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>>Drilling Moratorium Could Have Big Effect on Oil Prices

Published: Thursday, 27 May 2010 | 7:20 PM
By: Sharon Epperson
CNBC Senior Energy Correspondent

The Obama Administration's moratorium on new offshore oil drilling could have a serious impact on Gulf of Mexico production, resulting in a chilling effect on the oil industry and strong fundamental support for crude oil prices.

President Obama's announcement that the 30-day moratorium on new offshore drilling would be extended was expected, but his stand-down on 33 new rigs in the Gulf came as a shock to some industry watchers.

"The most surprising element of the announcement was the extension of the moratorium to the 33 wells under development, for an unspecified length of time," says Eurasia Group's Robert Johnston. "This is a significant escalation that will have a much more pronounced impact on the development plans of the offshore industry, particularly for operators that were expecting to move deepwater production into the production phase over the next year or two."

Though oil prices have been following the financial markets recently, these developments could be supportive as oil production will be immediately impacted.

At its peak, the Gulf of Mexico accounts for about 1.7 million barrels/day of production capacity.

"A 180-day halt in drilling activity would imply 200,000 barrels/day of lost capacity!" or nearly 37 million barrels over the 180-day period, said Clearview Energy's Kevin Book.

"Shallow-water permitting appears likely to continue," he said. But the bulk of production occurs further offshore. Deepwater and ultra-deepwater production account for about 80 percent of oil and 46 percent of natural gas production in the Gulf of Mexico.

An active hurricane season—today NOAA forecast 8-14 hurricanes in the Atlantic this year—combined with a drilling ban could mean $70 oil will soon be a faint memory.

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