In offshore drilling freeze, rumblings of a new era for oil industry

The six-month moratorium on new deepwater offshore drilling announced by President Obama Thursday isn't likely to have a big impact on the oil industry – unless it's a sign of things to come.

By , Staff writer

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    President Obama addresses a news conference in the East Room of the White House in Washington Thursday. Mr. Obama extended a moratorium on deepwater offshore drilling and promised to reform regulation of the offshore oil industry.
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In itself, President Obama’s decision to impose a six-month pause on offshore oil leasing, announced Thursday, is unlikely to have any great impact on US oil supplies or prices in the short run.

But within the oil industry, there is some concern that this offshore drilling moratorium could be the beginning of a new oil regime, with significantly tougher regulations to follow, as Mr. Obama promised.

US companies still see the Gulf of Mexico as their backyard with a stable, relatively predictable political and regulatory regime. But if new strictures on the oil industry are seen as being too reactionary, the move could in the long run drive companies to less tightly regulated places like Angola in their search for the next big discoveries. That could mean a loss of jobs in Gulf states and possibly weaken US energy security.

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"This could be a speed bump, or it could be the beginning of a transition toward long-term decline in US oil production," says David Pumphrey, an energy analyst at the Center for Strategic and International Studies in Washington. "It could put us in the position of importing more oil and possibly facing slightly higher oil prices in future because less non-OPEC oil is moving into the marketplace."

Obama’s announcement Thursday marks a reversal of significant chunks of the offshore exploration plan he forwarded in March. On Thursday, he said he would:

  • Suspend planned exploration of two locations off Alaska's northern coast.
  • Cancel August lease sales in the western Gulf as well as a proposed lease sale 50 miles off the coast of Virginia.
  • Continue for six months an existing moratorium on any new permits to drill new deepwater wells in the Gulf and other areas of the outer continental shelf.
  • Suspend action at 33 deepwater exploratory wells being drilled in the Gulf until investigations are complete on the causes of the Gulf spill.

The president said to reporters that he had erred in one major respect when he planned for more offshore oil exploration in March: "Where I was wrong was in my belief that the oil companies had their act together when it came to [handling] worst-case scenarios."

Calling oil industry connections with federal regulators at the Minerals Management Service "cozy and sometimes corrupt," Obama said he plans to unveil "aggressive new operating standards and requirements" for the offshore oil industry. The new rules are expected to be influenced by the recommendations of a presidential commission on offshore drilling regulation co-chaired by Democrat Bob Graham, former US senator and governor of Florida, and by Republican William Reilly, co-chair of the National Commission on Energy Policy and administrator of the US Environmental Protection Agency under former president George H. W. Bush.

On Wall Street, the announcement brought into question whether the valuable deepwater oil and gas leases would remain valuable.

"All these companies' share prices have taken a hit because many have very valuable leases in the Gulf, and the long-term fate of these leases – and whether they will ever drill in them – is now up in the air," says Amy Myers Jaffe, a research fellow at Rice University's Baker Institute. "What the president's announcement has accentuated for the industry in a very concrete way, is that the industry is only as safe as the practice standards of the weakest link."

It's not yet clear how the president's moves will impact energy legislation stalled in the US Senate. Sen. John Kerry (D) of Massachusetts portrayed the accident as yet another reason why Congress needs to endorse climate-energy legislation he supports.

But he also has said that the bill may be dead for this legislative season. That bill would have expanded offshore drilling – a key bargaining chip to win Republican votes.

Environmentalists were enthused by the president's announcements, but cautious about the long term, calling for more study before drilling in the Arctic Ocean.

“No new oil leasing, exploration, or production should take place until the president’s independent commission completes its process and reforms are implemented,” Marilyn Heiman, director of the Pew Environment Group’s US Arctic Program said in a statement.

To Ms. Jaffe of Rice University, the major issue is that the industry must develop new technology for dealing with deepwater blowouts – otherwise the future there could be limited.

"It's all well and good to say the focus is prevention, which is where the industry has been," she notes. "But there's human error, too – and the consequences simply cannot be that you damage an entire coastline of a state."

[Editor's note: President Obama's quotes have been updated to reflect the official transcript of his remarks Thursday.]

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