BP disaster darkens U.S., world fuel future

It was supposed to be the future, both for the United States and the world.

When the Deepwater Horizon oil platform sank more than a month ago, it may have taken down with it America’s best hopes for remaining an oil-producing powerhouse while waterlogging the fastest-growing source of new oil in a world thirsty for fuel, analysts say.

Most newly discovered oil in the United States and the rest of the world in recent years has come from the deep ocean waters. The contribution to new U.S. oil output from depths of a mile or more in the Gulf of Mexico was expected to rise to 72 percent in 10 years before last month’s catastrophic spill, according to the U.S. Energy Information Administration.

But now President Obama has slammed the lid on new deep-water drilling activities for at least six months while his administration investigates what caused the incident and ratchets up regulation of the industry.

With the massive spill demonstrating that there is no foolproof way to safeguard the environment while drilling at such great depths - where no humans can reach and existing technology falls short - many analysts doubt that the oil spigot will ever be turned back on to more than a trickle in the U.S., despite the nation’s heavy dependence on oil to fuel American lifestyles and to power economic growth.

“The BP spill is likely to throw a wrench” into plans in the U.S. and rest of the world to extract more and more oil from the deep oceans, said Richard Heinberg, an analyst at the Post Carbon Institute.

“Heavier regulations, and higher and more-expensive standards are on the way,” he said. “Future deepwater projects could be delayed by years.”

Mr. Heinberg said nations have increasingly plumbed the ocean depths in search for oil because “weve already chewed our way down through” most of the more readily available sources. “Theres very little onshore or shallow-water oil left to find. So down we go,” he said.

The problem is, “as the industry is forced to drill deeper in ever more hostile environments, there are more things to go wrong; and when problems happen, they are harder to fix,” he said. “An event such as the Deepwater Horizon explosion becomes more likely with every passing year, despite the continuing development of superior technology” that for the first time opened up the ocean depths in the past decade.

Even if the U.S. does not extend the regulatory ban on activity, oil companies will run into major financial obstacles in the future as insurance costs and liability claims soar, and investors balk at financing deep-water projects that they fear could go haywire like the BP venture, he said.

Gregory Lemaire-Smith, an associate energy analyst at Datamonitor, a business research group, said “any restriction in the exploration of offshore areas would be bad news” because of the critical role such drilling was expected to play in the future, not only in the U.S. but worldwide.

Offshore oil in the Gulf has become so essential to the U.S. - accounting for 40 percent of U.S. oil production overall - that he doubts Mr. Obama would make the drilling ban permanent despite the disaster and pressure from environmental groups.

In a sign that Mr. Obama remains reluctant to impose an all-out ban, the administration this week decided to continue allowing new drilling in the shallow waters of the Gulf of Mexico, where protection against disaster is more easily assured but less oil is available. It is allowing production to continue at deep-water wells that are already up and running.

“The state of the oil market doesnt allow the U.S. the luxury of closing offshore regions to activity - a fact that both political parties are all too aware of,” Mr. Lemaire-Smith said.

Effects on projects would ripple worldwide if the U.S. permanently rules out further exploration for oil in deep waters, where oil companies already face high costs and risks to access the oil, he said.

Exploration has been expanding off the coasts of Brazil, Nigeria, Angola and other countries, and the International Energy Agency recently projected that within 10 years, deep-ocean waters would be supplying 40 percent of all oil extracted worldwide.

“If the accident in the Gulf of Mexico triggers a spiral effect, the impact on the global oil and gas offshore industry could be alarming,” Mr. Lemaire-Smith said.

Analysts now expect the brakes to be applied to the burgeoning deep-water industry. Environmental groups are inciting public outrage over the spill and calling on their allies in Congress and the administration to outlaw further deep-water drilling.

“The massive oil spill in the Gulf will end up halting further oil and gas exploration in the United States for years to come,” said Brian Sussman, a San Francisco meteorologist and author of a book about climate change.

“The Gulf oil spill is the perfect ’out’ for a presidential administration which relishes taking advantage of a crisis” to push its political agenda, he said.

“Obama never had any real plans to drill, and now this disaster will allow the Democrats to move forward with cap-and-trade” to limit energy production and emissions without having to accommodate drilling advocates in Congress, he said.

The White House order suspending deep-water drilling a week ago already has halted work at 33 exploratory wells in the Gulf of Mexico employing tens of thousands of workers and costing $330 million a day in lost output, according to the National Ocean Industries Association.

In addition, the move has made it economically ineffective to produce crude from seven recently discovered wells, likely costing the government $7.6 billion in forgone revenue, the group estimates.

“The need to act in the face of the ongoing crisis is understandable,” said Burt A. Adams, association chairman. “Nobody wants to just rush into deep-water drilling during this ongoing crisis, but … considering that the deep-water regions generate 80 percent of the Gulfs oil production and 45 percent of its natural gas production, a six-month work stoppage will have severe and perhaps long-lasting impacts.”

Mr. Obama touted himself as a moderate advocate of offshore drilling only weeks before the accident by presenting a plan to allow drilling in limited areas off the coasts of North Carolina, Virginia, Florida and Alaska.

But because those areas are not thought to be as rich in oil as the Gulf - and because he left off limits big known fields off the coasts of California and Alaska - the effect of his decision was to push oil companies even further toward deep-water drilling in the Gulf, where oil is more plentiful and fewer restrictions exist, analysts said.

“President Obamas drilling proposal keeps some of our most promising oil fields off limits, forcing the industry to explore and drill in more costly deep-water locations,” said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University.

The Gulf, since the beginning of deep-water exploration in the 1990s, has always been a laboratory and showcase for pioneering technologies. The Gulf contains the world’s deepest wells and produces more oil from deep waters than anywhere else in the world.

While small consolation to the millions of workers, citizens and wildlife affected by the BP spill, oil executives say, the incident will serve a purpose in forcing the industry to develop safer technologies to protect the environment, just as the Exxon Valdez spill did a generation ago.

Whether the U.S. remains a major oil power may depend on the industry’s success. A century ago, when all drilling was on land, the U.S. was the world’s only oil superpower, with its rich fields in Texas quenching much of the industrializing world’s newfound thirst for oil.

But even before the spill, the biggest active U.S. fields were depleting rapidly while major fields holding promise in Alaska, California and elsewhere had been ruled off limits, causing U.S. production last year to fall to 5.3 million barrels a day - nearly half of peak production levels set in the early 1970s.

While the U.S. remains third in yearly production worldwide, behind Saudi Arabia and Russia, that has been in no small part because of furious exploration activity in the deep-water Gulf. Despite those efforts, levels of production are not high enough to satisfy even a third of the nation’s 18.7-million-barrels-a-day oil habit, according to the U.S. energy agency.