Offshore or not, that is the question?

The oil spill in the Gulf of Mexico is a tragic event, no one can deny that. As BP responds to the immediate impact, the effect could be industry wide both short and long term. In the short term industry resources are on hand to assist in stopping the leak and cleaning up. Industry participants, including Shell, will also be relooking at their operations to see what improvements can be made – even before the investigation into this event gets underway and the root cause is identified.

When such an event occurs it is also important to put it in perspective. For directly affected individuals and families there may be little or no consolation possible and seeing that will remind us all again of the tragic nature of this accident. But incidents of this magnitude are incredibly rare, not just in the USA but globally as well. Onshore and offshore production operates in many parts of the world all day and every day almost without incident, delivering the 80 million barrels per day of oil production that the world needs for transport (whilst oil is clearly an energy resource, much of it is now used in the transport sector in one way or another). US oil production stands at about 8% of this total or 6.7 million barrels per day in 2008. As demand has continued to rise, offshore production has become an increasingly important component of total production. Whereas oil and gas production started its life onshore over 150 years ago in places such as Pennsylvania and Azerbaijan, today about a third of global production is offshore. Big production areas such as the Gulf of Mexico and the North Sea have made a significant difference and many new major finds are offshore as well, such as the areas opening up off the coast of Brazil. As global oil demand continues to rise in the medium term, even as vehicle efficiency, electrification, hydrogen and bio-fuels change the nature of the transport sector, offshore access and production will be necessary not just to meet demand but to bridge the gap created by declining onshore fields.

 But putting facts and figures to one side, the longer term effect on the offshore industry and the potential expansion of offshore drilling into new areas may well be where the impact of the current event is really felt. The immediate human instinct is to say “stop”, “no more”, “put an end to it”, but that will have consequences as well. These won’t be felt tomorrow or the day after, but price pressure will grow over time as demand rises – even as alternatives and efficiency begin to have their impact.

For the USA where the issue of offshore access was already under discussion, continued offshore development, in tandem with a much more aggressive approach to vehicle efficiency in particular, are the country’s most immediately effective ways to increase energy security, reduce import payments, increase revenue for the Federal Government, and create many thousands of good paying jobs.

Looking at the numbers again – current US oil production is some 6.7 million barrels per day, but consumption is nearly 20 million barrels per day. That is a very significant gap, which means the US cannot be oil independent any time soon. Production has dropped by nearly a third since the peak in early 1970’s (when US demand and production weren’t that different) and continues to do so, despite growing offshore production. Even assuming no growth in personal transport demand, a rapid shift to transport electrification (say 50,000 vehicles in 2011 growing rapidly such that all new vehicles are electric by late 2020s), a target new internal combustion vehicle fleet average efficiency improving by 2 mpg per annum and no change in marine, aviation, chemicals or other uses of oil, it wouldn’t be until well into the 2030s that demand might equal supply again, assuming of course that supply can be maintained.