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US Oil Moves Inland, Making Storms Less Disruptive

Transocean Discoverer Enterprise drillship
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Transocean Discoverer Enterprise drillship

Recent trends suggest that the Gulf Coast is becoming to U.S. oil production what Apple is to the technology sector: a dominant player beset by challenges to its dominance.

Meanwhile, the Bakken Formation in North Dakota and Eagle Ford in Southern Texas are playing the role of Google and Samsung – upstarts shaking up the status quo in the sector.

Long the Mecca of U.S. energy output, the Gulf of Mexico has seen its clout diminish as new energy hubs threaten its mantle. Bakken, Eagle Ford and the Marcellus formation that cuts across the Appalachian Basin are becoming focal points of shale oil development.

Moving Inland

Figures from the Bureau of Safety and Environmental Enforcement underscore how Gulf oil production has been in a slow but steady decline. After churning out more than 570.2 million total barrels of oil during 2009, that figure shrank to 463.1 million in 2012 – coinciding with the ramping up of exploration in land-based hot spots.

That, according to market watchers, has implications for how U.S. energy output can recover from major storms that disrupt Gulf Coast oil production.

"When the Gulf of Mexico represented a larger share of domestic U.S. production, there was greater urgency to get shut-in production back online," said one energy company official, who asked not to be identified."Over the last 5-10 years, with so many new domestic energy sources onshore, there doesn't seem to be that urgency."

The effort to re-position energy production from offshore rigs to potentially more prodigious inland areas has picked up speed in recent months.

EOG Resources, BHP Billiton and ConocoPhillips — a trifecta of the largest companies in Texas energy exploration — have spent a combined $30 billion on Eagle Ford oil and gas. Elsewhere, energy company Apache has more than tripled the number of inland rigs and wells since 2010, according to company data, mostly in areas like Oklahoma, New Mexico and the Texas Panhandle.

Late last year, ExxonMobil bought the Bakken-based assets of Denbury Resources for $1.6 billion in cash and interests in two oil fields, in a move that gave the oil behemoth 50 percent more acreage in the oil hub.

Not to be outdone, energy giant Hess has also gone on a production binge in the suddenly hot Bakken. In January, the company said it churned out 87 percent more oil and gas from the region than in 2011. In a call with analysts, company chairman and CEO John B. Hess called the North Dakota outpost "arguably one of the best shale oil plays in the world."

In effect, the growing land presence of energy companies means the price of oil and gas could become less susceptible to the vagaries of natural disasters like Sandy and Isaac.

Shelter From the Storms

The recent trends in U.S. oil production may have the added benefit of insulating the world's largest energy consumer from a potential supply shock from turbulent weather.

To be certain, storms are a real risk to oil producers and refiners, given that the Gulf Coast still accounts for 23 percent of total U.S. crude production, with over 40 percent of total refining capacity located along the Gulf Coast, according to the Energy Information Agency.

As a result, companies like BP, ExxonMobil and Shell maintain extensive protocols to evacuate offshore oil platforms in the event of extreme weather. This is a real risk: this week, weather experts warned that the U.S.'s chances of getting hit with a major storm are 70 percent higher than last year – which saw Tropical Storm Isaac and superstorm Sandy batter the U.S.

"We take the risk of hurricanes seriously," an ExxonMobil spokesman told CNBC in an interview. "We have well-executed plans of preparation in place."

Most of the Gulf energy giants conduct evacuation drills to prepare workers, maintain emergency supplies and have rescue equipment on stand-by if a hurricane or tropical storm forms.

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