Bob McCarty Writes

During a conference call with bloggers Friday, American Petroleum Institute President Red Cavaney elaborated on his organization’s cautiously optimistic position on the future of the oil and natural gas industry.

“I think we should temper any enthusiasm with a sort of realistic look about what lies ahead,” Cavaney said, speaking 48 hours after House Democrats announced they would allow a quarter-century-old offshore drilling ban to expire.

“Already, there have been a number in Congress who are out telling their supporters that the moratorium will be reinserted when the new Congress and the new president gets in place and that this is just a, quote unquote, ‘temporary circumstance.’  Now, from our standpoint, we have to treat it the same way as well.”

Counting his chickens before they hatch doesn’t appear to be in Cavaney’s playbook.  And for several good reasons.

While most of the recoverable offshore oil and natural gas reserves are less than 50 miles off the coast, Cavaney said some want future legislation to allow drilling only in areas beyond 100 miles.  For those in the industry, that’s a non-starter.

“What we’re actually looking for and what we need is some proactive signal from Congress in particular, or whoever the next president is, that the moratoria is passed and here is what we can agree to in terms of potential exploration and production opportunities,” Cavaney explained.  “That’s really what we need to go to the next round.”

Asked about the outlook for the industry building new refineries and expanding both on- and offshore exploration, Cavaney cited concerns that have plagued the industry for decades.

“At the end of the day, if you go back and look over decades of time, you’ll see that refineries’ returns have been not too much more than what you call a passbook savings account.  And so, each time you build a refinery that has to give up, shall we say, a couple hundred million dollars of cost to do something that its competitors don’t, it’s going to be hard to recover it.  And it still is the private sector that puts the money behind it.”

Chukchi Area Map

Asked to discuss the impact of litigation on the industry’s ability to expand exploration efforts, Cavaney offered an example.

“Back in February of this year, in the Chukchi up in Alaska, they had a lease sale — as a matter of fact, a very attractive lease sale,” he explained.  “It ended up bringing in about $2.7 billion of bonus bids for the government.

“And do you know, as we sit here today, every single one of those leases has a lawsuit filed against it?”

Despite the fact that public opinion polls in August and September show the vast majority of Americans favor an expansion of drilling now, lawsuits plague the industry.

If the industry can get beyond the litigation issues and move forward toward an expansion of drilling, the future looks promising.  Some examples appear below:

• Though Alaska’s Prudhoe Bay was predicted to produce only 9 billion barrels of oil when it was brought online in 1977, some 15 billion barrels have been shipped and current estimates range to just more than 18 billion, according to API.  The same sort of underestimate could prove out in the Alaska National Wildlife Refuge — if, that is, drilling is ever allowed there. ha

• “If you look at the early Gulf of Mexico estimates, we’ve already shipped more out of the Gulf of Mexico that (experts) said was there to begin with,” Cavaney said.

• As late as 1995, experts estimated they had 165 million barrels of reserves in the Bakken formation of northern North Dakota and the northeastern part of Montana and Saskatchewan.  Today, the number being used is 3.6 billion of reserves.

Though I did not mention it, Cavaney did address the present crisis in the financial market and the impact it might have on efforts to expand oil and natural gas exploration in the United States.  Like executives in most other industries, he hopes elected officials in Washington find a solution soon.

“If this thing were to go on for a couple more weeks where we’re starting to dry up,” he said, “I can see a big impact.”