The Trump administration has had to rein in expectations for offshore oil drilling, with an aggressive sales pitch and boastful rhetoric mostly being met with tepid interest from the oil industry.
In March, oil and gas companies only bought about 1 percent of the acreage on offer in the U.S.’ largest offshore auction in history. The disappointing figures came after a lot of hype from the Trump administration, including discounted royalty rates.
Meanwhile, Secretary of Interior Ryan Zinke struck a much more contrite tone in his testimony to Congress last week, after proposing an aggressive offshore drilling plan in January, which was met with pushback from most coastal states. “States matter, local voices matter, you matter, and governors matter,” Zinke told a House panel. “I think I know exactly where everyone sits on both coasts. We are shaping our plan. This is not a rule. This is a plan.”
Opposition has come from both Republican and Democratic coastal states up and down both the Atlantic and Pacific Coasts. The political headwinds, combined with the high cost of producing in completely new areas, would likely keep investment on the sidelines, something that Zinke admitted in his testimony.
“What’s also happening, there is no doubt that drilling offshore is more risky than onshore. Investments are moving onshore to the Permian [shale drilling region], that is less risky,” he said. “Unlike the Gulf Coast, there is no subsea infrastructure,” Zinke said. “You would have to start from scratch.”
The disappointing results from the massive March auction in the Gulf of Mexico has also forced a revision of expectations. If the Gulf of Mexico is struggling – where political support is strong, infrastructure is well developed, and reserves are well understood – the prospect of moving forward on Atlantic and Pacific drilling seems out of reach, even before one considers the tough political terrain.
But a new report says that the results of the March offshore auction are not as bad as everyone thinks. The relatively poor results were “more a factor of the Administration’s amped-up rhetoric as opposed to anything surprising or negative about the actual results,” Tommy P. Beaudreau, a former director of the Bureau of Ocean Energy Management (BOEM) in the Interior Department, wrote in a report for Columbia University’s Center on Global Energy Policy.
In fact, the results were “relatively healthy and reflect trends in offshore development strategies and market conditions that have taken hold over the past several years and likely will continue.”
The recovery of oil prices is still rather recent, and several years of low prices have taken a “heavy toll on capital expenditures,” Beaudreau argues.
Moreover, offshore Gulf of Mexico has to compete with other oil assets around the world, including onshore U.S. shale, which has shorter lead times – a significant advantage for cash-strapped oil companies, particularly when the long-term market forecast remains highly uncertain. “This competition did not exist a decade ago when the [Gulf of Mexico] accounted for a significantly higher proportion of U.S. domestic oil and gas production,” Beaudreau said.
He also argues that the industry has dramatically lowered production costs, and moving forward will remain much more disciplined. That means that instead of buying up speculative acreage in auctions as in the past, oil companies are increasingly focused on a “strategic, value-driven approach to leasing decisions,” which has led to a more modest results in auctions. “Companies are focusing on lease blocks that are in prospective areas, fit well with their portfolio, and are close to existing, accessible infrastructure and facilities,” Beaudreau says. The bottom line, he argues, is that the March auction was not a disappointment, but a reflection of this new era in which companies pursue a more methodical approach.
Meanwhile, the oil majors have spent heavily in auctions in Mexico and Brazil in recent months, a sign that they are more interested in offshore basins that have remained off limits to them up until only recently.
The Trump administration has been trying to assert U.S. “energy dominance,” and an aggressive offshore plan was part of that. Even if interest from the industry is not a total disaster, offshore spending and exploration probably won’t go back to pre-2014 levels.