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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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New Gulf Of Mexico Leases Raise Concerns

jack up rig

The Trump administration on Wednesday held a new auction for offshore drilling in the Gulf of Mexico (GOM), yielding some $178 million in winning bids, a slight improvement from its last major lease sale in March which was at the time was called a major setback for the president’s plan to increase oil and gas investment in the region. 

The new sale encompassed 77.3 million acres and 14,474 unleased blocks in federal waters off of the coasts of Texas, Louisiana, Mississippi, Alabama, and Florida. It received 171 bids by 29 companies, with independent oil and gas producer Hess making the largest bid at $25 million. Hess is the eighth largest producer in the GOM and also has offshore assets in Europe, Asia Pacific and South America.

In the previous March sale, oil companies bid on just 1 percent of the total acreage that was offered at the time, raising $124.8 million on 159 bids from 33 companies, including bids from oil majors Royal Dutch Shell, Chevron, Total, and BP.

Just like in March, the Trump Administration put a positive spin on last week’s sale, calling it an improvement, while also downplaying perceptions of reduced interest in offshore oil and gas drilling.

“I look at it as a positive sale,” Michael Celata, GOM regional director at the Bureau of Ocean Energy Management (BOEM), told reporters Wednesday morning. “There is obviously continued interest in deep water. Overall, I still think the Gulf is a very viable place.”

“Bidders … appeared more willing to focus on deep water exploratory prospects than in the last couple of auctions, when companies chose acreage for its proximity to infrastructure and near-term production prospects.”

"Today you saw some companies willing to look at [new] opportunities," as big independent producer Hess and majors ExxonMobil and Norway's Equinor apparently won large block clusters in more remote areas where infrastructure is less built-out than where their current production is, Celata added.

Others held a similar positive view. Global commodities data provider S&P Global Platts said that results from Wednesday's GOM lease sale suggest that oil operators are once again starting to think long-term, selecting acreage in frontier plays that may not pay off for a decade or more.

In April, the U.S. Energy Information Administration (EIA) said that crude oil production in the Federal GOM increased slightly in 2017, reaching 1.65 million b/d, the highest annual level on record.

Although briefly hindered by platform outages and pipeline issues in December 2017, oil production in the GOM is expected to continue increasing in 2018 and 2019, based on forecasts in the EIA’s latest Short-Term Energy Outlook. The EIA expects the GOM to account for 16 percent of total U.S. crude oil production in each year. Related: Would The U.S. Sanction China For Buying Iranian Oil?

Results of last week’s sale are preliminary since the BOEM has 90 days to review the bids and assure that the offers are at fair market value. The agency often rejects several bids in each auction.

Forgotten safety issues

Though it’s been more than eight years since the catastrophic Deepwater Horizon accident in the GOM, the government and even the media seem to have forgotten the incident amid talk of the most recent lease and what it means to the country’s oil sector.

The Deepwater Horizon’s blowout preventer failed to seal the well on the night of the accident because the drill pipe buckled due to a mechanism known as “effective compression.” The accident is considered the largest accidental marine oil spill in the world, and the largest environmental disaster in U.S. history.

However, the latest annual report from the Bureau of Safety and Environmental Enforcement’s (BSEE) SafeOCS reporting system, which details offshore drilling equipment failures, has called for more data sharing among GOM operators. BSEE is an agency operating under the Department of the Interior.

According to BSEE report, offshore drilling rig operators in the GOM reported 1,129 blowout preventer equipment component failures in 2017.

Findings from the agency showed that 18 of 25 active operators in the GOM, representing 45 of 59 active rigs, logged failures during the reporting period, which marked the first full year in which industry professionals could submit confidential well control equipment failure reports under the Well Control Rule.

However, it should be noted that the report’s findings were based on a 59 percent participation rate, meaning 41 percent of the gulf’s operators did not participate, which would have pushed the number of blowout preventer component failures much higher.

“Increasing participation in SafeOCS and sharing safety data across industry are critical for generating meaningful analysis, BSEE Director Scott Angelle said in a press release last month. “The ultimate goal of this program is to identify proactive steps to mitigate risks and ensure offshore operations are safe, reliable and environmentally sustainable.” Related: Can U.S. Shale Stop A Global Oil Supply Crisis?

It should also be noted that a vast majority of reported equipment failures (1,044) occurred subsea, including 902 when rigs were not in operation. Overall, 83.8 percent of all reported failures occurred when rigs were not operating.

The report added that external leaks accounted for 49 percent of observed equipment failures, with some 87.7 percent of those failures occurring on rigs not in operation. Internal leaks (24.4 percent) and mechanical damage (7.2 percent) were the next most common observed failures. Wear and tear were the reported root causes of equipment failure in 53.6 percent of these incidents. Report authors, however, stated that they believed that figure might be an overestimate and would require further research.

More participation needed

The report’s authors added that “collecting more detailed, accurate, timely and relevant equipment failure data can support a more in-depth statistical analysis on root causes of equipment failures and the development of predictive analytics of failure events.”

“The industry can use this information to make changes to current practices and improve safety and equipment reliability.”

By Tim Daiss for Oilprice.com

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