It's Boom Time for Oil in the Gulf of Mexico, Despite a Ban on Drilling in Many Areas

Amid the debate over offshore drilling, a reality check.

The Texaco Petronius platform is located 90 miles due south of Mobile, Alabama, in the Gulf of Mexico.

The Texaco Petronius platform is located 90 miles due south of Mobile, Alabama, in the Gulf of Mexico.

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At the Royal Sonesta Hotel in downtown New Orleans later this month, the U.S. government is offering for lease, as part of a regularly scheduled sale, 18 million acres in the Gulf of Mexico that are open for oil and natural gas drilling. The tracts could potentially yield as much as 400 million barrels of oil. The lease auction is just one example of how much oil exploration is currently occurring in the Gulf of Mexico. But the sale also reveals the limits of new drilling, as 400 million barrels is barely enough to meet the nation's oil needs for 19 days.

Listening to the debate swirling in Washington over offshore oil, however, it would be easy to conclude that nothing much is happening in the Gulf of Mexico today. GOP lawmakers, engaging in some old-fashioned political thea-ter during the first part of Congress's August recess, occupied the dimmed Capitol to call for an end to the congressional moratorium on opening up new coastal areas to drilling and to decry Democratic opposition to the idea. Republican presidential candidate John McCain has been trumpeting the cause almost daily on the campaign trail. And even presumptive Democratic nominee Barack Obama, as part of his new energy plan, has modified his earlier opposition to expanded drilling.

Their motivation is simple. Two thirds of Americans say they favor more drilling, mainly out of hope that gas prices will fall as a result.

But in reality, the country's oil situation is far more complex and dynamic than the Washington debate lets on. New drilling activities, either planned or already underway, are being largely overlooked. At the same time, there are major obstacles to boosting production in a timely and sizable manner, particularly shortages of complex drilling equipment. Perhaps most important, the Department of Energy estimates that, even if Congress removed all restrictions on offshore drilling, the impact on global oil prices would be "insignificant."

Bidding war. Today, the Gulf of Mexico, which produces more than a quarter of the country's domestic crude oil, is actually in the midst of a resurgence. New technology is allowing companies to push farther into deeper water, and oil production there is up.

A bidding war for rights to millions of acres in the Gulf is quietly building. In 2007, the number of leases issued to oil companies there jumped by about 25 percent, and the average bid price for a single tract has soared this year by 50 percent to nearly $6 million, according to GOMExplorer, which gathers data on the Gulf's oil and gas industry.

This is partly a matter of timing. Earlier this decade, many oil companies let leases idle because the price of oil was too low to make a profit or they were pursuing other projects. Some unused leases terminate after 10 years, and in the past two years, many expired leases became available again. Another factor is the expansion of deep-water drilling, which has become more profitable with new technology and rising oil prices. A government report, released in May, found that 72 percent of oil production in the Gulf of Mexico in 2007 came from deep-water drilling, and the number of deep-water projects has doubled since 2002.

Despite all this activity, oil experts say the fruits of these projects won't come close to reversing the downward spiral in U.S. oil production. Fields have aged, and many reserves have been depleted. These trends have prompted oil executives to push for opening up more land. "What you have is a scarcity of resources," says Dory Stiles, investor relations manager for Murphy Oil Corp., an oil and gas exploration firm. "Companies are looking for more opportunities to explore."

Yet even if Congress opens up the 574 million acres now off limits along the outer continental shelf, tight supplies of equipment and labor will severely constrain exploration in the next decade. Only a limited number of shipyards are capable of building the necessary $700 million drilling rig, and many of the rigs being built today are going to Brazil, West Africa, and Southeast Asia, where the oil business is also booming. Even then, it usually takes at least seven to 10 years for the oil to start flowing.

Updated 8/11/08