An Offshore Drilling Example

By BJ

While it probably didn't make the news down south, the Province of Newfoundland and Labrador signed a major offshore oil deal yesterday.

The government of Newfoundland and Labrador is estimating the province will gain at least $20 billion in royalties and up to 3,500 jobs from the Hebron offshore oil project, after a final agreement was signed Wednesday in St. John's.

While the US presidential race in the last few days has been far more concerned over whether or not some guard scratched a cross in the dirt back in the late sixties, or which candidate would be more likely to start WWIII, it wasn't all that long ago that the McCain campaign's big idea was to open up new areas of the US continental shelf to offshore drilling exploration to help ease gas prices. Well, here you have a present-day example of a new offshore field being developed, so I thought it might be instructive to see how long it takes for the 700 million barrels of oil there to start influencing gas prices.

The field was actually discovered back in 1981. For the better part of two decades it sat there undeveloped for economic reasons, but thanks to rising oil prices, it grew attractive again a few years ago.

What followed was one of the bitterest disputes over control of an oil field in recent Canadian history. The demand by Newfoundland Premier Danny Williams for an ownership stake in the project, and a refusal to give Chevron and Exxon a half billion in tax breaks had them walking out of the negotiations in 2006 and calling Williams the North American Hugo Chavez. Newfoundland and Labrador has been the poorest Canadian province for close to 50 years, and the companies no doubt thought that the apparent loss of such a potential windfall would either force Williams to come to their terms or see his opposition take over. Neither happened, and oil just kept rising, and suddenly the oil executives are all smiles as they sign the agreement with Williams.

More to the point when it comes to McCain's claims of opening up new areas of the shelf for oil exploration to affect gas prices, the agreement signed yesterday, for an oil field discovered almost 30 years ago, won't start pumping oil until at least 2017. How much do you think that will help you out when you next hit the gas station?

Comments

[Bithead]

Quite a bit, actually.
Gasoline prices are determined by crude oil FUTURES.

THe recent gasoline pricec drops were started by PResident Bush when he took the Presidental ban on offshore drillin off. Not a drill touched earth and yet the prices when down on the mere possibility that more oil would be in our future.

Of course, there's a lot of partialy developed fields out there already which will be fully online in less than a year... so things will be even better than that, in terms of rices, in very shhort order indeed... once the Congressional Demoacrts stop blocking us getting our own oil..

[Bithead]

Oh... and ,... Bonus round:

What has OPen done every time a new oil field threatens? THey lower prices by upping output. They've done it every time.

[anderson]

bithead,

Futures plays do not extend 17 years! They are generally contracts 6-12 months in advance of delivery. No one in oil markets would play a 17 year futures contract. Clue in.

I would further suggest that oil futures started dropping in response to noise coming out of Washington that they were going to examine the roll of market speculation in futures, which was also driving other commodities, as well. The timing of this threat of investigation and potential regulation was coincident with Bush's executive order.

[BJ Bjornson]

Gasoline prices are determined by many things, but oil FUTURES, as you say, aren’t nearly as important as the price the refineries actually pay for the oil they're refining. Plus, as anderson noted, the futures price most often quoted is for oil contracts in the near future, not for a decade hence. Once refined, the law of supply and demand kicks in, high prices means fewer miles driven, which allowed supplies to increase, lowering prices until people started driving more again. Gas supplies dwindle, prices go up to compensate.

And as for the partially developed fields, if the fields are already open, how can the Democrats be blocking them? If you had any reading comprehension, you’d note that McCain’s plan is to open new areas for exploration; meaning to look for suspected but undiscovered fields. Nobody is blocking development or exploration in the areas already open for development, let alone fields already being developed. And any fields in development are already included in the proven reserves.

[Online forex trading plaftorm]

Yeah i deffenetly agree with you no one in the oil market will commit to a contract of 5 years and 17 thats really impossible .

[Matt]

I just ran across this interesting article "Drill Here, Drill Now," that delivered a number of interesting points about offshore drilling. One interesting fact is that 620,500 barrels of oil ooze organically from North America's ocean floors each year, compared to the average 6,555 barrels that oil companies have spilled annually since 1998. It's an interesting article and i suggest you read it.

[BJ Bjornson]

Does it bother to mention the difference between oil seeping out at depths were pressure is intense enough to keep it from rising into the habitable zone compared to oil slicks swallowing up seabirds and washing up on beaches? No? What a surprise.

Besides, it still won’t change the fact that more exploration offshore isn’t going to make the slightest difference to gas prices.