By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)

A resurgence of oil and gas activity is taking place in the Gulf of Mexico, and with the dramatic slide of the US land-drilling activity; the new recovery is a bright spot for the offshore industry, which has been on a steady decline for the past decade.

The current US land rig count is a direct reflection of the falling price of a barrel of oil, which has fallen from a record high in July 2008 of $147 a barrel to $35 at the close of the market on Friday January 15th. The oil and gas industry is a price-driven industry: drilling activity tracks with the price of a barrel of oil. Simply, the higher the price of a barrel of oil, the more drilling activity; low prices, less drilling.

Low oil prices coupled with the lack of investment capital and credit, will cause oil and gas projects around the world to be scrapped or tabled in 2009. The budgets for independent oil and gas companies that depend on investment capital and credit to finance their projects are slashing their 2009 budgets, while the majors or integrated companies who are sitting on plenty of cash will continue with their 2009 projects. The lack of investment into exploration in 2009 will cause a crude supply shock that we could feel as early as mid 2010. Prices will soar.

However the price/activity scenario does not necessarily apply to exploration activity in the Gulf of Mexico, especially in the deep water Gulf of Mexico. Exploration projects in the deepwater are developed and planned over a period of 15 to 20 years and are committed to a long-term plan, versus tracking the current price market trends. There are projects coming on line today that started fifteen years ago when average yearly price was $15 a barrel.

For the past decade the drilling activity in the Gulf of Mexico has been on a steady decline and should be at or near its bottom. The exodus from the Gulf has been a result of more lucrative projects in other parts of globe. According to a 2006 study, it costs more money to find a barrel oil in the Gulf of Mexico than it does anywhere else in the world. That hasn’t necessarily changed, but the global geopolitics of the world has changed, because of $100 plus oil. State owned or national oil companies made it more difficult for western oil companies to operate, thus sending them back home to search for exploration projects in a friendlier environment.

We often take for granted that oil is an unlimited resource much like the air we breathe, but it’s not. The world oil supply is fixed, embedded in our planet and is no longer being formed.

IEA (International Energy Agency) stated in its annual report that without extra investment to raise production, the natural annual global crude oil depletion rate is 9.1%. The report warned the world needed to make, “a significant increase in future investments just to maintain the current level of production”. IEA chief Nobuo Tanaka said, “The price of oil has fallen too far in response to a decline in world demand for fuel.”

Energy security for the United States will eventually come from the Gulf of Mexico. It is estimated that of the 85 billion barrels of oil that is undiscovered and technically recoverable in the OCS, 59% is in the Gulf of Mexico. As well, of the estimated 420 Tcf (trillion cubic feet) of natural gas that is undiscovered and technically recoverable in the OCS, 56% is in the Gulf of Mexico.

In June of 2008 President Bush lifted the 26-year moratorium on drilling in the OCS. The lifting of the moratorium applied to all areas of the MMS planning areas in the OCS with the exception of the Eastern Gulf of Mexico, which is controlled by a moratorium imposed by Congress under the Energy Security Act of 2006.

According to the new administration, President Obama has said he is “open to” allowing offshore drilling if it is part of a “comprehensive” energy proposal. Interior Department chief Ken Salazar said, “The fact of the matter is there are places in the OCS where it is appropriate for drilling…in the Gulf of Mexico and Alaska…but there may be other areas that are off limits.”

On January 16, 2009 the MMS (Minerals Management Service) released its 2010-2015 draft proposal for the Outer Continental Shelf Oil and Gas Leasing Program, commonly referred to as the five year program, which specifies the size, timing and location of the areas to be considered for Federal offshore leasing.

Under the proposed plan, three Gulf of Mexico lease sales would be scheduled for 2010, 2011 and 2013, offering leases that are currently off-limits. It is anticipated there will be a bidding war on the leases offered. If the sale mimics the 2007 lease sale we could see the average bid price for a single lease climb by 50 percent.

It’s not just the geopolitics driving the return of western companies to the friendly environment of the Gulf of Mexico. New deepwater drilling and completion technology along with higher oil prices add to the profitability of projects. A decade ago low prices caused companies to let idle leases expire while they pursued projects in other parts of the globe. The companies are now coming back to bid on expired leases to develop.

Deepwater Gulf of Mexico will be the focus for the near future until, higher gasoline prices encourage the lifting of the Eastern Gulf of Mexico Moratorium. Seventy two percent of the oil produced in the Gulf of Mexico comes from deepwater. “What you have is a scarcity of resources,” says Dory Stiles of Murphy Oil Corporation. “Companies are looking for more opportunities to explore.”