Gulf exploration and production: A stunning accomplishment with an uncertain future

Just a few years ago, drilling in waters more than a mile deep was nearly impossible. Today, the offshore oil and gas industry has developed and deployed a new generation of drilling vessels capable of drilling in water depths that nearly double that range.

By Carl Thorne, NOIA Chairman
ENSCO International Inc.Chairman, President, & CEO

Just a few years ago, drilling in waters more than a mile deep was nearly impossible. Today, the offshore oil and gas industry has developed and deployed a new generation of drilling vessels capable of drilling in water depths that nearly double that range. These vessels are technological marvels able to maintain station and weather serious storms and treacherous currents without endangering human or marine life.

As most in the industry are aware, recent technological innovations have transformed the face of the oil and natural gas industry. Industry has successfully melded advances in computer-related technologies with innovations in materials, geophysics, engineering and navigation, and satellite technology to achieve vastly improved safety and environmental performance while lowering the finding and producing costs of oil and natural gas.

Nowhere is this technological transformation more evident than in the Gulf of Mexico. As recently as the late 1980s, most experts agreed that the Gulf was drying up, that most of its oil and natural gas had been found and produced. However, an infusion of new technologies over the last 10 years has wholly revitalized the region. Now the Gulf is widely recognized to be a promising area, and oil production levels have been increased sharply every year since 1996.

Many are beginning to recognize the critical role the outer continental shelf (OCS) program plays in meeting the nation's energy needs. OCS production has grown to more than 25% of domestic natural gas production and about 25% of oil production. And 90% of this production comes from the Central and Western Gulf of Mexico, making the region the largest single source of oil for the US market.

Renewed attention has been focused on the Gulf because of the relatively recent shift in oil production from the shallow waters of the Gulf to the deepwater. Since the 1990's, the deepwater of the Gulf of Mexico has emerged as a world-class oil and natural gas province. Between 1996 and 1999, technological advances coupled with economic incentives passed by Congress under the 1995 Deep Water Royalty Relief Act, encouraged energy companies to acquire more than 2,600 leases in water depths of 800 m or greater, pushing the total number of leases in the Gulf of Mexico past the 7,000-m mark.

Deepwater oil and natural gas production rose 41% and 51% respectively from 1998 to 1999. In November 1999, the volume of oil produced from the deepwater surpassed production from the shallow water for the first time. From 1990 to 2000, total Gulf oil production rose 65%, as rapidly rising deepwater production offset a 9% decline in supply from the shallow waters of the Gulf.

Newer data continues to be encouraging. The US Minerals Management Service recently announced that deepwater oil production had increased by 24% from 2000 to 2001. Production from the deepwater Gulf soared an astonishing 50 MMbbl in one year to reach 570 MMbbl by the end of 2001. Natural gas production also showed an increase, rising about 4% to reach 5.07 tcf. The estimates of remaining recoverable resources from the Lower 48 OCS rose sharply during the 1990s, reaching more than 50 Bbbl in 2000, an increase of more than 135% over the estimate made five years earlier, and over five times larger than the 1990 estimate.

All of these numbers demonstrate that the US offshore oil and natural gas industry is the global leader in terms of technology, management, and the ability to extract mineral resources in an environmentally sound manner. This is a stunning accomplishment, and one that the entire industry can look upon with pride.

The Gilded Age?

Although the industry has defied expectations in the Gulf of Mexico, questions remain with regard to how long these production levels can be sustained. Statistics from the US Department of Energy indicate that current performance may gild an uncertain future. According to the agency, "Lower 48 state oil production is expected to increase by 11,000 b/d to a rate of 4.9 MMb/d in 2002, followed by a decrease of 8,000 b/d in 2003." The agency also unearthed another surprising statistic: by 4Q 2003, five offshore platforms will account for slightly less than 10% of all lower 48 oil production. Considering that there are more than 4,000 producing platforms in the Gulf, the fact that five of them account for 10% of lower 48 production gives one pause. The department also indicates that production from one of these platforms will peak sometime this year, giving further cause for concern.

NOIA believes it is clear that despite the essential role that the Gulf has played in meeting US energy needs, future contributions along similar lines is uncertain. The rapid supply growth witnessed in the past decade may continue, but according to US Department of Energy forecasts, this growth is unlikely to continue beyond five years, whereupon total OCS oil production will likely peak and decline.

There are many who will take issue with these statistics. Some argue that the peak will come later, others that we may currently be witnessing a peak. Either way, there is a high degree of consensus that current Gulf production will soon decline. The impacts of this on a nation with energy needs growing exponentially are clear: We must find new ways of ensuring access to reliable energy supplies.

Expanding access

One way of addressing this forecast decline is to open new prospective areas to exploration. Unfortunately, much of this area is under moratoria. Moratoria placed on offshore drilling and development on the US Atlantic and Pacific Coasts, the Eastern Gulf of Mexico, and parts of Alaskan offshore waters constitute one of the most significant barriers to the responsible development of energy resources. The consequence of these actions is to ban until 2012 any effort to inventory or explore for critical oil and natural gas resources estimated to lie beneath these areas

Areas of the OCS currently off limits to leasing activity are estimated to contain about 16 Bbbl and nearly 70 tcf. This represents approximately one-third of the total estimated oil resources remaining offshore of the lower 48 states. As a point of reference, 70 tcf could fuel the current residential needs of the entire US for 14 years; 16 Bbbl of oil would sustain domestic production equal to current imports from Saudi Arabia for 27 years.

The US has the most advanced technological capability of any nation on earth. It has the proven ability to produce oil cleanly, safely, and efficiently. Yet the US continues to export exploration and production activities to nations that have neither the will nor the resources to monitor and care for the environment. Currently, less than 20% of the federal OCS is open to leasing or scheduled for leasing under the next five-year plan. This policy precludes development without regard to the nation's energy needs or to newly available technologies used to prevent or remedy any environmental impacts or conflicting uses that might arise.

In 1990, former President George H.W. Bush issued an executive order banning exploration in many offshore areas; he said the government must study the potential for energy reserves and the environmental and scientific concerns about drilling.

Today we have answered most of these concerns, but are no closer to moving beyond moratoria than we were in 1990. Leasing and drilling are not currently practical in some areas due to a variety of political and environmental issues. But it is time to move past these conflicts and develop a new national consensus that enables the responsible development of our vital national energy resources.

For too many years a false choice has been posed between energy production on the one hand and environmental protection on the other. The implication is that if energy production is allowed, the environment is inevitably compromised. We know that this is not true. In the Gulf of Mexico, the offshore industry has demonstrated incontrovertibly that energy production and environmental protection are not mutually exclusive goals. That is a box into which the debate must not be sealed.

Instead of this false dichotomy, we must pose the question in a new way: What must be done to enable the safe and environmentally sound energy development that our country requires in order to maintain our high quality of life? Only then will we move away from the false choice of energy vs. environment, away from self-defeating moratoria on natural resources and toward the sound management of our nation's energy needs and supply.

Few nations in the world manage their natural resources in the manner of the United States. Many countries follow the United States in regulating and monitoring their industries closely, but few close off access altogether. It is a policy that simply makes no sense.

It is ironic that in the same decade that we have seen phenomenal advances in offshore technology, the barriers to offshore oil and natural gas exploration have actually increased. NOIA hopes the growing technological potential will motivate policymakers to identify and recommend policies that will remove barriers to access and the development of offshore energy supplies. At NOIA we are working toward this end, and I hope that you will join us.

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