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Good Day for Oil and Gas Companies as US East Coast Officially Opens for Drilling

On wednesday, the Obama administration announced comprehensive new regulations on offshore oil and gas drilling. Potentially opening some significant new acreage previously off limits to the petroleum industry.

Under the plan, the outer continental shelf along the southern Atlantic coast will become available for leasing in 2012. Waters stretching from northern Florida to New Jersey would be opened for drilling.

Drilling in the US Outer Continental Shelf

This is an important development for the industry. Previously, the entire Atlantic coast had been off-limits to drilling, as per a presidential and congressional moratorium enacted in 1981. Under the old rules, offshore drilling had only been permitted off the western Gulf of Mexico states: Texas, Louisiana, Mississippi and Alabama.

A big part of the push for new offshore drilling was prompted by recent legislative amendments that would allow Atlantic coastal states to take a direct share of royalty revenue from offshore drilling in their waters.

Previously, the laws were written such that royalty revenues would have gone entirely to the federal government. Texas and Louisiana were the only states entitled to receive revenue from drilling in their coastal waters. Not surprisingly, these were the only states that had approved drilling within their areas of influence.

But with the laws changed, states like Virginia have been pushing the Obama administration to lift the offshore moratorium in their neighborhoods. With many states hurting for cash in the wake of the financial crisis, the prospect of oil and gas royalties is a big sell.

But the new Obama drilling plan is not as petro-friendly as the industry had been hoping. Only a sliver of coastal waters off Virginia (the light green triangle in the map above) has actually been cleared for leasing. And that lease sale has been pushed back from a planned 2011 launch to at least 2012.

The rest of the south Atlantic will only be leased if an environmental study (to be conducted over the coming year) shows drilling here to be low-impact. No lease sale dates have been set. The same goes for most of the northern Alaskan coast.

More disappointingly for the industry, the entire Pacific coast will remain off-limits to drilling. A letdown, as this area is thought to contain much larger reserves than the Atlantic side.

And most of the eastern Gulf of Mexico will also remain closed. A small portion, far offshore of western Florida (the blue section on the map) could be made available. But only if Congress lifts a specific moratorium on the area. At a White House press briefing yesterday reporters asked press secretary Bill Burton if the President would direct Congress to lift the ban. The question was dodged without an answer, not raising a lot of hope for drilling in this region.

The opening of eastern Gulf drilling is the biggest prize as far as oil and gas companies are concerned. It will be interesting to see if the cash-strapped Florida government pushes the Obama administration and Congress to open the moratorium-laden waters.

Meanwhile, the discoveries in Virginia and elsewhere in the south Atlantic are likely to be relatively small. Meaning major E&P companies may ignore the area.

Which could open opportunities for smaller firms. A hundred-million-barrel find is not material to Shell, but would be huge for a junior. Potentially good news for the investors who back these smaller companies.

But there's still a lot to play out between here and first spud. Let's hope this "big day" doesn't turn out much ado about nothing.

Here's to uncharted waters.

By. Dave Forest of Notela Resources




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