Gulf Coast oil

"Studies" left a comment in my last post, saying: "I am still unsure as to why we do not attempt to drill in the exploration areas we own in the gulf of mexico. I am pretty positive that there is SOME amount of oil there. " I was going to simply comment back, but realized there is enough to say to justify an extended post.

Of course, we are drilling in the Gulf- this is why gas spiked after Katrina. The storm damaged not only many of the rigs, but also the ports where the oil is unloaded and refineries where it is processed. A great deal of our domestic production comes from the Texas/Louisiana coastal area.

By International law, each country controls the first 200 miles out. The petroleum industry has developed technologies over the last decade or two that allow drilling to be feasible in deeper water. The problems are, first, drilling even on land is a tremendously expensive proposition. Deep water drilling is many times more expensive- $100 million just to drill the hole is a number I've seen. And that does not include the extraction infrastructure if oil is found. This means that (problem 2) companies want to be as certain as they can they're going to hit something that will pay back their up front investment. So there's a great deal of time invested in geophysical surveys, particularly seismic, and analysis of whatever other geologic information is available, such as correlation of the stratigraphy from other wells in the area. Furthermore (problem 3) at this particular point in time, there is a shortage of the drill ships necessary. According to the linked article, quite a few will be launched in the next few years, which should loosen that particular bottleneck, but for the time being, the existing drill ships are booked a year or more in advance.

Finally, an exploration group may finally decide to drill and end up with a dry hole. In my undergrad classes these were referred to as "scientific successes, but economic failures." There are a slew of well-logging techniques wherein instruments are lowered down the hole and a variety of rock characteristics are recorded. Schlumberger is the biggest and best-known well services provider; here is the table of contents for the various logging services they provide (77 Kb pdf). So even if the well is dry (and most are), more information is acquired allowing better targeting for the next hole. But this requires still more time for re-analysis of the available data.

So even in the best-case situation, the time from leasing to production is going to be years, and not uncommonly more than a decade. While the issue has been raised in the news that oil companies have not utilized existing leases, appropriate time has not been given to the idea that drilling for oil demands a great deal of time and capital investment. An oil company does not just go out and drill holes all aver the place- at least the ones that do go bankrupt pretty quick. After they lease an area, many millions are spent to try to get a sense of how the rocks are distributed miles underground, and where various fluids (oil, gas, brine) would reside given that distribution.

The upshot of all this is that if we opened our coastal areas for exploration and drilling at the beginning of February next year, it would likely be 2020 before any significant portion of whatever oil exists in those areas begins to flow into the market. In addition, as long as we simply burn 2/3 of our petroleum to move vehicles around, the estimated amount and extraction rate of offshore oil is not going to make any substantive difference in price at the pump. A best-case analysis of the ANWAR reserves suggested that peak production there would lower the cost of a barrel of oil by 75 cents (the price per barrel went past $140 for the first time yesterday), and no more than six cents per gallon at the pump- probably less. Estimated offshore reserves are larger than ANWAR, but are unlikely to be able to make a big dent in the prices people are paying.