Opportunity for Growth
Oil and Gas Industry Plans for Its Future

By Dennis Wamsted

Last summer, record-high crude oil and gasoline prices forced Congress and the White House to scramble for solutions to the nation’s energy needs. Now, with demand down sharply — the number of vehicle miles traveled, for example, fell more than 100 billion miles in 2008 — policymakers have an opportunity to plan for the long term. Given the myriad economic problems currently facing the U.S., they may be tempted to ignore this opportunity and push the issue off into the future. But that would be a mistake, one with serious long-term implications for both U.S. energy consumers and producers.

The economy undoubtedly will turn around. The latest estimate from the Energy Information Administration (EIA), for example, forecasts economic growth at 2.5% per year through 2030. The agency, which is the independent statistical branch of the U.S. Department of Energy, pointed out in a January analysis that this growth won’t be uniform: Continued declines are expected through 2009, and as a result, average growth may not hit the long-term trend of 2.5% until 2020.

But that growth is coming, and it has major ramifications for the nation’s oil and gas producers. For example, while consumption of liquid fuels is expected to fall through 2010 to less than 20 million barrels per day (mb/d), demand will turn around after that and climb steadily to more than 21.6 mb/d by 2030. Similarly, natural gas consumption is expected to drop below 2007 levels in 2010 before beginning a steady upward climb from just under 22.5 trillion cubic feet (tcf) a year to 24.4 tcf in 2030.

What this means for the nation’s oil and gas producers is that despite the current downturn, they have to be planning now to invest in the projects — which can take decades and cost billions to bring into commercial operation — that will provide the resources U.S. consumers will need when the economy improves. And policymakers need to be planning right alongside them.

The estimated resource base in the Gulf of Mexico area open for exploration
climbed from about 9 billion barrels of oil in 1987 to almost 45 billion
barrels in 2006, largely as a result of improved technology.

The Outer Continental Shelf

The key untapped region for oil and gas development in the U.S. is in the waters of the Outer Continental Shelf (OCS) in the Atlantic and Pacific Oceans, in the eastern Gulf of Mexico and surrounding Alaska. For almost 30 years, exploration and development activities in these areas have been forbidden, by either congressional or presidential action, despite their significant resource potential. In the wake of last year’s record-high prices and supply concerns, Congress approved OCS development and the Bush administration moved ahead with a plan to begin leasing the areas to potential developers. Earlier this year, that effort was put on hold by the Obama administration, pending the completion of a new review.

Secretary of the Interior Ken Salazar says the review, which is supposed to last six months, is needed “to establish an orderly process that allows us to make wise decisions based on sound information.’’ Salazar, whose department controls OCS development activities, adds that the additional time “will allow us to restore an orderly process to our offshore energy planning.’’

Oil and gas industry officials worry that the delay is little more than the beginning of another de facto development moratorium that will prevent companies from exploring some of the most promising areas remaining in the U.S.

Exactly how much oil and gas may be in the OCS is unknown — in large part because of the past development moratorium. A briefing document released by the U.S. Department of the Interior’s Minerals Management Service (MMS) last year during the initial movement toward leasing activities included an estimate of just under 18 billion barrels of undiscovered but technically recoverable oil in the various off-limits OCS areas. But MMS, which is the Interior agency directly responsible for OCS activities, also pointed out that because there has been no exploration work in many of these areas since the 1970s, “we really don’t have an accurate picture of the resources there.’’

As a reference, MMS noted that the estimated resource base in the Gulf of Mexico area open for exploration climbed from about 9 billion barrels of oil in 1987 to almost 45 billion barrels in 2006, largely as a result of improved technology. “Similarly, one might expect to see changes in the estimates for these [currently off-limits] areas as well,’’ says MMS.

The story is the same for natural gas: Estimates in the early 1970s put the total resource base in the Gulf of Mexico at roughly 50 tcf. Since then, the industry has produced 149 tcf in areas open for development in the Gulf, and MMS now estimates that there may be an additional 232 tcf waiting to be developed.

