BY Keith Halliday Will the Gulf spill sink plans to drill offshore in the North? Offshore gas is important to both Northern pipeline proposals

As this column was being written, the oil spill from deep beneath the surface of the Gulf of Mexico was turning into an environmental catastrophe, as well as a financial and public relations nightmare for BP. The explosion that sank the Deepwater Horizon rig gushed thousands of barrels of oil into the Gulf each day.

At press time, the spill was still not as big as the Exxon Valdez disaster in Alaska (which spewed an estimated 11 million gallons of oil), but it’s still very serious. Twenty days after the explosion, BP still hadn’t been able to staunch the flow.

The political reaction was much quicker. California Governor Arnold Schwarzenegger immediately said “Hasta la vista, baby!” to plans he had previously supported for new offshore drilling off Santa Barbara, despite the state’s desperate need for tax revenues. President Barack Obama, who had (embarrassingly) brought out new offshore drilling plans only a few weeks before the spill, toured the area and told news crews that the region faced a “potentially unprecedented environmental disaster.”

In Canada, federal NDP leader Jack Layton called for BP executives to be brought before emergency parliamentary committee hearings, referring to lobbying efforts by oil companies which he said could result in less stringent drilling regulations in Canada’s North.

So does this mean curtains for offshore drilling in the North? In private conversations, many in the industry already complain about the level of environmental regulation in the North. Will there be an outright ban, or new restrictions that make drilling economically impossible?

This is an important question for backers of Northern gas pipelines. The proposed Denali project from Prudhoe Bay to Alberta, for example, relies on “expansion shippers” to cover 20 per cent of the project’s $35-billion (U.S.) costs. It needs yet-to-be-discovered gas to make money in the long run, and backers are hoping offshore gas will be a big part of this.

It’s worth noting that the Gulf disaster involved oil drilling, not natural gas extraction. Natural gas blowouts, while serious, don’t leave giant oil slicks: Mostly the gas burns or dissipates into the atmosphere. But this distinction isn’t going to calm many politicians.

So what does this mean for the North?

To put the BP spill in perspective, two things are important. The first is that the energy industry has absorbed the cost of new regulations before. Or, to be more precise, it has passed costs on to consumers. An example is double-hulled tankers, which became mandatory in the U.S. after the Valdez. They cost more than single-hulled ships, but it hasn’t stopped oil exports from Alaska. Everyone in the Lower 48 just has to pay more for fuel.

The story is likely similar with natural gas drilling in Arctic waters. Relief wells and other safety investments will drive up the cost of producing offshore gas, but if the demand exists then the drilling will still happen.

Which brings up the second point: demand. This is where the outlook gets murkier for supporters of Northern offshore drilling. The U.S. Energy Information Administration’s latest report on proven reserves shows that there is a big difference between oil and natural gas.

Proven reserves of oil from Lower 48 onshore and Alaska have been trending down steadily, from around 30 billion barrels in 1977 to about half of that in 2008. Offshore oil proven reserves, on the other hand, have been trending up. Given the U.S. government’s desire to wean itself off Mid-East oil for security reasons, there will be enormous pressure to keep on drilling for offshore oil.

Natural gas, on the other hand, shows a remarkable surge in proven reserves in the onshore Lower 48, up from around 130 trillion cubic feet for most of the 1990s to over 220 trillion in 2008. This is thanks in large part to large discoveries of “unconventional” gas such as shale gas, which new technologies are making economic for the first time.

Energy companies are bound to exploit these reserves, and this is where new offshore drilling regulations may hurt development of Arctic Ocean gas. If the U.S. government takes a hard line on offshore drilling and instead supports onshore gas drilling in the Lower 48, Mackenzie gas will be made less competitive.

The upshot is that, despite the horrifying photos of the Deepwater Horizon burning in the Gulf of Mexico, offshore drilling is going to continue. But whether that includes natural gas drilling off Northern Canada and Alaska remains uncertain, and probably even more uncertain than it was before the Deepwater Horizon rig blew up.

Keith Halliday is a Whitehorse-based management consultant.