London, 17 June 2010

Deepwater oil production in the Gulf of Mexico accounted for 23% of all oil produced in the United States last year, and 7% of all crude consumed in the nation's refineries, according to the Energy Information Administration's Annual Energy Outlook.

Offshore production has risen 770,000 barrels per day since 1990, helping offset declining output of almost 2.9 million barrels elsewhere. In the Gulf, deepwater has been the fastest growing segment in recent years, accounting for more than three-quarters of all production last year.

Before the blowout of BP's Macondo well, and the subsequent drilling moratorium, EIA forecast deepwater output would rise another 35% to hit 1.67 million barrels per day in 2015, up from 1.23 million bpd in 2009. By then, Gulf deepwater output would account for almost 29 percent of all oil produced in the United States:

(See graphic PDF below)

Some analysts have suggested Macondo puts a large share of this forecast production in jeopardy, tightening the forward supply picture significantly. The International Energy Agency (IEA) has labelled it a potential game changer.

President Barack Obama has seized on the spill to urge the country to "embrace a clean energy future." In practice, though, deepwater production is so important the United States has no alternative to continue exploration and raising output if the country is to have any real prospect of meeting predicted energy needs at acceptable prices without jeopardising energy security by raising imports even further.

EIA predicts slower growth in liquid fuel consumption over the coming two decades mostly as a result of increased energy efficiency. Gasoline demand may even have peaked, at least the component derived from petroleum, as a result of increased ethanol blending under the Renewable Fuels Standard (RFS).

But efficiency improvements, as well as biofuels, and other renewable, are unlikely to completely meet all future needs on their own.

Pressure to resume drilling new wells, with additional safeguards, will therefore be immense. There is no practical alternative. Any moratorium is set to be relatively short, at least for operators other than BP itself.

Ends --

By John Kemp, Reuters market analyst - for Commodities Now

The views expressed are his own.

Attachments:

EIA-GOM-PROD.pdf

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