Importance of Deepwater Drilling Briefing Paper – 8.26.

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The Gulf of Mexico oil spill is tragic, and the oil and natural gas industry owes it to the American people to reduce the risks of offshore drilling. But our nation’s demand for energy is growing, and we will need more oil and natural gas to meet that demand in the coming decades. Deepwater production in the Gulf of Mexico plays an important role in meeting this demand, and an extended moratorium on safely producing these resources would create a moratorium on economic growth and job creation—especially in the Gulf States whose people and economies have already been most affected by the oil spill. 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. Deepwater development represents the ―new frontier‖ in offshore oil and natural gas development. Approximately 80 percent of the oil and 45 percent of the natural gas in the Gulf come from deepwater exploration. Deepwater development will continue to play a major role in the Gulf of Mexico, and in our nation’s energy future. Of the more than 7,300 active leases in the Gulf of Mexico today, 58 percent of them are in deep waters – including the 20 highest producing leases in the Gulf. Exploration and production for oil and natural gas in the Gulf of Mexico supports hundreds of thousands of jobs and is a key factor in U.S. technological leadership in the global energy economy. While understanding and correcting the causes of the Gulf of Mexico accident are essential, the American Petroleum Institute opposes lengthy or open-ended delay of offshore oil and natural gas development, as proposed by the administration. Reducing U.S. domestic oil production will lead to hundreds of thousands of lost jobs, billions of dollars of lost government revenue and a sharp decrease in our nation’s energy security. This issue is much larger than the oil industry, since access to affordable energy impacts every sector of our economy, every state in our nation and every American family. An extended moratorium would undercut our nation’s access to affordable, reliable, domestic sources of oil and natural gas. A recent study1 found that a six-month moratorium on new drilling activity would result in a reduction of 4 percent of deepwater Gulf of Mexico production, between $120-150 million in lost royalties to the federal government and a $300-500 million overall decline in government revenue in 2011. The same study found that longer delays (1-2 years) in new drilling projects would lead to an almost 20 percent reduction in deepwater production in 2015 and 2016.

1

―Deepwater Horizon tragedy: near-term and long-term implications in deepwater Gulf of Mexico,‖ Wood Mackenzie Upstream Insight, May 2010

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A second study2 that analyzed the economic impact of lost Gulf of Mexico oil production suggests that, if new permits were restricted by just 74% (not even a full moratorium) over a five year period, domestic oil production would be 350,000 barrels per day lower by 2014 – and result in more than 120,000 lost jobs, at a minimum. A third study3 states that a one-year delay on new deepwater projects could cut world oil supply by 500,000 barrels per day between 2013 and 2017. Delays and new regulatory costs could increase the marginal costs of new deepwater production by 10 percent. The Louisiana Department of Economic Development estimates the deepwater drilling suspension will result in a loss of 3,000 to 6,000 in-state jobs in the first two to three weeks and potentially more than 20,000 Louisiana jobs within the next 12-18 months. With regard to the Department of the Interior’s review of deepwater safety measures, more details are needed, but the industry is concerned about the potential impacts changes could have on the economic and energy security of the country. The administration’s decision to stop all deepwater drilling for at least six months in the Gulf of Mexico means that 33 drilling platforms will be idled. This will have significant impact on the people and economies of the Gulf States: The 33 drilling platforms support as many as 1,400 direct and indirect jobs, which means as many as 46,200 jobs could be lost in the short-term because of the moratorium. These jobs pay an average weekly wage of $1,804, meaning that lost wages for those jobs could be as high as $5 to $10 million per month, per platform—or $165 to $330 million per month for all 33 platforms idled by the moratorium.
If increased liability limits result in the consolidation of smaller and mid-sized companies into larger companies, there would still be a loss of production in the Gulf, according to a new report by Grant Thornton4 (The Implications of the April20 2010 Oil Spill on Deepwater Exploration and Production, Grant Thornton LLP, Summer 2010). As suggested by Grant Thornton LLP, ―policymakers must consider the long-term economic ramifications of their regulatory policies on deepwater operators. Policymakers should avoid making decisions solely out of a desire to satisfy the public’s appetite for swift retribution on the energy industry.‖

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―Measuring the Economic Impacts of Modifying Jones Act Regulation of Offshore Oil and Natural Gas Production Vessels,‖ IHS Global Insight, November 2009 3 Bernstein Research, May 28, 2010 4 ―The Implications of the April 2010 Oil Spill on Deepwater Exploration and Production,‖ Grant Thornton, August 2010

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