President Obama launched a last-minute effort to protect his legacy on climate and clean energy earlier this month by approving a permanent ban on offshore oil and gas drilling in large swaths of the Arctic and Atlantic oceans.
The decision, announced in partnership with Canadian Prime Minister Justin Trudeau, was condemned by the oil industry, which argued that restricting offshore drilling areas could damage the U.S. economy. “Blocking offshore exploration weakens our national security, destroys good-paying jobs, and could make energy less affordable for consumers,” said Erik Milito, upstream director at the American Petroleum Institute (API).
At the same time, the ban was applauded by environmentalists, who fear President-elect Donald Trump and his pro-fossil fuel administration will severely undermine efforts to mitigate the effects of climate change. Trump has already pledged to roll back a host of Obama’s environmental policies within his first 100 days in office.
The offshore drilling ban is unique in that it may be able to survive a Trump attack. Obama approved the ban by using an obscure 1953 law that governs offshore leases in the U.S. continental shelf. The law gives Obama the ability to act unilaterally, and nowhere does the law say a successor can undo those actions. If Trump does attempt to repeal the ban -- as the oil industry hopes he will -- environmental groups will at least be able to make the rollback difficult.
But while both supporters and opponents are making a big deal of Obama’s last-minute gesture, the ban actually has little real-world significance, according to Imran Khan, senior manager of the upstream research team at Wood Mackenzie.
“The offshore drilling ban is largely symbolic,” he said. “I don’t see companies eager to explore those areas anytime soon.”
"Very much frontier exploration"
Today, the Gulf of Mexico is the primary area for offshore drilling, which is split into three planning areas: central, eastern and western. The central area is the most developed -- that’s where most of the lease sales take place and most operators currently work. The western area is active as well, but with the decline in oil prices over the last two years even western lease sales have received little attention.
Parts of the eastern area, meanwhile, were recently opened up to developers but received zero bids in the last lease sale. According to Khan, that’s because there isn’t as much information available on the eastern section, and because oil and gas companies still have plenty of opportunity to work in the central and western Gulf.
These parts of the Gulf are the core of the U.S. offshore drilling market today. Operators have been working there for 20 to 30 years and they understand the geology, Khan said. “Those areas aren’t getting that much attention and they still have a lot of room to explore, so why would developers be interested in the Atlantic?”
The Atlantic Ocean has virtually no offshore oil and gas drilling infrastructure in place at the moment, which is an enormous barrier because the infrastructure is so expensive. But even if infrastructure wasn’t an issue, the Atlantic was unlikely to see much action.
Last year, the Bureau of Ocean Energy Management (BOEM) made a preliminary decision to auction as many as 104 million acres of the mid- and south Atlantic in 2021. This year, ahead of Obama’s official ban, BOEM opted not to include those areas in light of opposition from environmental groups and coastal communities, and because of low industry interest -- although the decision drew harsh industry criticism. Instead, the program focused on auctions in the Gulf.
"The proposal focuses potential lease sales in areas with the highest resource potential, greatest industry interest and established infrastructure,” said Interior Secretary Sally Jewell, in a statement.
The last time a company drilled in the Atlantic was in 1983 and there are currently fewer than four wells, said Khan. Because there is very little information available on the Atlantic, drilling there “would be very much frontier exploration, which is very expensive because of the environmental conditions and lack of infrastructure,” he said.
“Any interest in the Atlantic would be in the very distant future at best,” Khan added.
It’s a similar story in the Arctic. The new Obama ban blocks offshore drilling in areas of the Chukchi Sea and the majority of the Beaufort Sea -- areas that were already receiving little to no industry attention.
In September 2015, Shell announced that it would cease further exploration in the Arctic after spending $5 billion to drill two wells in the Chukchi. Shortly after Shell’s withdrawal, BOEM canceled two potential offshore lease sales scheduled for the next offshore drilling five-year lease plan from 2017 to 2022, due to a lack of industry interest.
“Even if those areas were open, they’re just way too expensive to explore in and develop,” Khan said.
ConocoPhillips, Eni, Statoil and Repsol also own leases in the Arctic, but abandoned those drilling rights earlier this year.
Still a friendly time for fossil fuels
So despite the oil and gas industry’s strong objections to President Obama’s new offshore drilling ban, in reality there were few plans to drill in the Arctic and Atlantic in the coming years -- and throughout the duration of President Trump’s four-year term. API’s claim that the new drilling ban “destroys good-paying jobs” would more accurately refer to “potential future jobs,” since companies are not currently operating, and have few actual plans to operate, in the waters the ban serves to protect.
"In the long term, certainly deepwater is a key part of large companies’ portfolios,” said Khan. “But in the short run, we have seen companies divert investment from deepwater wells to lower-capex onshore oil and gas drilling.”
Of course, as an industry that operates on decade-long time horizons, it’s the long-term options that the oil companies want to defend. And in that endeavor the American Petroleum Institute and others are likely to find an ally in Trump. The new administration could also make life a lot better for oil companies long before taking on the legal battle to reopen unexplored offshore sites in the Arctic and Atlantic Oceans.
For one thing, Trump could lengthen lease times in existing offshore drilling plays in the Gulf of Mexico, giving companies more time to develop new sites. Trump could also open up additional areas of onshore drilling in the National Petroleum Reserve-Alaska (NPR-A) and the Alaska National Wildlife Refuge (ANWR), which President Obama sought to protect. He could also open up areas for offshore drilling that are not covered by the ban, such as the 2.8 million acres near the Beaufort Sea.
In addition, Trump could revive and approve the Keystone XL pipeline. And he could reduce the royalty rates that oil and gas companies pay to the federal government for production in federally owned areas. A lower royalty rate could suddenly make harder-to-reach plays economically viable.
So while Obama’s latest offshore drilling ban created quite the stir, market dynamics make it a largely symbolic move. There are plenty of other areas for oil companies to go after, and plenty of reasons why companies would choose not to explore uncharted sites for many years to come.
However, environmentalists shouldn’t get too excited. Because oil and gas companies work with long timelines, Trump may well decide to try to challenge Obama’s use of the 1953 law and bring the Arctic and Atlantic Oceans back into play. Even though it may not be viable to drill new wells in those oceans for a decade or more, Trump could decide to reverse the ban for symbolic reasons of his own.
Arguably, the only way for offshore drilling to really come off of the table is for there to be a significant drop in global demand for oil and gas, which means the offshore drilling debate doesn’t only center on lease sales and drilling laws. How electric vehicle and renewable energy markets develop in the coming years will also play a role in how this issue evolves, and how well Obama’s environmental legacy is preserved.