New Year, No New Wells in Gulf

The Obama Administration may have lifted the moratorium on deep water oil and gas development in the Gulf of Mexico, but the federal government has yet to authorize any new drilling activity.  As a consequence, according to the WSJ, industry experts do not expect to see any new wells in the Gulf before late 2011 or even 2012. And it’s not just deep-water drilling that’s been affected. Operations in shallower water have been subject to increased regulatory scrutiny as well.

The impact of the delays goes beyond the oil industry. The Gulf coast economy has been hit hard by the slowdown in drilling activity, especially because the oil spill also hurt the region’s fishing and tourism industries. The Obama administration in September estimated that 8,000 to 12,000 workers could lose their jobs temporarily as a result of the moratorium; some independent estimates have been much higher.

The slowdown also has long-term implications for U.S. oil production. The Energy Information Administration, the research arm of the Department of Energy, last month predicted that domestic offshore oil production will fall 13% this year from 2010 due to the moratorium and the slow return to drilling; a year ago, the agency predicted offshore production would rise 6% in 2011. The difference: a loss of about 220,000 barrels of oil a day.

Gulf drilling operations will rebound, but won’t reach pre-BP-spill levels for some time. The imposition of new regulatory requirements is a particularly tough burden for smaller operators and is inducing some companies to shift their operations elsewhere. Is it worth it? That depends on whether one thinks the new regulatory requirements will enhance environmental protection. I am skeptical.