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Offshore oil: What's really out there?

The president is pushing to lift the ban on drilling off the coasts. That won't be a quick fix for oil prices.

By Barney Gimbel, writer
Last Updated: July 21, 2008: 3:37 PM EDT
Opening up U.S. coasts to more oil drilling may not be such a quick fix.

NEW YORK (Fortune) -- President Bush intensified pressure on Congressional Democrats this weekend to end a 26-year-old offshore drilling moratorium, saying lawmakers have closed off "vast" oil reserves that could be tapped to lower record gasoline prices.

There are just two problems with that critique:

First, it'll be at least five years - and more like 10 - before any significant amount of new oil starts flowing.

Second, no one really knows how much oil is out there to begin with.

Congress banned offshore drilling in most federal waters in 1982, citing environmental concerns. And with few exceptions, oil companies have largely given up the fight to start drilling off the coasts of California and Florida, where the most reserves are believed to be.

But with oil hovering around $130 a barrel and an American public increasingly antsy about rising gas prices, the idea - like the one involving opening up the Arctic National Wildlife Refuge to exploration - is once again open for debate.

McCain, Obama disagree

Some Republicans argue that the United States could easily produce an extra 3 million barrels of oil a day - a 35% increase in daily domestic production - if the oil companies were allowed to explore in American waters again.

Democrats counter that the further opening of federal waters to drilling could damage the environment while failing to lower prices in the near term. The issue has divided the presidential candidates, with Democrat Barack Obama opposing an end to the moratorium, and Republican John McCain supporting more drilling with the consent of states.

So who's right?

If the bans were lifted tomorrow, government agencies would spend a year or two conducting environmental and economic reviews of any lease applications. Even then, when ExxonMobil (XOM, Fortune 500), say, obtained a lease, the company would take another five years to explore, drill wells, build production platforms and lay pipelines so that commercial production could begin. And that doesn't include the potential delays caused by lawsuits from states, environmentalists and fishermen.

So lifting the ban won't get a lot more oil flowing quickly. On the other hand, says Anadarko Petroleum chairman and CEO James Hackett, any significant new find could bring down prices simply because the market would know the oil would be available eventually.

"So lets say we discover something within two years of getting the lease," says Hackett, whose company is a leading oil-exploration firm. "We may not produce it for another two years, but the price impact may actually be felt during that period. But you'll never find any new discoveries without actually going and looking."

Which leads back to the second point, above. No one, Hackett concedes, can quantify how much oil is off the coasts.

With the exception of the Gulf of Mexico and Alaska, America's coastlines are largely unexplored. There have been only about 350 exploration wells ever drilled in federal waters along the Pacific Coast. Along the Atlantic, it's closer to 50. That compares with more than 40,000 wells in the Gulf of Mexico.

"Could America pump three million more barrels a day?" asks Harold Syms, who heads up the resource evaluation division of the U.S. Mineral Management Service. "It's certainly possible - optimistic but possible."

By broad government estimates that often rely on decades-old data, there are 86 billion barrels of oil in federal waters, with about 18 billion located in areas now off-limits. The greatest prize based on sheer volume probably lies off the coast of Southern California, which is estimated to hold 5.6 billion barrels of oil and 10 trillion cubic feet of natural gas.

The eastern and central Gulf of Mexico are believed to hold 3.7 billion barrels of oil and 21.5 trillion cubic feet of gas. MMS analysts say there are also smaller caches off the Atlantic seaboard and further up the Pacific Coast.

If the ban were lifted, oil companies would probably rush into places they know, like off the coast of Los Angeles and Santa Barbara. There are already 26 million barrels a year produced there from platforms built before the offshore moratorium on new wells went into effect.

The Gulf Coast of Florida would take longer to get going quickly because of the lack of necessary infrastructure - pipelines and refineries - nearby.

It would be even more difficult on the Atlantic. There, the oil-reserve estimates are so out of date that the MMS has had to draw on well data from Nova Scotia and even from North Africa - which 200 million years ago, after all, was all but bumping up against the southern coast of North America.

Reader feedback: Is more U.S. drilling the answer to soaring gas prices? Why or why not? Tell us what you think. To top of page

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