Uncharted Waters

There has been a lot of discussion in the national press lately about high gasoline prices, which already top $4 per gallon in California and average $3.69 for the nation as a whole. In fact if you tune into the news media, it is already abundantly clear that the price at the pump will be an election year touchstone for Republicans and Democrats to sling mud at the other about who is to blame for this calamity. Yet for all of the points on which the parties differ, there is widespread consensus that the key to bringing down gas prices lies in expanding domestic oil drilling. Drill. Baby. Drill.

To follow the logic of this argument, leave behind what you learned in that economics class you took as an undergrad and forgot that with less than 8 percent of total global production any incremental addition to domestic drilling would have no material effect on the global price for crude [1]. Forget also the cognitive dissonance melting your brain as you try to reconcile expanded oil and gas exploration with the claim (by every President in the last 50 years) that America must reduce its oil dependency.  Assume for now that this all makes sense and you can see how promising job-creating, gas-price-lowering domestic energy is a favorite among politicians. Sound too good to be true? Well it is, but that’s not the point of this blog post. The point I will make is that this quest for domestic fossil fuel production is taking us into uncharted waters. Literally.

On Monday, an article in the New York Times noted a recent agreement between U.S. and Mexico to cooperate on deepwater oil and gas exploration in the Gulf of Mexico. What this really amounts to is an agreement between our two countries on how to partition part of the Gulf of Mexico that lies outside of the exclusive economic zone of either country. Figure 1 shows two holes in the ownership of the sea where no country has a sovereign claim—a claim over the sea and the resources underneath [2]. These legal “doughnut holes”, each about 7,000 square miles, have until now been ignored because there was no pressing interest in fighting over how the ownership rights of these [3]. In fact an agreement of the territorial dispute over the Western gap had already been reached in 2010 (amounting to a 60/40 split in Mexico’s favor), and this week’s announcement relates to an early expiration of the moratorium on oil exploration and production within that area. As such, both U.S. companies and PEMEX (Mexico’s national oil company) will have the opportunity to develop deepwater wells within the area where large hydrocarbon deposits are suspected in the Perdido Fold Belt [4]. What’s at stake in the Western gap? According to PEMEX, about 2,500 billion barrels of oil equivalent (bboe) [5].

The Doughnut Holes. Source: Harte Research Institute for Gulf of Mexico Studies

Challenges of Deepwater Drilling. Source: Chevron 2007

I took two things away from this. First, we should be concerned about PEMEX’s technical ability to operate the complex task of drilling at well below 6, 7 or 10 thousand feet of water. As figure 2 shows, the technical challenges are immense [6]. Mexico has much less experience than U.S. companies in operating these wells, having only drilled about a dozen to date compared to thousands drilled by U.S. companies. Second, we should expect an announcement soon about what will be done with the Eastern Gap that obfuscates the sovereign boundary between Mexico, the United States and Cuba. I would speculate that these negotiations are already underway, and that there is significant political benefit to announcing another breakthrough in domestic drilling before November’s election. But make no mistake: ultradeepwater exploration will bring significant risk. We should ask ourselves if keeping gas below $4 is a good thing at all.

Some additional resources:

A great map of GOM drilling operations by National Geographic

History of the negotiations between U.S. and Mexico related to the Western Gap

References:

[1] CIA World Factbook 2010. Available: https://www.cia.gov/library/publications/the-world-factbook/fields/2173.html

[2] International Cooperating in Managing Offhsore Hydrocarbon Development. Presentation by Dr. Richard McLaughlin. Available: http://www.sgmsummit.org/schedule/McLaughlin.pdf

[3] Reservoirs That Cross Country Lines Need Special Agreements. Offshore Magazine. Available: http://www.offshore-mag.com/articles/print/volume-69/issue-7/latin-america/reservoirs-that-cross.html

[4] Trudgill, Bruce (1999). The Perdido Fold Belt, Northwestern Deep Gulf of Mexico. Available: http://geology.mines.edu/faculty/btrudgil/Trudgilletal1999.pdf

[5] State Department Factsheet on U.S. – Mexico Hydrocarbon Agreement (2012). Available: http://www.uspolicy.be/headline/state-dept-fact-sheet-us-mexico-hydrocarbons-agreement

[6] Siegele, Paul (2007). Deep Water Gulf of Mexico Operations. Chevron Corporation. Available: http://www.chevron.com/Documents/Pdf/DeepWaterGulfOfMexicoPresentation.pdf