Offshore drilling has come under heavy scrutiny in the wake of the Gulf of Mexico oil spill. No surprise there. Companies exploring for oil and gas in various U.S. coastal areas have been favorite targets for environmental groups for years and BP's (BP) apparently flagrant disregard for safety protocols on the Deepwater Horizon rig does nothing but paint the company and the industry in a negative light.
The fallout from the calamity in the Gulf has included the Obama Administration reversing course from its surprise announcement in March to expand offshore drilling activity and the Interior Department has announced that it will not grant any new offshore leases until an investigation into the Deepwater Horizon explosion is complete. Again, none of these announcements are all that surprising.
What potential bans on offshore drilling have done is fuel speculation that oil producers will now shift their focus to more onshore opportunities. From an economic perspective, onshore drilling makes a lot of sense for oil companies because it costs less than going offshore. Of course, that does not mean that drilling for oil onshore is a perfect scenario. In fact, onshore drilling has its own separate set of problems that make the endeavor a potential minefield for energy producers.
Not the least of those problems is a limited number of recoverable barrels of crude. According to the now infamous Minerals Management Service (MMS), the Federal Outer Continental Shelf, which includes the Gulf of Mexico and coastal areas of Alaska, contains 115.1 billion barrels of oil, 70 billion of which are economically recoverable.
That number drops quite a bit when looking onshore. According to the United States Geological Survey (USGS), onshore reserves stand at 48.5 billion barrels. Despite improvements in drilling technology, plenty of groups are concerned about onshore drilling. The Interior Department has announced stricter regulations for onshore drilling in the wake of the Gulf spill.
And drilling onshore does more than irk environmental groups. Areas of western states like Montana, North Dakota and Wyoming are believed to hold decent amounts of oil and natural gas, but many of those reserves lie on federal lands, used by hunters and sportsman who are vocal about their disdain for onshore drilling that may threaten their recreational lands.
Remember the debate surrounding the Arctic National Wildlife Refuge (ANWR)? That is basically an onshore resource and President Bush could not get approval to tap into this resource when his party controlled both houses of Congress. ANWR may hold as much as 16 billion in reserves, according to the USGS, but who knows when, if ever, that oil will be accessed?
Occidental Petroleum (OXY), the fourth-largest U.S. oil company, made a massive discovery onshore in Kern County, California last year. The company has been secretive about how many barrels the find may hold and exactly where it is, but analysts have said there may be up to 1 billion barrels there. A Bloomberg News piece said earlier this week that Occidental, which has eschewed offshore drilling for years in favor of onshore projects, is poised to benefit from more onshore activity.
Occidental may eventually prove to be a compelling investment opportunity due to its onshore presence. In the face of few alternatives to replace lost offshore production, let's hope Occidental is successful.