Exactly what percentage of these resources would be produced is also uncertain, but a study — done for the American Petroleum Institute (API), the Washington, D.C.-based trade association that represents the nation’s oil and gas industries, by ICF International, a major energy and environmental consulting firm based in Fairfax, Va. — concludes that allowing development in the previously banned areas of the OCS, Alaska’s Arctic National Wildlife Refuge (ANWR) and a small portion of federal land in the Rockies, could boost U.S. crude oil production “by as much as 2 million barrels per day in 2030.’’ A similar increase is expected in natural gas production, with ICF pegging the potential increase at more than 5 billion cubic feet per day by 2030.

ICF estimates that opening up the banned OCS areas,
ANWR and the Rockies could produce 160,000 new jobs in 2030.

Enhancing U.S. Energy Security

This new production would significantly reduce U.S. dependence on foreign oil and gas imports. ICF’s study points out that this additional domestic development could offset nearly 20% of the nation’s crude imports and more than 60% of the nation’s anticipated natural gas imports in 2030.

EIA makes similar points in its latest analysis, which, given the agency’s independence, may be even more important for the nation’s oil and gas producers. Experts on competing sides of pending energy issues frequently take issue with EIA’s findings or disagree with its models. But the agency’s analysis provides a useful baseline since it is completely straightforward: It simply looks at existing laws and regulations and makes future projections.

In the January release of an overview of its highly anticipated Annual Energy Outlook 2009, the EIA assumes that OCS exploration and development will take place, and, if carried out through 2030, will produce some significant changes in the U.S. energy equation. In particular, EIA estimates that U.S. crude production will climb from just 5.1 mb/d in 2007 to 7.4 mb/d by 2030 — spurred by increasing output in the deepwater areas of the Gulf of Mexico, new finds in the previously off-limits Pacific and Atlantic OCS regions and new onshore enhanced oil-recovery projects.

As a result, EIA adds, net liquids imports will account for a much smaller share of total demand in the future than they do today. Overall, EIA says it expects “U.S. dependence on imported liquids … to continue declining over the next 25 years, from 58% in 2007 to less than 40% in 2025.’’

An Economic Bonus
In addition to the tangible security advantages linked to boosting domestic production, there are obvious economic benefits. Specifically, in its analysis for API, ICF estimates that opening up the banned OCS areas, ANWR and the Rockies could produce 160,000 new jobs in 2030. If all the oil and natural gas that had been off limits to development for decades were produced, it would bring in $1.7 trillion to federal, state and local governments. In today’s depressed economic environment, those are numbers worth noting.

“This study underscores how the oil and natural gas industry can enhance America’s energy security and help solve our economic problems by increasing production of our nation’s vast oil and natural gas resources,’’ Jack Gerard, API president and chief executive officer, said when the study was released. “The U.S. oil and natural gas industry supports 6 million jobs, and more drilling for oil and natural gas will mean more energy for America, more well-paying jobs and trillions of dollars of much-needed revenue that will help federal, state and local governments pay for critical services.’’

The industry has invested heavily in boosting its environmental performance,
spending some $160 billion since 1990 on needed upgrades and compliance activities.

Environmentally Aware

Old stereotypes die hard, and few have been harder to kill off than the oil industry’s historically poor reputation on environmental issues. Problem is, the facts tell a completely different story:

• Leases currently operating on the OCS produce about 1.4 mb/d of oil, and since 1980, according to MMS estimates, less than 0.001% of the oil produced there has been spilled — significantly less than the volume of natural seeps from sea floor vents in the Gulf of Mexico.


• The powerful hurricanes that have rocked cities on the Gulf of Mexico coastline in the past decade have not resulted in any significant oil spills from operating rigs in the gulf.


• The footprint taken up by oil and gas development has shrunk significantly during the past quarter century.


• The industry has invested heavily in boosting its environmental performance, spending some $160 billion since 1990 on needed upgrades and compliance activities, and developing emerging energy technologies, earmarking almost $100 billion for these efforts from 2000 to 2005 alone.
  

A New Outlook

With both a new administration and a new crop of leaders on Capitol Hill, it is time to take a fresh look at the nation’s oil and gas industry. The industry is ready to make the investments required to provide the resources the nation will need when the current economic slump comes to an end. But the industry cannot do it alone — it will take cooperation and bipartisanship from Congress, the White House and the environmental community.