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.

Source: Bureau of Ocean Energy Management

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.

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