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More Federal Land Drilling: Possible, But Not Profitable

Oil Field

As the United States catches its breath following the shock election victory of Donald Trump, the oil industry could be facing significant changes, including the President elects’ open door policy on leasing federal land for oil drilling.

This is a key part of Trump’s energy strategy, which he clearly presented to American voters, in the run up to the election.

One of the major components of the plan is to unleash the $50 trillion worth of untapped shale oil and natural gas reserves, to contribute to Trump’s vision of energy independence for the United States.

Subsequently, the 45th President of the United States believes that this will create millions of new jobs in the energy sector, while conserving natural habitats and resources, bringing what the Trump team says would be an energy revolution.

According to the House Committee on Natural Resources , currently the federal government commands 640 million acres of land, that can be broken down into defence lands, natural parks and forests, and the offshore outer continental shelf.

In theory, all federal lands are available for oil extraction, the perimeters which would preclude drilling on all publicly owned land, are created from Congress legislation.

The new President’s view on this issue is not a total departure from the present incumbent of the White House Barack Obama, who also wanted to streamline permits or drilling on federal lands. Related: Drilling Frenzy? Oilfield Services Booked Out

Although so far, the detail of the oil drilling policy proposal is conjecture, we will need to see what is actually presented in the Interior Department's leasing plans to fully understand what any changes will really mean.

In general, it’s probably just too early to say what extent the presidential changeover will really mean for oil production.

Clay Lightfoot, a Research Analyst on Wood Mackenzie's US Upstream Lower 48 team, reflected: “A lot of factors play into operator strategies of when and where to drill, but oil price is the biggest. With prices where they're at now, companies are keen to invest in areas that yield the most attractive economics, which means areas with existing infrastructure and ample historic production to prove that sufficient oil and gas volumes are present.’’

“In other words, operators want to remove uncertainties, such as how new wells perform and what midstream costs might end up being, to make sure they can generate sufficient returns.”

He continued: “Right now, these areas are largely in the hands of private citizens. In fact, none of the major plays have a significant footprint on federal land.”

“The Bakken, Eagle Ford, Permian with the exception of some federal land in eastern New Mexico, and Marcellus, are all sitting on private land. Any play that takes off due to less regulation would have likely already been discovered.”

The same principle is applicable to offshore projects, where costs are exponentially higher. Leaving the federal government needing to do more than just open the doors to federal waters in order to generate significant activity.

“The resource types found will vary considerably across federal lands.“ Lightfoot added.

“But shale gas and tight oil are likely present throughout parts of it. Exploration, appraisal work, and infrastructure builds would have to be done by operators in order to gain a better understanding of how much oil and gas is technically possible and economically feasible to recover.”

“These activities are less likely to occur in low price environments, due to the added cost and ability to produce more cheaply elsewhere.”

Obstacles to federal land drilling are likely to be found from several avenues, including negative local and state public opinion, which in theory could lead to action in the State and Federal courts.

Non-governmental Organisations could also step in to have their say on state land excavations. Related: Iraqi Kurds May Reject Oil Cuts, Putting Baghdad In Difficult Position

This despite the rigorous processes which are carried out by the Interior Department in their analysis of government land.

Those areas that are deemed to be too complex for commercial use, are usually withdrawn from any activity, there is little doubt that Trump’s pledges will place the magnifying glass of public scrutiny on federal land drilling.

Whether Trump’s vision of an energy independent United States is realistic, Vance Scott, Ernst and Young’s Americas Oil & Gas Transaction Advisory Services Leader, said: “Energy independence is probably technically viable but does not make commercial sense.’’

“There is no point in the United States consumer paying higher prices for fuels developed in the USA, when they can get crude at a much lower cost from Canada, Mexico or the Middle East.”

“This is a fundamental economic theorem in comparative economics. If the demand for oil / natural gas in the rest of the world is high enough, and supplies are restricted, then pricing will justify drilling which could deliver energy independence.” He added.

“If the US producers, including shale players continue to drive technical efficiencies, their breakeven costs may reach a point that can justify energy independence, but that is a very substantial improvement.”

Only time will tell if this, amongst many other vigorous campaign statements from Donald Trump, will become a reality.

By Peter Taberner for Oilprice.com

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  • Race on December 08 2016 said:
    Most economical oil extraction will be on federal land near existing pipelines. That would be Alaska and Utah.
  • EH on December 09 2016 said:
    First off,, I'd like to show my Gratitude and give THANKS to my Lord and Savior Jesus Christ, then 62% elected President Obama, The Saudi Prince-King, our hard working vulnerable UNDER COMPENSATED Hard working Men and Women in the oilfields and Last, but definitely not the last, Elon Musk and the competition in that technology.

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