Where can America Find More Income and Jobs?

In January 2008, ExxonMobil and Norway’s Statoil announced a promising discovery in the Julia Field in the Gulf of Mexico that may contain a billion barrels of oil. In October of that year, Exxon applied for a 5-year extension of the lease for time to develop a suitable development plan. To the company’s surprise, the U.S. Department of Interior denied the request in February 2009, and has continued to turn down subsequent appeals. The company has filed a lawsuit to have the decision overturned.

The Wall Street Journal reports:

Exxon’s lawsuit said the government has granted “thousands” of extensions over time. It said the government’s denial of its extension relied on legal interpretations that it “had never before applied and had never before articulated.” Statoil asserted in its lawsuit that no request for an extension for a deep-water development “had ever previously been denied.”

Jim Brown reports that the Julia well was drilled in 6,500 feet of water to a depth 31,160 feet, numbers that continue to dazzle me with the scope of the engineering challenge involved. Brown also offers this commentary:

Exxon is known for moving slowly in developing plans for offshore production but given the complexity of developing oil fields six miles below the surface that is to be expected.

The government said Exxon did not present a firm plan for producing the oil. Duh! You have to drill it first and one exploratory well does not give you enough information to develop a “firm plan” for producing the oil in an entire lease. Nobody had ever been required to provide a firm plan in the past. This was a new and previously unneeded requirement….

Ignore the fact that thousands of workers and tens of billions of dollars would pour into this development. Ignore the fact that the federal government would receive roughly $11 billion in royalties off this development. Ignore the fact that by arbitrarily refusing the extension the production of this oil has been set back by a minimum of 5-7 years. If the lease has to go through the auction process again and someone else wins and has to develop the seismic data, drill exploratory wells, etc it could be 10-15 years before the oil is produced. This is mass stupidity at the government level.

It already took Exxon years to do all the preparation just to drill the initial exploratory well. It will take any new bidder those same years to repeat the process.

And in a separate story August 15, Brown had this:

Noble announced last week another deepwater rig was leaving the Gulf of Mexico for work elsewhere. The Noble Paul Romano had been idle since June 2010 and it now going to work for $325,000 per day for Gujarat State Petroleum in Egypt….

Since the moratorium was canceled Chevron has received three deepwater permits, BHP Billiton had four wells approved and Shell won five permits. There have been some singles awarded to other companies. The major drillers are not expecting a return to faster permit approvals until the end of 2012 or early 2013….

The rig utilization rate in the Gulf is now 54% compared to 78% worldwide.

An idle rig impacts over 1,000 workers. Some estimates are higher depending on how deep you go into the onshore support structure. Rigs have two complete shifts so a rig with 150-200 workers has twice that many with one half onshore at any given time. For an active rig there are dozens of support vessels moving men, equipment, supplies, food, etc back and forth from shore. There are the support companies like Schlumberger, National Oilwell, Weatherford, Cameron, etc, that operate as contractors to the rigs.

On shore there are supply houses, fabricators, helicopter services, regulators, inspectors, engineers, etc that work constantly to keep the rig operating.

Having these rigs on standby means they have a skeleton crew keeping the engines running and keeping the lights on. Everyone else is drawing unemployment.

That’s about 10 rigs that have left the Gulf so far, and half those that remain are idle.

In other news, President Obama is planning to deliver an important speech early next month detailing the Administration’s new plans for promoting jobs growth.

Where can America find more income and jobs?

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About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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