The Impacts of Delay

Kyle Isakower
Posted January 27, 2011

On January 4th at the State of American Energy event, API president Jack Gerard released a study by Wood Mackenzie that compared the impact of two scenarios: raising government revenues from fees and payments associated with increased access to areas that are currently off-limits to oil and natural gas development; and raising government revenues from an additional $5 billion per year in taxes on the industry. The results revealed that not all revenue is created equal.

Comparing the total government revenue impact from the two scenarios (access versus taxes, for the period between 2011 to 2025) shows increased access generates an estimated $150 billion in additional government revenue. Under the higher taxation scenario, net revenues are estimated to decrease by $128 billion. In short, the negative economic consequences of higher taxes will, in the long run, more than offset any short-term tax revenue gains. More importantly, as millions of Americans struggle to find jobs, total additional direct, indirect and induced jobs in 2025 could exceed 530,000 in the increased access scenario. On the other hand, the higher tax scenario would result in a loss of jobs, estimated at 170,000 in the peak job loss year of 2014.

The advantages of greater access are clear, but just as importantly, the oil and natural gas industry must also be allowed to produce energy in those areas where we - in theory - already have access. It is important to consier that BOEMRE has indicated that even after they resume permitting in the deepwater Gulf of Mexico, the pace of permitting will be slower than was previously the case. We thus asked Wood Mackenzie to take a look at the impact of potential permitting delays on production. The study (found here) established a Base Case for post-Deepwater Horizon production including estimates for exploration and appraisal costs on 25 undeveloped deepwater fields, and then analyzed the economic impacts of a 1-year and 2-year delay in project development due to permitting delays. The results are quite dismaying:

• With a 1-year delay in permitting, 13 of 25 potential deepwater fields are at risk of being sub-economic (Wood Mackenzie based their analysis on commonly-used internal rates of return thresholds; individual companies will make their own decisions regarding project viability). The 13 fields have total potential reserves of 2.7 billion barrels of oil equivalent and a potential peak production loss in 2019 of as much as 540,000 barrels of oil equivalent (boe) per day. A loss of 540,000 per day of production could decrease the total 2019 GOM deepwater production by 27%.

• With a 2-year delay in permitting, 17 of 25 potential deepwater fields are at risk of being sub-economic. The 17 fields have total potential reserves of 3.1 billion barrels of oil equivalent and a potential peak production loss in 2019 of as much as 680,000 boe per day. Loss of this production could decrease the total 2019 GOM deepwater production by 34%.

• Cumulative government revenue (royalties and corporate income tax) at risk over the life of the resource is $13.7 billion and $18.1 billion, respectively, for a 1-year and 2-year delay in project development.

API used the potential investment loss figures from the Wood Mackenzie study to calculate possible job losses through use of IMPLAN modeling. We found that maximum at risk employment, is 90,000 in 2016 with a one-year delay and 125,000 in 2015 with a two-year delay.

The Federal government needs money, and the American people need jobs. It is imperative that BOEMRE begin issuing deepwater permits in the Gulf, and that when they do, permits are processed expeditiously. Adding delays to permit processing will only serve to further disadvantage domestic deepwater drilling, leading to poorer energy security, less government revenue, and fewer American jobs.