Oil Majors Wait for Permits to Drill in Alaska, Gulf of Mexico

Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) are increasing their lobbying efforts to push the U.S. Government to grant drilling permits for exploration. ^[1] The permit process, which was considerably tightened after the Gulf of Mexico oil spill has been viewed by the industry as a bottleneck in the growth of exploration and production activity in the country. However, with the state of Alaska planning an oil and gas lease sale at the end of this year and a slight improvement in the number of permits issued in the Gulf of Mexico, drilling activity could see a substantial rise in the near future. Other oil and gas majors such as ConocoPhillips (NYSE:COP), BP (NYSE:BP) as well as companies like Anadarko Petroleum (NYSE:APC) have exploration activity in Alaska and the Gulf of Mexico.

We believe there is around 25% upside to Exxon Mobil’s stock, which Trefis estimates is worth $93. Our price estimate for Chevron stands at $104 representing a 5% premium over its current market price.

Big Oil’s Deal to the U.S. – Permits for Jobs

Quoting a Wood Mackenzie report, the CEO of the American Petroleum Institute (API) Jack Gerard stated that favorable policy initiatives could help the Oil and Gas industry create around 1.4 million job in the U.S. and result in output jumping by 10 MMBoE/day by 2030. ^[2] The API, which represents over 480 oil and gas firms, is pushing the government to open non-park federal onshore and offshore areas for development and increasing the number of drilling permits in the Gulf of Mexico to levels prior to the BP spill.

The Obama administration, though it has been battling persistently high unemployment since the downturn in 2008, seems to have other plans. The President has proposed ending the $46.2 billion in subsidies that oil and gas companies to curb the budget deficit which the API CEO has termed as a mistake. ^[1] The API believes that a better way for the government to generate more revenue would be by permitting more exploration and earning the resulting royalties and taxes. Production for some of the oil majors such as BP and Exxon has seen a slight decline over the last few quarters and recovering operations in the Gulf are seen as a possible antidote to the falling output.

Drilling activity to rise in Alaska

The state of Alaska is looking to auction more than 14 million acres in the Beaufort Sea, on the North Slope and in the North Slope foothills towards the end of 2011 for exploration and production. ^[3] Alaska, which has seen seen its production decline every year since 2002, is under pressure to boost exploration activity to keep oil flowing through the Trans Alaska Pipeline system.

The Obama administration also has plans to sell leases in the National Petroleum Reserve in Alaska later this year. The reserve, once identified as a strategic oil reserve for the U.S. Navy, is estimated to hold around 900 million barrels of undiscovered oil and 53 trillion cubic feet of natural gas, according to the latest U.S. Geological Survey. ^[4] Companies such as Shell are already looking to begin operations in the Alaskan Northern Coast. ^[5]

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1. Big Oil to Congress: We Want More Deepwater Drilling, Wall St Cheat Sheet [↩] [↩]
2. Policy shift on oil and natural gas could create 1.4 million new jobs, increase revenue to government by $800 billion, study says, API [↩]
3. Alaska Plans to Delay State Oil-Leases Auction Until December, Bloomberg [↩]
4. USGS Oil and Gas Resource Estimates Updated for the National Petroleum Reserve in Alaska (NPRA), USGS [↩]
5. Shell a step nearer to starting test drilling in Alaska, The Hague Online [↩]