Opening 98 percent of the US continental shelf for drilling is hardly the be-all and end-all for future production.
THE oil price reached highs not seen since 2014 when Brent hit $70 this week. The price rise came against the backdrop of a harsh winter in the US and the production cuts of OPEC and non-OPEC producers.
Consecutive weekly draw-downs in US stocks of 12.3 million barrels per day (bpd) over the past two weeks as well as questions over the outlook of US shale production in the medium term also contributed to the rise.
This is all part of the weekly ebb and flow of the markets.
But what really piqued the interest of observers was the decision by US President Donald Trump to open 98 percent of the US continental shelf for the drilling of oil and gas wells.
He overturned President Obama’s initiative, which blocked 94 percent of the outer continental shelf for oil and gas exploration and production.
Trump wants to turn the US into the pre-eminent global energy superpower by opening up the coastal area with 47 exploration and production licenses.
Like so many of Trump’s initiatives, it polarized opinion: The oil industry was enthusiastic, while the environmental lobby was up in arms.
Written protests came thick and fast from state governors, municipalities, businesses and fishing families.
The governor of the state of Florida, Rick Scott, even got the proposal overturned in his coastal waters after intervening with Ryan Zink, the US interior secretary spearheading Trump’s efforts.
The question remains as to what is behind this new policy initiative. Trump for one wants to “Make America Great Again” in oil exploration and production. Part and parcel of this plan is to turn the country into a major player in the oil and gas space. He may well succeed.
On the back of increasing shale production, the US has become a major producer on the global stage. It puts the country up there with the Kingdom of Saudi Arabia and Russia. It will, however, never dwarf their importance on the international energy scene. There is enough global demand to accommodate three major producers.
The new initiative comes amid uncertainty as to how much more the Permian and other shale basins have to give.
According to WoodMac, the international energy consultancy, US shale production will double between now and 2024 to 9.6 million bpd, but decline thereafter.
Trump’s plans also need to pass a gauntlet of legislative and legal hurdles before the blocks can be offered for auction in about 18 months.
Once that has happened, demand will depend on the long-term outlook for the oil price.
Properties in the Eastern Gulf of Mexico and in Alaska’s Arctic National Wildlife Reserve may well be picked up first, because of the existing pipeline infrastructure.
Where there is little to no infrastructure, oil companies may shy away rather than committing billions to exploration, production and infrastructure.
There is some merit in Trump’s new initiative. Should the shale reserves really be in decline, there is validity in opening up new opportunities.
One should, however, heed the concerns of coastal communities who depend on more than oil and gas for prospering economies. Fisheries and tourism may well provide more employment opportunities than upstream oil and gas.
On a different note, while it is encouraging that the US president wants to breathe life into the oil, gas and coal sectors, it is difficult to see how he can promote the US economic agenda if he does so at the expense of renewable energy.
One does not preclude the other. The renewables space will provide many job opportunities in future. If the US president leaves this field to others, America may well lose out. At this point China and the EU spend billions on research and development in this sector, which will provide many jobs in the decades to come. Whoever does not keep up, will lose.
Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources
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