Obama’s Offshore Overture

By Gustavo Coronel l May 5, 2010

President Obama’s overture to energy-independence-minded Democrats and Republicans in Congress during his January 28 State of the Union Address was meant as an unabashed attempt at vote-getting in exchange for passage of his climate change and so-called clean energy agenda, specifically to pass “cap and trade.” He was direct and unequivocal, saying:

“It means making tough decisions about opening new offshore areas for oil and gas development. It means continued investment in advanced biofuels and clean coal technologies. And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America. I am grateful to the House for passing such a bill last year. And this year I’m eager to help advance the bipartisan effort in the Senate.”

The decision of President Obama on March 31 to open significant U.S. offshore areas for oil and gas exploration has deep energy, environment and political implications. While it seems to be consistent with the goal of becoming less dependent on foreign energy imports, the decision has been made in parallel with others that would postpone similar activities on the north slope of Alaska, in areas off the East Coast and, possibly, in some offshore areas of California, Oregon and Washington. Concerned about these postponements, Democratic Congressmen have warned the administration against delaying activities in Alaska. House Natural Resources Committee members Jim Costa (D-Calif.) and Dan Boren (D-Okla.) have encouraged Secretary of Interior Ken Salazar in a March 26 letter to “move forward expeditiously with the 2007-12 [OCS] program,” as it relates to oil and gas development offshore Alaska.

Open criticism of Obama’s proposal has come from many quarters including Senator James Inhofe (R-OK) who calls it a maneuver “designed to curry favor with Republicans and even many Democrats who remain staunchly opposed to his global warming cap-and-trade legislation.” Inhofe quotes the Institute for Energy Research (IER) in support of his argument, which has called the president’s announcement “a huge leap backward” since before Obama’s announcement to open areas for offshore drilling the “vast majority of the areas in the Outer Continental Shelf (OCS)” were already open for business. In fact, the Gulf of Mexico provides 30 percent of U.S. energy supplies.

At the time, Senator Inhofe added that Senators John Kerry (D-MA), Lindsey Graham (R-SC) and Joe Lieberman (I-CT) “will try to adorn the [cap and trade] bill with provisions that create the appearance of promoting and encouraging more domestic energy.” That bipartisan effort has since collapsed.

Other critics at American Solutions point out that President Obama wants to combine this proposal with a new, large energy tax that would “kill” up to one million jobs and put energy beyond the pockets of thousands of Americans, before seeing any benefits from his announced policy. They argue that this policy amounts to a de facto ban on offshore drilling since no drilling is permitted “in the Pacific Ocean….a large portion of the Atlantic Ocean…some of the most promising areas of the Gulf of Mexico…[and] in much of Alaska.”

The reaction of the oil companies has been largely positive, however. Both Exxon Mobil and Shell have called it a step forward, although Shell would not like to see the Alaska development delayed.

In defending the proposal, Secretary Salazar says that the Minerals Management Service (MMS) estimates there are 36-41 billion barrels of economically recoverable crude oil and 168-294 trillion cubic feet (TCF) of natural gas, representing up to 80% of the undiscovered economically recoverable oil and gas on the outer continental shelf, OCS, in the eight planning areas within the regions under consideration in the new program. OCS is made up of four regions: Alaska, Pacific, Gulf and Atlantic. The U.S. Geological Survey has also spoken of some 70 billion barrels of oil resources possibly existing in the offshore areas of the Artic Circle. There are reasonably well-founded expectations of significant future oil and gas production coming from U.S. offshore areas that would in time contribute to America’s energy independence.

Current oil consumption in the U.S. is about 750 million barrels per year. The estimates of oil resources in the offshore areas could, therefore, provide the country with 40 or more years of consumption at the current rate, although they would not be the only resources available, so that consumption could be met from other domestic sources as well. However, there will be enormous technical and economic hurdles to overcome in order to utilize these potential resources. Drilling offshore in deep waters presents technical challenges that have not yet been mastered, as the April 20 fatal fire and explosion of the Deepwater Horizon drilling rig demonstrates. The economic requirements will be very significant, although, of course, the new production resulting from the investment should provide an acceptable return in most, if not in all, areas.

But, what about time? An orderly and efficient development of these offshore areas will take decades. America, however, must start sometime and somewhere rather than prolong the delay in making these critical decisions. The commitment to develop these resources would extend the life of oil as the prevailing source of energy in the U.S. far beyond what environmentalists and promoters of alternative sources would like to see. The massive development of petroleum resources in U.S. offshore areas would delay the commercial development of other sources such as solar, wind, biofuels and nuclear. The U.S. could go from being dependent on foreign oil imports to being dependent on its offshore oil production. The enemy would change its face, from being geopolitical to being environmental. More expensive and taxpayer subsidized cleaner energy would have to wait, although the presence of significant offshore natural gas resources could help to balance this environmental minus.

The catastrophic fire and loss of the Deepwater Horizon DH and the large oil leakages generated by the accident of the British Petroleum (BP) “Macondo” well in offshore Louisiana, has added instant complexity to the issue. This tragic accident has thrown considerable doubts on the convenience of large-scale offshore oil operations and on the capability of the oil industry to conduct environmentally safe activities in the very sensitive offshore areas. Consequently, President Obama has been forced to retreat from his posture of ostensibly promoting these activities only weeks ago into a cautious, wait and see attitude.

Some analysts even see a “silver lining” in the regrettable tragedy. Frank Gaffney, president of the Center for Security Policy, says that it might accelerate the national impulse to become free from oil dependency, with his primary focus being the “secure and swift adoption of the Open Fuel Standard” utilizing non-petroleum derived fuels such as methanol, butanol and alcohol-based fuels like ethanol on Flexible Fuel Vehicles (FFVs).

Although the tragedy should not have a short-term effect on the markets, since there are close to 4 million barrels of oil production closed down due to the economic recession still affecting most of the world, there could well be a backlash against massive, future offshore drilling due to environmental concerns, although the Deepwater Horizon rig explosion is the first offshore accident of its kind in years. Today oil is essential only to transportation since other uses can largely be satisfied from other sources, both technically and economically. A tragedy such as the one unfolding in offshore and inland Louisiana might become the rallying cry behind those who want to put an end to the century old dictatorship of oil.

But unlike the finale of the William Tell Overture, President Obama’s offshore overture to Congress in his State of the Union Address may not be riding to America’s rescue of energy independence, as depicted in the theme of the Lone Ranger.

Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to

SFPPR News & Analysis.