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Is Deepwater Drilling More Profitable Than Shale?

Conventional wisdom in oil markets…

Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Trump’s First Step To Boost Gulf Of Mexico Drilling

offshore rig

Small but potentially very important item for oil and gas explorers this past week. With the U.S. government making drilling much more attractive in one of the world’s go-to petroleum destinations.

The Gulf of Mexico.

The US Bureau of Ocean Energy Management (BOEM) announced last week it is lowering royalties on oil and gas production in the shallow water Gulf of Mexico. With rates set to drop to 12.5 percent, from a current 18.75 percent.

The revised rates will apply to wells drilled in less than 200 meters water depth. With deeper-water wells continuing to command the 18.75 percent royalty.

Changes in royalties will apply to all new wells in shallow water going forward — but will not be applied retroactively to existing projects.

BOEM noted that “hydrocarbon price conditions and the marginal nature of remaining [Gulf] shelf resources suggest a royalty rate reduction is an appropriate and timely action.” Which makes sense, given the agency saw bids on shallow water acreage last year fall by more than 90 percent as compared to 2014.

The government is thus trying to bring drillers back to the shallow Gulf by offering better fiscal terms.

Of course, one of the biggest drivers here is President Trump’s “energy dominance” platform. Which he has been pushing to agencies across the U.S., in a drive to streamline and promote new drilling for oil and gas.

This week’s move is almost certainly an offshoot of that presidential pressure. And thus may represent the first big investment opportunity to come down in natural resources because of Trump’s election. Related: Will Oil Inventories Continue To Fall Over The Summer?

For E&Ps, the lower royalties could indeed create opportunities. With overall government take in the Gulf of Mexico already having some of the lowest rates globally.

Drillers here were having good success prior to the collapse in oil prices. With the shallow water region even seeing a boom in private equity investment, pouring billions into projects here.

This week’s royalty change could bring back some of that investment excitement. Watch for the industry response during upcoming Gulf of Mexico bid rounds — with the next round scheduled for August 16.

Here’s to necessary changes.

By Dave Forest

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  • Bill Simpson on July 10 2017 said:
    It would have been a big deal 50 years ago.
  • MontanaOsprey on July 10 2017 said:
    They need to bring down the new deepwater royalty rates to 8.00% or less. It's a lot, lot more expensive (try $5 Bil) for something like deep water exploration and the related Thunder-horse drilling and production platform, a hundred fifty miles or more from shore!

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