President-elect Trump made a number of energy-related promises on the campaign trail that have rightly drawn skepticism from experts. Most don’t think his administration can successfully boost both the domestic natural gas and coal industries, given that the two fuels are locked in a fight to the death for market share. Similarly, bringing jobs back to eastern coal mines that have been decimated by competition from western mines seems unlikely.
But there is one promise that analysts should take more seriously: The Trump team’s stated desire to increase U.S. oil production by expanding access to federal lands. It would take a bit of help from Congress, but the data suggests that there are sizeable additional resources that could be tapped.
Federal government estimates place total U.S. oil resources, in addition to proved reserves (about 40 billion barrels at the end of 2014), at more than 120 billion barrels, including roughly 30 billion barrels onshore and 90 billion barrels offshore. Now, not all of these areas are attractive. The waters off the west and east coasts are estimated to hold nearly 15 billion barrels of oil, but most states lack necessary infrastructure, while some like California are deeply opposed to drilling and have a substantial say in what happens off their coasts. More than 23 billion barrels are located off the coast of Alaska, where difficult operating conditions and a high regulatory burden have raised the cost of development, and where Shell infamously drilled a dry hole after $7 billion and several years of trial and error in 2015.
That said, there are two areas where President Trump and a Republican Congress could work together to expand access to resources that would likely result in increased production, even if the political and legal battles would be bruising.
The first is the coastal plain region of the Arctic National Wildlife Refuge (ANWR). Federal estimates suggest that this tract of federal land, which represents just 8% of the total area of the Refuge, contains 7.7 billion barrels of oil. While much of the surrounding territory was permanently designated as wilderness in 1980, the coastal plain was set aside for further study and assessment. This area remains off-limits to oil and gas activity today, but a Republican-controlled Congress and presidency could move to open it. While environmentalists have bitterly opposed such action, pro-drilling members of Congress have recently suggested this could be a top priority in 2017.
The state of Alaska, which has been hit hard by low oil prices and declining production will certainly be a strong advocate, not least because it receives 90% of royalties collected from production on federal lands within the state. ANWR production would also help fill the trans-Alaska pipeline, which is dangerously close to its minimum flow rate.
A second area is the Eastern Gulf of Mexico, which has largely been off-limits for decades and remains so under current law through 2022. The federal government estimates the region to hold approximately 3.6 billion barrels of oil. While that might not sound like much, there are reasons to be optimistic that the Eastern Gulf could be a prolific oil region. Notably, some of the most attractive discoveries and highly sought-after acreage in the Gulf of Mexico in recent years have been located in the Central Gulf adjacent to the Eastern Gulf, and many in the industry believe geology extends across map boundaries. Moreover, development in the Eastern Gulf would benefit from access to shipping infrastructure that already exists throughout the Gulf region.
Though members of the Florida Congressional delegation have typically opposed industry activity off their coast due to the potential impact of a spill on tourism, a number of compromises have been floated in the past that drew support. Prior to the Deepwater Horizon oil spill in 2010, the Obama Interior Department indicated that it was considering leasing in the farthest western portions of the deepwater Eastern Gulf, which are more than 100 miles from the Florida coast and where the bulk of the resources are believed to exist.
While estimating the impact of opening new areas is inherently uncertain, there is some analysis that suggests opening these two regions could be substantial over time. A 2011 study from consultancy Wood Mackenzie, for example, found that oil production from ANWR’s coastal plain could top 1 million barrels per day (mbd) within a decade from the date of initial access. Estimates for the Eastern Gulf were even larger. For context, total U.S. production was 8.6 mbd in September.
A fair question is whether oil companies would rush to develop these resources given the availability of lower-cost shale resources on state and private lands. But, it is important to remember that not all oil companies are the same. Large international oil companies have been the slowest to build strong shale portfolios, and they have considerable skill and expertise in developing exactly the kinds of capital-intense, complex resources found in the ANWR and deepwater Eastern Gulf. Moreover, these companies have diverse portfolios spanning the globe, and investment decisions are evaluated in that context. Would companies like Shell and ExxonMobil prefer the stability and transparency of operating in Alaska or Florida compared to the complexities they encounter today in Nigeria or Iraq? Almost certainly.
A separate question is whether markets need this oil at all given the current state of oversupply. But, with OPEC cutting, global upstream investment still depressed, and demand growing strong, markets are set to tighten again by the end of the decade. It’s easy to imagine that not only would markets find room for more U.S. oil, they might be desperate for it.