There May Be Oil Offshore, But…

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lie beneath currently off-limits Pacific waters.

The oil industry has been pressing lawmakers for access. The National Ocean Industries Assn. (NOIA), which represents 300 companies engaged in offshore oil and gas drilling, spent $200,000 in the first quarter, according to a disclosure form filed in the House. The group, whose members include drilling giants Diamond Offshore Drilling (DO) and Halliburton (HAL), used the money to press for lifting the offshore oil ban and on a variety of other issues. NOIA also includes companies that would more immediately benefit from more access: seismic exploration companies including CGGVeritas, WesternGeco, a subsidiary of oil-services firm Schlumberger PGS Geophysical.

Other industry groups eagerly support such a switch. "At today's [oil] price levels, there is lots of interest in offshore areas," says William Whitsitt, president of the American Exploration & Production Council, a trade group for independent oil companies including Devon Energy (DVN), Noble Energy, and Apache (APA). The American Petroleum Institute (API) also supports lifting the ban.

No Guarantee to Drill

But while companies and their lobbyists are gunning for access, there's no guarantee they'd ultimately produce more fossil fuels. First, seismic exploration data have not been updated for more than a quarter century, and extensive testing would be required before companies made decisions on capital allocations. And any oil that is recovered would go into the global marketplace—not directly into U.S. consumers' cars. (The API counters that new supplies anywhere would help to lower overall consumer prices.)

Democratic lawmakers are raising such arguments to oppose new production in coastal areas. They point to MMS data showing that 83% of the area now leased by energy companies in the Outer Continental Shelf is not producing energy. While there are 2,200 producing leases in that space, an additional 6,300 are nonproducing. Democrats have proposed the "Drill Act," which they say would spur exploration on already available lands in Alaska, the West, and the western Gulf of Mexico. "There may be good and sufficient reasons why the companies that lease this land are not producing oil from it, but I believe we need to ensure that there is diligent development of existing leases," Senator Jeff Bingaman (D-N.M.), chair of the Senate Energy & Natural Resources Committee, told the Senate on July 16.

Noble Energy's Davidson disputes the notion that companies are intentionally not drilling on leased areas, citing the complexities of obtaining the proper government permits and seismic research. Also, wells selected for drilling may come up dry because of faulty data. "Energy companies are trying to pursue every idea we can," says Davidson. "I find the idea that leases are lying fallow a real stretch."

Conservative Companies

Meanwhile, some prominent politicians are beginning to support the idea of coastal drilling—or at least some aspects of it. Senator Kent Conrad (D-N.D.), for instance, says he supports more oil drilling in the Gulf of Mexico but has not committed to domestic offshore drilling elsewhere. In June, Governor Charlie Crist (R-Fla.) reversed his long opposition to drilling off the state's coast, citing the financial pain high prices are inflicting.

With oil prices extremely volatile, companies are being conservative (BusinessWeek.com, 3/20/08) on their capital spending, fearful of an abrupt end to the bullish run. The uncertainty was highlighted the week of July 11-18, when crude oil futures tumbled (BusinessWeek.com, 7/17/08) more than 12%, to settle at $128.88 on July 18 from a July 11 record high above $147.

If the oil ever does flow from U.S. coastal areas, its ultimate destination offers another wrinkle to the issue. Crude oil sloshes around a vast global marketplace, where energy producers aim to secure the best price. That means U.S.-sourced crude could be sold anywhere a consumer is willing to pay more. Former Vice-President Al Gore, who opposes lifting the moratorium, raised that point at a July 17 news conference on energy policy. "You take an oil deposit right off the coast of California—that's more likely to be sold to China,— said Gore.

Join a debate about drilling in the Arctic National Wildlife Refuge.

Herbst is a reporter for BusinessWeek.com in New York.