As catastrophes go, the flood of oil in the Gulf of Mexico (GOM) ranks right up there. Today I’m going to look at the effects of the 6-month moratorium on deepwater drilling. Back on May 6, I published Oil Production In the GOM—What’s At Stake? This is a follow-up based on new developments since then.

Let me repeat this graph from the earlier article with my original caption.

GOM past and projected oil production from the Mineral Management Service (MMS), with a committed scenario and a “full potential” scenario fantasy (striped bars). Red stars mark years when hurricanes affected production. 2009 production was significantly understated (EIA data) in this May, 2009 MMS report, partly because there were no significant weather-related disruptions.

Energy consultants Wood Mackenzie released a study of the effects of the drilling moratorium on future GOM production. They found that—

  • Around 80,000 barrels of oil equivalent per day (boe/d) would be deferred from 2011 to later years. This is around four percent of our total deepwater GoM production estimate for 2011 of 1.875 million boe/d.
  • Looking farther out, tightened drilling safety regulations and longer permitting timeframes will result in slowed drilling activity, impacting timeframes in all phases of exploration, appraisal and development. These delays could defer over 350,000 boe/d (almost 19%) of deepwater GoM production in 2015 and 2016.
[Technical note: boe/d = barrels of oil equivalent per day, and “equivalent” means that natural gas has been included in that number using the standard energy conversions (BTUs, or whatever).]

These Wood Mackenzie estimates on postponed production affect the MMS “committed” scenario. The alert reader will note that I called the MMS “full potential” scenario a fantasy in my original article. With the drilling moratorium in effect, and heavy regulation of deepwater drilling coming down the pike, my conclusion about the “full potential” scenario is now a certainty. Intangibles only reinforce this finding, to wit—

  • If tightened regulation and new drilling practices cause longer drill times, both exploration and development well costs will increase causing operators to re-evaluate project economics. Since development drilling costs can be up to 70% of total capex, the impact on overall project economics could be detrimental to the extent that it challenges the commerciality of a number of projects, both large and small.
  • Higher exploration costs in frontier areas of the Gulf of Mexico – which are already economically marginal – could dampen the exploration community’s appetite for these areas, which form a vital part of th long-term production prospects in the region.

Crude oil production in the Gulf makes up anywhere from 25% (in a bad year) to 30% (in a good year) of total U.S. production. Lost oil production must be replaced, all other things being equal, with imports. Domestic oil production has fallen further and further behind our oil consumption since 1970.

Producing oil domestically is certainly better than importing it, but regarding “energy independence” and similar nonsense, that ship has sailed. When people say “Drill, Baby, Drill,”  you should wonder what drugs they’re on (and where you can get some, depending on what kind of person you are).

The longer term outlook for the global oil supply is pretty bleak, so the GOM deepwater drilling moratorium and increased regulation thereafter are just a few more (smallish) factors affecting Our Oil Future. In the short-term, I doubt the moratorium will be extended beyond 6 months because it is damaging the economies of Louisiana and southeastern Texas far more than the oil spill itself (at least so far). In fact, the exploratory or appraisal drilling pause may not even last 6 months.

As far as price goes, the moratorium will have little effect, and will very likely be overwhelmed by global economic factors which will reduce world oil demand. Take a look at The Next Oil Price Shock (which I may revise in the near future).

The oil spill is a great environmental tragedy. From an oil supply point of view, this tragedy offers us some Good News and some Bad News.

First, the Good News

  • Americans will have to take a serious look at their disastrous decades-long dependency on unfriendly foreign drug dealers oil suppliers.

And now, the Bad News

  • Americans will have to take a serious look at their disastrous decades-long dependency on unfriendly foreign drug dealers oil suppliers.

See ya’ later.