IEA: BP’s oil spill threatens future supply

The International Energy Agency (IEA) expresses major concerns over future oil supply, as new regulations threaten to tighten deepwater drilling, following BP’s Gulf of Mexico oil spill

The Paris-based IEA has revealed that the explosion on BP's Deepwater Horizon oil rig from the Macondo oil well in the Gulf of Mexico in April did not only significantly push up crude oil future prices in July but it also threatens future supply, as regulators tighten up any offshore drilling activity.

"This year's Macondo disaster in the deepwater US Gulf highlights ever‐present supply risks," said the IEA in its monthly Oil Market Report. "[BP's oil spill] also places the ability of the industry to access important new reserves on a knife‐edge. Some 30% of existing global oil, and nearly 50% of new supplies by 2015, needs to be sourced from offshore [supplies], much of it from deepwater."

Crude oil futures trended higher in July on stronger financial markets and supply outages in the US Gulf of Mexico and the North Sea. By early August, prices rose to their highest level in three months, flirting with the $100 per barrel (bbl) mark before retreating on more comfortable supplies and concerns over the global economic recovery. West Texas Intermediate (WTI) light sweet crude oil futures contract and New York Mercantile Exchange's (Nymex) new Brent futures contract currently stands near $80/bbl.

In July, the IEA was forced to recalibrate its oil market assessment methods, citing "game changing events", such as the BP Gulf of Mexico oil spill. Meanwhile, market experts have unveiled various reports showing that the Macondo disaster will tighten global supply on various levels.

In the US, the government has placed a six-month ban on new drilling in the Gulf of Mexico. The temporary ban, imposed in May, could be lifted in November 2010 with only a modest impact on supply, but the long-term regulatory burden remains unknown and could lengthen lead times, increase costs across technology and change project economics.

Barclays Capital's Global Energy Outlook: Value after Macondo report said that the oil spill will tighten global oil supply as US oil production is set to wane, following expectations that the disaster will lead to stricter regulation and closer scrutiny of drilling operations in the US.

Barclays Capital added that the oil price for the end of 2010, which currently stands at $90/bbl, looks "undervalued".