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Trump’s Offshore Plan Unlikely To Spark Drilling Rush

KMZ

Last week, the Trump Administration proposed the most aggressive U.S. offshore oil and gas drilling plan since the Reagan Administration, offering to open more than 90 percent of the federal Outer Continental Shelf (OCS) for consideration of future exploration and development.

The draft proposal—which will now undergo a public comment period and proposed program drafts that will take months—has drawn harsh criticism from the governors of the Pacific states and from Florida.

Analysts, however, think that the opposition to offshore drilling in the West and East coast states is just one of the reasons why the oil and gas industry will not be jumping into a kind of oil drilling rush along the U.S. coasts.

Oil firms will have to calculate if potential huge investments into exploration and into production infrastructure will yield any returns on investment in the prevailing oil prices years from now. In addition, companies will have to start seismic studies in some areas from scratch—for example, areas in the Atlantic and the Pacific were last appraised in the 1980s.

Then oil companies will have to contend with some natural phenomena such as the Gulf Stream in the Atlantic. And last but not least, a possible new administration in 2020 or 2024 could rescind drilling plans, and by then, companies are not expected to have started production in the currently-off-limits waters.

The plan to open almost the entire U.S. coast to drilling is just an initial draft plan and could dramatically change in the form of the proposed program after the comment period ends. The Administration is starting big to have wiggle room to narrow down the areas, according to analyst speculation.

In its current form, the initial plan could potentially unlock up to 65 billion barrels of oil equivalent (boe), consultancy Rystad Energy said last week. This estimate, however, is the high-case scenario in which all unexplored areas would see exploration activities, and disregards constraints such as limited access to capital, insufficient infrastructure, or environmental concerns.

“The question remains, what is the likelihood of companies prioritizing exploration and development in all of these areas. During the last three years, we did not see high interest in exploration in the deep-water GOM,” Nils-Henrik Bjurstrøm, Product Portfolio Manager and Head of Exploration analyses at Rystad Energy, said. Related: The Single Biggest Oil Price Influencer In 2018

The consultancy has estimated that there has been “a tremendous shift of E&P spending towards shale.” Last year, U.S. drillers channeled more than 60 percent of their total investments to shale, and this trend is likely to increase to about 70 percent in the coming decade, Rystad says.

The Bureau of Ocean Energy Management’s (BOEM) latest estimates from 2016 show a mean of 89.87 billion barrels of undiscovered technically recoverable oil and a mean of 327.49 trillion cubic feet of undiscovered technically recoverable natural gas in the federal OCS. Most of those resources are in the Gulf of Mexico, followed by Alaska, the Pacific, and the Atlantic.

Despite the billions of probable barrels left to be discovered, oil prices will be the major determinant in drilling plans, according to analysts.

“In the current commodity pricing environment, I don’t see a lot of appetite on laying down new infrastructure,” Imran Khan, who leads Wood Mackenzie’s commercial valuation team for oil and gas projects in the Gulf, told CNBC.

The laying of new infrastructure is always expensive, and it becomes even more so in states that oppose drilling. States control the first three miles of shallow water, and then the federal jurisdiction begins. Therefore, uncooperative states may dig in and refuse to authorize pipelines and facilities.

“The state can make it difficult to provide the support services in order to maintain production and also to gain production,” Grady Hurley, an oilfield and maritime attorney at law firm Jones Walker, told CNBC. “For the most part, companies don’t want to operate where they’re not welcomed and where there’s other opportunities,” he noted. Related: Is An Oil Price Correction Overdue?

Then in the Atlantic, “You have the Gulf Stream to contend with, which is a consistent 3-knot current from south to north that I don’t think you can put a platform in,” William Turner, senior research analyst at Wood Mackenzie, told Hart Energy.

There’s also the risk of a change of agenda in a new administration that could additionally discourage oil firms from being willing to spend big after they have just turned the corner of the downturn.

“There’s not going to be any platform already producing oil in a seven-year window. That would be extremely fast. Whatever plans they are going to be developing will be subject to a new administration at some point,” Turner told Hart Energy.

Of all the areas currently up on the block, analysts see the Gulf of Mexico and Alaska, especially areas not far from existing infrastructure, as the most viable potential developments.

By Tsvetana Paraskova for Oilprice.com

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  • Bill Simpson on January 10 2018 said:
    Until the prices rise above $70 a barrel for a year, not much will happen offshore, even in the Gulf of Mexico, where prospects for more discoveries are quite good, and state governments in Texas and Louisiana are oil and chemical industry friendly.

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