three months after the spill began. Although the spill has been contained, the long-term environmental impacts of the disaster are still unknown, and the region is still reeling from the immediate ecological and economic consequences. In late October, the Economic Times reported preliminary data showing that the spill may have killed more than six thousand birds and six hundred turtles.

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. In a December 2010 report, the Interior Department's inspector general also found that federal offshore drilling inspectors in the Gulf are understaffed, insufficiently trained (PDF), and lack official procedures for some crucial decisionmaking.

A presidential commission report issued on January 11, 2011, outlines a number of issues that led to the spill. "The well blew out because a number of separate risk factors, oversights, and outright mistakes combined to overwhelm the safeguards meant to prevent just such an event from happening," the report says. "But most of the mistakes and oversights at Macondo can be traced back to a single overarching failure--a failure of management." Meanwhile, BP's internal investigations team released a public accident report (PDF) in September 2010 that identifies eight major faults, including in the construction of the well and the company's emergency plan. BP and the presidential commission also cite oil field services company Halliburton as responsible for improperly testing the cement mixture used to seal the well--which could open the company to liability. Meanwhile, Halliburton officials blame BP's "flawed well design and poor operations" (NYT) for the disaster.

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" (TexasTribune) as Deepwater Horizon.

How much of an impact will the Deepwater Horizon oil spill have on U.S. offshore drilling?

Timeline: Oil Dependence and U.S. Foreign Policy

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, and in May issued a six-month moratorium suspending the construction of thirty-three deepwater exploratory wells in the Gulf.

The moratorium was lifted six weeks early (CNN), a few weeks before congressional midterm elections, which some critics said was premature and possibly politically motivated. An inter-agency report issued in mid-September estimated the drilling hold resulted in a temporary loss of 20 percent of oil rig jobs (PDF) and up to twelve thousand jobs total in the Gulf. Environmental advocates are concerned that the Interior Department's new safety regulations (CSMonitor) are still not enough to mitigate risks of drilling in depths greater than five hundred feet. Meanwhile, the oil industry says that the new rules have slowed all new leasing offshore and, in effect, act as a de facto moratorium. In January 2011, the Obama administration announced that thirteen companies would be allowed to resume deepwater operations (TheHill) in the Gulf without submitting new plans under the National Environmental Policy Act. They would, however, need to comply the new safety procedures.

"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.

In the months after the spill, MMS was reorganized into three new offices in order to resolve conflicts in its mission to protect the environment, oversee leases and encourage development, and collect revenues. Despite the changes, in its January 2011 report the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling recommended industry practices and government rules be overhauled in order to restore faith in offshore drilling. The report recomended the creation of new independent agency to oversee drilling regulations.

U.S. lawmakers remain divided over changing liability rules for oil spills and increasing the cap--currently capped at $75 million under the 1990 Oil Pollution Act, a response to Alaska's1989 Exxon Valdez tanker spill--to $10 billion. Critics, like thean 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 largest operators--would be able to participate. American Petroleum Institute, oppose 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. A review of the BP spill by the British parliament release in January 2011 found that the country's offshore liabilty limit of $250 million is insufficient but that "a moratorium on offshore drilling in the UK Continental Shelf would cause drilling rigs and expertise to migrate to other parts of the globe."

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.

*[Editor's Note: A previous version of this article incorrectly listed the number of MODUs in operation worldwide as more than 130. As a result, the article incorrectly stated that Gulf deepwater rigs represented a third of all rigs worldwide and half of ultra-deepwater rigs worldwide.]

--Caitlin O'Connell contributed to this report.

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