Economic Impacts of Legislative and Regulatory Proposals on Deepwater Drilling

and the Oil and Natural Gas Industry Briefing Paper – 7.29.10

In the wake of the Deepwater Horizon accident, the Obama administration and some in Congress
have put forth a variety of legislative and regulatory proposals intended to prevent a similar
accident in the future. While the industry is committed to making any necessary changes to
address offshore safety and environmental protections, there is growing concern that many of the
proposals—imposing unlimited liability and changes to well and rig designs—would threaten
thousands of U.S. jobs, reduce domestic production and jeopardize our nation’s energy security.

As legislative and regulatory proposals are considered that impact domestic oil and natural gas
production from deepwater offshore resources, it is critical that proposals both protect taxpayers and
the environment, as well as advance our nation’s energy and economic interests. Proposals that
render deepwater development uneconomic could result in:

o The loss of as many as 175,000 direct, indirect and induced jobs a year associated with
deepwater development through 2035;
o Additional job losses if shallow water drilling projects are affected;
o A reduction of annual gross domestic product by more than $20 billion per year or a
cumulative impact of approximately $500 billion in the next 25 years;
o A reduction in long-term U.S. oil production by 27 percent; and
o An increase in long-term U.S. foreign oil imports by 19 percent.

According to government estimates, the nation’s increasing energy demands, now and over the next
several decades, will be met by increased domestic oil and natural gas development.

Energy is fundamentally linked to the U.S. economy—more energy means more jobs, higher incomes
and economic growth. Failing to realize this correlation gets us neither the energy we need, nor the
economic growth we seek.

Increased Liability Limits

Removing the oil spill liability cap would threaten the viability of offshore operations and could
significantly reduce U.S. domestic oil and natural gas production, threatening jobs and U.S. energy
security.

Significant increases in financial responsibility requirements could put about 145,000 jobs at risk, and
force all small and mid-sized oil companies out of the Gulf of Mexico. Only a handful of the very
largest companies and national companies owned by foreign governments would remain.

As Congress deliberates this issue, thoughtful consideration must be given to harmonize the need to
provide necessary resources to protect taxpayers and our environment, while allowing the oil and
natural gas industry to safely and reliably provide the energy our nation relies on for our economic
and energy security.

Well and Equipment Design; Shipping Rules

Legislatively prescribing well design and equipment standards risks removing the flexibility necessary
for safety and engineering experts to consider the unique characteristics of any well site. Experts in
rig design and drilling safety are better able to determine technology needs and situation specifics.

Requiring oil rigs, which are large moveable ―ships,‖ to be built and flagged in the United States
ignores the reality that U.S. shipyards do not have the capacity to meet this requirement. Thousands

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 of U.S. citizens are at work on foreign-flagged vessels operating in our waters. If these ships are
forced to leave, 151,000 – 266,000 jobs could be lost and 265,000 – 440,000 barrels of oil per day
could be lost.

Six-month Moratorium

While understanding and correcting the causes of the Gulf accident are essential, API is profoundly
concerned about a moratorium on oil and natural gas exploration in the Gulf of Mexico. It is
unnecessary and shortsighted to shut down a major part of the nation’s energy lifeline while we work
to enhance offshore safety.

A moratorium threatens enormous harm to the nation and to the Gulf region, putting 46,200 jobs and
4 percent of deepwater production at risk, and wiping out up to $500 million in potential government
revenue in 2011 alone.

The administration’s deepwater moratorium has created a ―de facto moratorium‖ on shallow-water
drilling, creating regulatory uncertainty and slowing the permit process, which, if it continues, could
impact as many as 25,000 direct and indirect shallow-water jobs.

This issue is much larger than the oil industry—access to affordable energy impacts every sector of
our economy, every state in our nation and every American family. The moratorium is essentially a
moratorium on economic development.

About 30 percent of the nation’s total domestic oil production and 13 percent of domestic natural gas
production comes from the Gulf of Mexico, where a majority of the nation’s offshore development
takes place. Additionally, approximately 80 percent of the oil and 45 percent of the natural gas in the
Gulf come from deepwater exploration.

Increased Taxes

Some in Congress want to increase federal revenue by repealing or modifying several long-standing,
legitimate tax policies affecting the U.S. oil and natural gas industry. These proposals would
undermine efforts to stimulate the economy, create new jobs and secure the nation’s energy future.

In 2009, the oil and natural gas industry had an effective tax rate of 48.4 percent, compared to 28.1
percent for other industries. Our industry supports more than 9 million American jobs and supports
7.5 percent to the nation’s gross domestic product, and any claim that we do not pay our ―fair share‖
of taxes is unsupported by the facts.

Repealing tax provisions that were enacted to create and keep U.S. jobs here, such as the domestic
jobs manufacturing deduction, would make U.S. companies less competitive abroad and reduce the
number of jobs in the United States.