Finding the Sweet Spot for Offshore Drilling

The Obama Administration made some important announcements about offshore drilling last week. And in the near and medium term, we believe increasing U.S. oil production is compatible with successful efforts to significantly reduce U.S. greenhouse gas (GHG) emissions.

Offshore drilling has been much talked about lately. Expanding offshore drilling in the federal outer continental shelf (OCS) areas and increasing oil and gas revenue sharing for nearby coastal states is part of the package of climate and energy policies being negotiated by Senators Kerry, Graham, and Lieberman.

Under current law, the Minerals Management Service (MMS) develops five-year plans for leasing areas in the federal OCS for oil and gas development. The current plan extends from 2007-2012. Prior to 2008, most of the areas on the Pacific and Atlantic Coasts were under Presidential or Congressional moratoria regarding offshore oil and gas leasing. In 2008, however, Congress revoked its long-standing appropriations-based moratorium on such offshore leasing, and President George W. Bush effectively rescinded the Presidential ban on offshore drilling. Much of the Eastern Gulf of Mexico, however, is under a statutory drilling ban until 2022 (under the Gulf of Mexico Energy Security Act of 2006). In its final days, the Bush Administration released a draft five-year plan that would replace the current plan and open formerly off-limit offshore areas to drilling.

Early in its tenure, the Obama Administration extended public comment on the draft five-year plan. In addition, a court case required the Department of Interior (DOI) to reassess its environmental sensitivity analysis for certain Alaskan offshore areas open for leasing under the current 2007-2012 plan.

Just last week, on March 31, the Obama Administration unveiled its new offshore drilling strategy. For one, DOI has revised the current five-year plan (in light of the court decision) and cancelled scheduled offshore lease sales in some Alaskan OCS areas. Second, DOI announced that it will begin preparing environmental impact statements for offshore leasing in the Mid- and South-Atlantic OCS and in part of the Eastern Gulf of Mexico—all areas currently off-limits (see maps here and here). This step is necessary for preparation of a proposed five-year offshore leasing plan for 2012-2017 that could include lease sales in these areas.

It’s important to note that current estimates indicate that the Eastern Gulf of Mexico has significantly more economically recoverable oil and gas than the Mid- and South-Atlantic. The Obama administration proposal would reportedly open up an area of the Eastern Gulf of Mexico that contains about two thirds of the Eastern Gulf's oil and gas resources (since the proposal includes a 125-mile buffer along the Florida coast where drilling would still be prohibited). While DOI intends to move forward with studying the Eastern Gulf of Mexico for inclusion in its next offshore leasing plan, Congress would need to act to actually open the area for leasing prior to 2022 given the statutory moratorium.

Similarly, Congress would also need to pass legislation in order to change how federal offshore leasing revenue is shared with coastal states. Whether and how revenue from oil and gas leases in federal waters is shared with coastal states is determined by law (OCSLA and GOMESA) and not by DOI’s leasing plans (see here for a good discussion of this issue from NPR). Under current law, Atlantic coastal states would only share in federal leasing revenue for leases close to state waters. The Obama Administration’s announcements did not concern revenue sharing with states.

What kinds of impact might opening these new offshore areas have on U.S. energy supply? In 2008, ICF International prepared a study on behalf of the American Petroleum Institute of the potential for offshore oil and gas production from the previously off-limits OCS areas. ICF projected that opening the entirety of the Atlantic and Eastern Gulf of Mexico OCS might yield production of between 50-200 million barrels per year of oil by 2030. The high end estimate represents about 11 percent of current U.S. domestic crude oil production and about 3 percent of our combined domestic and imported oil. And because the oil market is a global one, changes in U.S. production have small impacts on the global oil prices and the price at the pump (see here for a study the U.S. Energy Information Administration conducted in 2009 of the effect on production and prices of opening the Atlantic and Pacific OCS).

Many analyses of U.S. energy use show that even with aggressive efforts to reduce GHG emissions from fossil fuel use, the country will likely continue to use oil as a significant if not dominant transportation fuel for decades while fuel economy improvements, electric vehicles, biofuels, and perhaps other alternative fuels reduce oil consumption. In fact, just one day after the Obama administration announced its offshore oil and gas strategy, it also formally established new fuel economy and GHG standards for passenger cars and light trucks. In this context, increasing domestic oil production while also enacting policies to significantly reduce GHG emissions could mean that domestic oil production makes up an increasing percentage of a declining total U.S. oil consumption. From a climate perspective, in the near and medium term, increasing U.S. oil production can be consistent with successful efforts to significantly reduce U.S. GHG emissions.

Steve Caldwell is a Technology and Policy Fellow