Will the Gulf Help Oil Majors Stay Afloat?

Depleting oil reserves is an open secret that has started hurting oil companies' output levels. But the greater concern is this: If oil sources are drying up, is an acute energy shortage far behind? With this question in the background, the U.S. government's decision to auction Gulf of Mexico oil leases is of immense significance.

Why all the hullabaloo?
Global demand for energy has been on the rise against the backdrop of increasing population and income growth. An expected 1.4 billion increase in population along with a 100% rise in the world's real income over the next 20 years is likely to push up energy consumption by 39%. The share of oil and natural gas by 2030 is expected to be around 52%-54%, with the demand for oil increasing by 19% to 102 million barrels per day and the demand for natural gas increasing by 2.1% per annum.

Such a spike in demand needs to be accompanied by a rise in supply. But much to everyone's dismay, this has not been the case in the latest quarter of 2011. All the oil behemoths, with the exception of Shell (NYS: RDS.A) and Statoil (NYS: STO) , have reported a decline in oil and gas production. Depletion of reserves was the main reason, although the Libya unrest also dealt a blow to companies such as ConocoPhillips (NYS: COP) . With the Libya problem on the brink of resolution, oil firms are now putting their heads together to find ways of ramping up production.

One way of doing this is to increase acreage. That more or less explains the large number of mergers and acquisitions taking place in the global oil and gas market. BHP Billiton (NYS: BHP) acquiring Chesapeake's (NYS: CHK) Fayetteville shale or Eni testing new acreages on the east coast of Africa are all part of the drive by oil companies to find new sources of production. In such a situation, the U.S. government's lease sale in the Gulf of Mexico comes as a big relief.

Can the sale bridge the gulf?
The Gulf of Mexico is a major oil and gas reserve for the United States. Its offshore oil and gas production accounts for 29% of total U.S. crude oil production and 12% of U.S. gas production. But BP's (NYS: BP) infamous oil spill in 2010 resulted in a six-month drilling moratorium as well as formulation of new rules, regulations, and safety guidelines, which have hurt output. According to Bob Dye, who oversees government affairs for Apache, the time taken to acquire a permit in the Gulf of Mexico after the spill has increased from 45-60 days to 100 days, in some cases even 200 days. The spill had affected 33 deepwater drilling sites in the Gulf.

The 12 offshore lease sales will comprise 3,913 unleased blocks with a potential to produce 423 million barrels of oil and 2.56 trillion cubic feet of natural gas. According to the U.S. Department of the Interior, the proposed area contains more than 75% of estimated supplies of recoverable oil and gas from offshore the United States. This presents a perfect opportunity to oil companies to either gain new acreage and start production from the Gulf of Mexico or increase their current acreage. In fact, Chevron (NYS: CVX) , Exxon (NYS: XOM) , and Anadarko have shown interest in drilling new wells and expanding their operation in the Gulf.

Foolish takeaway
The Gulf of Mexico lease sale could not have come at a more opportune time for global oil and gas players struggling with declining production. Though they will have to maintain stringent safety rules in deepwater drilling, the huge potential reserves make it lucrative enough to invest. We had better keep an eye on the companies moving for new acreages in the Gulf.

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At the time thisarticle was published

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