Some days there is so much to talk about, it's hard to know where to start. So, for this month's column, I'll try to cover a number of topics that are different, yet related.
Let's start with offshore drilling. Although welcomed, it's generally agreed that President Obama's decision to open up new areas in the eastern Gulf of Mexico, along the Atlantic Coast, and off the north shore of Alaska is more politics than substance. The intent was to throw a few crumbs at Congressional Republicans and a few oil states Democrats in an effort to get them on board for the upcoming fight over comprehensive energy and climate legislation. It will be a long time before actual drilling can commence in any of these areas, but the good news is that Obama's announcement is an indication the White House doesn't plan to permanently reverse President Bush's offshore policy.
One 2008 study put the potential revenues of opening up the Outer Continental Shelf to hydrocarbon exploration at $1.1 trillion. But this would be from opening up all areas currently off limits, which Obama did not do. Revenues would be split between petroleum companies, their shareholders, and the federal and state governments, which would be a significant benefit for Americans even though it likely would be spread out over several decades.
Unfortunately the recent loss of Transocean's Deepwater Horizon in the Gulf of Mexico just 50 miles off the coast of Louisiana along with the apparent deaths of 11 crew members and the subsequent oil spill may have an adverse impact on public perception of the offshore oil and gas industry. In all likelihood, it will slow but not stop efforts to expand offshore exploration and production in North America.
New Orleans attorney Keith Hall of Stone Pigman, a litigator who has represented major energy companies and others in class-action and injury cases, said, "This accident could slow down exploration activity in the Gulf, just as the region was starting to recover from the recession, and just as the area is set to mark the fifth anniversary of Hurricane Katrina."
Declining UK production
In an April industry brief, the research team at Raymond James pondered the significance of the decline in North Sea oil production on the United Kingdom, which happened on the watch of former Prime Minister Tony Blair and current PM Gordon Brown, both members of Britain's Labour Party. Over the past 10 years or so, says RJ, the UK has experienced an oil production decline of horrendous proportions.
When Blair first became prime minister in 1997, the UK produced 2.7 MMbpd, of which nearly 1 MMbpd was exported. By 2009, UK production had plummeted to 1.5 MMbpd – a 46% decline over a 12-year period, an average of 5% per year. As a result, in 2004, the UK recorded its first petroleum trade deficit in 13 years, and in 2006, became a net importer on a sustained basis. By 2009, the UK was importing roughly 0.2 MMbpd, with the import requirement likely to double by 2012.
While most of the decline is a function of geology rather than policy, the Labour government will get some of the blame. If voters elect Conservatives to run the next government, they may take some modest steps to provide incentives for investment, which will slow down declines. The RJ report notes that Norway's declines haven't been quite as severe as the UK's, but they illustrate that North Sea production has peaked – for good.
China's global expansion
Oil consumption in China is second only to that of the United States. In 2009, it consumed about 3 billion barrels and imported a little more than half of that amount. The country's proven oil reserves will run out within 10 years, making it increasingly dependent on foreign energy sources, assuming no new domestic reserves are found.
Beijing has elevated energy policy to the level of a national security concern, and China is dramatically expanding its supplies of international oil. Its strategy has focused on securing supplies from Africa, South America, and Eurasia through loan-for-oil deals. In addition, Chinese NOCs are investing aggressively in foreign oil companies in return for oil.
China has used the opportunity presented by the global recession to strengthen its overseas oil supplies. With strong government support, Chinese NOCs were in cash-rich positions and have been actively buying overseas assets. Watch for this to continue for the next few years at least.
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