President Obama’s Offshore Drilling Ban: Politics or Price Mover?

Author: Scott Whitler, Account Manager, Kinect Energy

On December 20th, President Barack Obama, under urging from environmentalists and Democratic Congress members, moved to indefinitely block oil and natural gas drilling in U.S. waters in large sections of the Arctic and Atlantic oceans. Using a provision in the Outer Continental Shelf Lands Act of 1953, President Obama effectively banned offshore drilling in 118.8 million acres of U.S. waters. This covers a large majority of the Beaufort and Chukchi seas in the Arctic and 31 underwater canyons in the Atlantic. The move comes as a direct counter to President-elect Donald Trump’s campaign promise to increase domestic oil and natural gas production.
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Source: Bureau of Ocean Energy Management https://www.boem.gov/2016-National-Assessment-Fact-Sheet/

The law does not state a clear provision for reversal; therefore, the ban will hold in place pending what will most likely be a lengthy legal battle or action from Congress to amend the underlying Act.  It is certainly not permanent, but not something that President-elect Trump can simply throw in the back of the Obamas’ U-Haul as it pulls away from the White House.  So the question becomes “Is this simply political posturing or something that will have a significant impact on oil and gas production and pricing?”

According to Bureau of Ocean Energy Management (BOEM) estimates, there are nearly 31 billion barrels of oil and 169 trillion cubic feet of natural gas classified as undiscovered and technically recoverable in the Arctic and Atlantic outer continental shelf of the United States.  That’s an impressive amount, but comes with significant challenges to drilling.  The BOEM forecasts that crude oil prices would need to be $100 per barrel or natural gas prices $5.34 per Mcf for the resources to be drilled economically.  Royal Dutch Shell had been the only company actively exploring in the Chukchi Sea off the Alaskan coast, but halted those plans earlier this year and took a $4.1 billion loss for their efforts.

The bottom line is this action will have little to no impact on near term oil and natural gas pricing.  What it does impact is the ability of producers to plan operations in those areas.  It can take years of planning and billions of dollars to drill and move these resources to market and this uncertainty will make it hard for producers to commit resources to these areas.  Drilling efforts will most likely continue to be concentrated in the Gulf of Mexico and onshore shale plays, leaving these areas dormant until a clearer policy is established.  President-elect Trump has made it clear that his energy plan will be fossil fuel friendly so we can expect that he will work to overturn this ban.  How successful he proves to be will go a long way towards determining if these large reserves of oil and gas ever have the opportunity to become part of the U.S. energy mix.

Underwater Pipelines

Author: Sandy Zoulek, Account Manager, U.S. Energy Services

Did you know there is an oil pipeline crossing under the water at the five-mile stretch between the Upper and Lower Peninsula of Michigan, where Lake Michigan and Lake Huron meet? The area between the two Great Lakes is called the Straits of Mackinac.  The pipeline, called “Line 5” by its owners, Enbridge Energy, is part of an extensive system which transports oil and liquefied natural gas throughout the Midwest and Canada.

Mackinac Bridge, spanning 5 miles, and connecting the Lower and Upper Peninsula

Mackinac Bridge, spanning 5 miles, and connecting the Lower and Upper Peninsula

Built in 1953, Line 5 is a 30” diameter pipeline that runs 645 miles, originating in Wisconsin, running under the Straits of Mackinac, and ending in Sarnia, Canada.  When underwater, the pipeline consists of two side by side 20” diameter pipes which span the distance shore to shore of approximately 5 miles.  The pipes range in depth, up to 270 feet underwater and 20 million gallons of light crude oil and natural gas fluids pass through them each day.

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Did you also know that “The Great Lakes and their connecting channels contain more than 90% of the freshwater of the United States and 20% of the world’s supply of fresh surface water?” National Wildlife Federation 2012


With this fact, and since the pipeline is 63 years old (some consider 50 years the ‘life expectancy’), many activist groups (Patagonia commissioned a Documentary:  Great Lakes, Bad Lines) and Michigan Counties are calling for its retirement.  Reasons range from the obvious risk of a spill, to failure to comply with easement rules, poor safety record by the pipeline’s owner, and the example of the spill on the Kalamazoo River (MI) in 2010 from Line 6B of the Enbridge portfolio. (The Kalamazoo River spill is the largest inland oil spill in US history, releasing one million gallons of heavy crude oil.)

Due to the impending risk of a spill, some Michigan legislators have filed suit to have the pipeline be re-categorized as an off shore pipeline.  Under the Oil Pollution Act, the liability for cleanup costs for owners or operators of onshore facilities is capped at $634 million, whereas companies operating pipelines classified as offshore facilities are required to demonstrate they have sufficient resources to pay for all cleanup costs.

In March of 2016, David Schwab, PH.D., of the University of Michigan Water Center, conducted a study of what he determined was the “worst possible place for an oil spill”. (Statistical Analysis of Straits of Mackinac Line 5: Worst Case Spill Scenarios)  The study, complete with animation to determine to potential flow of the spill, shows that 700 miles of shoreline would be affected by a spill in the Straits.  The Straits are subject to wide and varying factors including constantly changing currents, wind, and ice that would contribute to the complexity of a spill.

Enbridge is fighting back stating that the U of M Water Center modeling study was based on unrealistic assumptions.  Additionally, they have  “introduced new measures to help ensure the line continues to safely transport light crude oil and natural gas liquids……” further stating that “It does not and will not, carry heavy oil.” (heavy oil includes bitumen which was a key factor in the spill cleanup issues at Kalamazoo) Enbridge also states that the line is being operated at less than 25% of its maximum pressure capacity for enhanced safety.

Since the Kalamazoo spill, Enbridge has changed the way it operates, implementing numerous enhancements to operating and safety procedures.  They have established a Pipeline Control System and Leak Detection (PCSLD) department to better focus on maintenance needs. The response time for a spill is listed as 3 minutes in their many online brochures about Line 5.

Enbridge carries out hundreds of safety drills each year, but also embarked in a mock oil spill drill in 2015 specifically in the Straits of Mackinac to show their commitment to the safety of the Straits, Lake Michigan, Lake Huron, and the lakeshore.

This pipeline, as are all 2 million+ miles of pipeline, is governed by the Pipeline Hazardous Material Safety Administration (PHMSA) who is carefully monitoring the safety practices of Enbridge and Line 5. PHMSA’s focus is on public and environmental safety, holding Enbridge and all other pipeline owners and operators accountable for proper maintenance and safe operations.

Emails from Enbridge spokesperson, Ryan Duffy, state that “Line 5, while not perfect, is in very good condition and meets or exceeds today’s standards for new pipelines.”

Everyone, including Enbridge, agrees that an oil spill in the pristine waters of the Straits of Mackinac would be catastrophic.