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Outlook for Gulf of Mexico and Food Not Good

In the span of two weeks, the Gulf of Mexico oil and gas industry has been presented two assessments of when drilling activity may begin to pick up. About a week and a half ago, Bureau of Ocean Energy Management, Regulation and Enforcement Director Michael Bromwich, in a speech in Washington, D.C., said that his organization was working hard to grant offshore deepwater drilling permits.  When pressed during the question and answer session, he said he would be “stunned” if it wasn’t until the third or fourth quarter before permits were awarded. He also said that in the future, the pace of granting permits in the Gulf of Mexico would not be as fast as in the past, which he knew would disappoint the oil and gas industry. 

Last Friday, during the earnings conference call with investors and analysts, Schlumberger Chairman and CEO Andrew Gould said that it would be the end of 2011 or 2012 before a deepwater well is commenced drilling. When questioned further about his view, he said it wouldn’t be before 2012. In fairness, Mr. Gould did say he was “going out on a limb.” I’m sure many in the industry would like to be handing him a saw before long.

For deepwater drilling there clearly are many hurdles for the industry and the BOEMRE to clear before permits can be issued. Some of these hurdles involve rules and regulations that have still to be written and others that need detailed interpretations. Big questions revolve around how the “worst case oil spill” will be measured and how the industry will manage and share the deepwater containment and clean up assets being built. 

As we approach 90 days since the early lifting of the deepwater drilling moratorium following the BP Macondo well oil spill, the offshore oil and gas industry is reaching the point when it has to make decisions about moving assets and attention from the Gulf of Mexico. Deepwater drilling rigs have already left the Gulf and others destined to come here have been diverted. Other offshore assets such as deepwater supply vessels are already heading elsewhere. How long before the trickle of assets leaving becomes a cascade?

So what is the response of the Obama administration? On Friday, the Environmental Protection Agency moved to increase the number of automobiles that can use greater concentrations of ethanol in their fuel. The EPA has added autos built between 2001 and 2006 to the earlier approval of 2007 and newer cars than can burn E-15, or gasoline containing 15 percent ethanol. The use of E-15 is quite controversial as engine manufacturer research shows it to be damaging to older engines and all small engines. Yet the EPA claims that it doesn’t hurt these older engines, even though the research hasn’t been totally completed.

Ethanol remains a sorry energy saving program. Scientific research shows that ethanol barely, if at all, saves energy compared to the energy needed for its production. Besides that, ethanol uses a significant amount of the domestic corn crop that is contributing to food inflation. In 2001, only 7 percent of the nation’s corn crop went to produce ethanol. Last year it was 40 percent, or four of every ten bushels of corn grown went to the fuel market. Lastly, ethanol uses copious amounts of water; much more than used by any other fuel produced.

We’ll be interested in what President Obama says Tuesday night in his State of the Union address about our nation’s energy policy and plans. We doubt his agenda will change, which doesn’t auger well for the future of the oil and gas business or our food bills.