The Federal Oil Plays: Gulf of Mexico and Alaska

With all the attention focused on the onshore Lower 48 liquids, largely on private lands, we wouldn’t want to leave out the other major frontier regions that have been headliners in the past – namely, the offshore Gulf of Mexico and North Slope Alaska. These two regions, for which the development of resources is heavily influenced by federal policy, together still account for one-third of U.S. proved oil reserves (Energy Information Administration, as of 2009) and one-third of annual U.S. crude oil production. However, as recently as 2003, these two regions’ share of crude oil production combined had been as high as 45 percent. Since then, shale plays have bolstered onshore Lower 48 production while the federal offshore has hesitated and Alaskan production has declined.

Offshore Gulf of Mexico

U.S. offshore activity goes back to the end of the 19th century, when California drillers began drilling from wharfs built out over the water. A major step in offshore development was taken in 1947 when the first producing well out of sight of land was drilled by Kerr-McGee in the Gulf of Mexico. Once federal/state jurisdictional issues were addressed in the 1950s, offshore production rose steadily over time. Deepwater drilling, defined as water depths of 1,000 feet or more, made history when the Cognac field began production in 1979, four years after its discovery. Since then, with advances in technology, the average water depth of discoveries has trended deeper, from 1,300 feet in the 1970s, to 3,650 feet in the 1990s, to 5,200 feet for the most recent decade.

The federal outer continental shelf (OCS) has continued to contribute a significant share of U.S. crude oil production, reaching 1.8 million barrels per day in September 2009. Almost all of that has been Gulf of Mexico production, while California and Alaska OCS production accounts for only about 50,000 barrels per day. While the overall count of active offshore rigs has trended downward over much of the past decade, recent year’s declines have been primarily for natural gas drilling. In fact, the number of offshore rigs searching for oil actually increased. In more recent years, the Gulf’s oil production has varied; then, following leasing and drilling restrictions implemented after the Macondo accident in spring 2010, federal Gulf of Mexico production slipped to the 1.2-1.3 million barrels/day range. More recently it has edged up to around 1.4 million barrels per day. Increasingly, Gulf of Mexico oil production has come from fields in the deepwater and ultra-deepwater (greater water depths than 5,000 feet). According to EIA, deepwater’s share rose from 57 percent of the region’s oil production in 2004 to 80 percent in 2009, and is no doubt even higher now.

Despite recent lagging production, the Gulf of Mexico has hardly lost its significance. In fact (based on EIA data for 2009), the region accounts for five of the 20 largest oil fields in the U.S., and 17 of the top 100. Some of the top fields, according to that list, include Thunder Horse (discovered 1999, first production 2008), Mars-Ursa (discovered 1989, first production 1996), Atlantis (discovered 1998, first production 2007), Mad Dog (discovered 1998, first production 2005), and Tahiti (discovered 2002, first production 2009). Most of these were found in water depths of roughly 4,000 to 6,000 feet. While projects cover a range of sizes, more than 70 percent of current Gulf of Mexico production comes from the 50 largest fields. As is evident from these fields’ histories, the offshore production timeline can easily take up to ten years between preplanning and seismic work to first production, depending on technological advances, existing infrastructure, and current geologic knowledge.

Over just the past five years, the region has provided more than $37 billion in federal revenue from royalties and bonuses, and reserves estimates indicate the potential for further federal revenue inflows, depending on economics, technology, and policy. An assessment of undiscovered technically recoverable oil and gas resources performed by the Bureau of Ocean Energy Management (BOEM) in 2011 put the mean estimate for the Gulf of Mexico at 48 billion barrels of oil and 219 trillion cubic feet of gas – or 89 billion barrels and 398 trillion cubic feet when offshore Alaska, Pacific, and Atlantic are also included. The region has also played a significant role in job creation. According to a study by IHS, the offshore industry in the Gulf of Mexico generated almost 400,000 jobs in 2009.

Alaska

Alaska’s large Prudhoe Bay discovery in 1968 deservedly put that state’s sizeable potential in the spotlight. Although the first oil production in Alaska was much earlier, in 1905, until the 800 mile Trans-Alaskan Pipeline was built to deliver North Slope oil to market, Alaskan output was modest and concentrated in the south. With North Slope production beginning in 1977, Alaskan output climbed to a high of just over 2 million barrels per day by 1988, replacing Texas as the top-ranked producer for that year and accounting for one quarter of all U.S. oil production. Then, the state began a steady decline, with the most recent production in Alaska hovering around 500,000 – 600,000 barrels per day, its share shrinking to less than a tenth of the nation’s crude oil output. In March this year, Alaskan production dipped to 567,000 barrels per day, according to preliminary EIA data, as the state was edged out from its long-standing number 2 ranking by North Dakota.

Nonetheless, exploration and development continues in Alaska, with an average 5 to 10 rigs running during the first half of 2012. Onshore undiscovered technically recoverable oil is put at 16 billion barrels by USGS, with the offshore adding another potential 26.6 billion barrels according to BOEM. The Nikaitchuq field, discovered in 2004, ranks among the top 100 for reserves, according to the EIA’s 2009 reserves data. It began production in 2011 with plans for peak production at 28,000 barrels per day and with recoverable reserves put at 180 million barrels. The 2008 federal Chukchi Sea lease sale brought in nearly $2.7 billion in high bids, among the highest for any Alaska offshore lease sale. Though a lengthy lease and permit process and a spill response plan stood in the way of production, the region may soon see drilling begin. The federal government has also reaped more than $400 million in royalty payments over the past five years, and the state has collected more than $12 billion in payments.

Source: Energy Information Administration

Beyond that, as tight oil development is already a major trend in the onshore Lower 48, Alaska’s as-yet-undeveloped shale prospects may be on the horizon, as well. Earlier this year, the U.S. Geological Survey (USGS) prepared a new assessment of these resources, concluding that although significant uncertainties are present, the potential is large. For North Slope shale plays, the USGS put the mean estimate at 940 million barrels of oil with a high end of as much as 2 billion barrels. The USGS also assessed a mean of 42 trillion cubic feet for natural gas and 262 million barrels of NGLs. Among other factors, the possibility of liquefied natural gas exports may play a role in how Alaska’s natural gas is developed in the future.

Core Pillars

Alaska’s ranking for crude oil production has been challenged by North Dakota, and the federal offshore Gulf of Mexico has already been surpassed by Texas as of last year. Onshore plays, largely on private lands, have more recently been the growth areas for production at the expense of areas under greater federal control. While there are a host of factors that affect such trends, these major areas are still too important to be left to chance. The Gulf of Mexico and Alaska will continue to be strategic pillars of America’s energy supply. These areas will present their own unique policy and technological challenges going forward, but their historic and future contribution to America’s energy matrix remains critical.

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