Outlook mixed as federal government prepares for Gulf offshore oil auction, billed as largest in history
WASHINGTON — Vast swaths of the Gulf of Mexico will go on the auction block for offshore oil and gas drilling in less than two weeks. But the 77-million-acre sale, billed as the largest in the country’s history, may not shake off the offshore oil industry's three-year slump.
With oil prices hanging below the $65-per-barrel mark and plenty of appealing prospects in the shale fields of Texas and the Dakotas, analysts and industry observers suggested that interest in this round of lease sales won’t differ dramatically from a similar auction in August that yielded disappointing results.
In an effort to juice interest from oil companies in new offshore drilling ventures, the Trump administration cut the royalty rate the federal government will charge on some of the shallow-water tracts to 12.5 percent for both the August and upcoming March 21 sales.
Deep-water leases, which are generally more lucrative and appealing to drill, will still carry the longstanding 18.75 percent rate in this month's auction.
But a federal advisory panel has recommended cutting to 12.5 percent, the lowest rate allowed by law, on all offshore leases on all leases going forward. That recommendation is now sitting on Interior Secretary Ryan Zinke's desk.
Some hope reduced royalty rates — essentially the cut of future oil sales the federal government takes on future oil production — will drive a rebound in offshore drilling activity.
Others worry that the cut could shortchange taxpayers and the state of Louisiana, which depends on tens of millions in federal Gulf of Mexico oil revenue to fund coastal restoration projects.
Louisiana receives a cut of federal Gulf oil royalties under a revenue-sharing arrangement which began delivering its first payments to Louisiana and other Gulf Coast states in recent months. The deal, set up under the 2006 Gulf of Mexico Energy Security Act (GOMESA), has so far fallen short of initial projections.
Louisiana for years had anticipated $140 million in annual revenue from the program but now expects half that amount when the first major check arrives this spring, with the downturn in offshore drilling and lower prices largely to blame.
Alabama, Mississippi and Texas are also included in the GOMESA arrangement — though Louisiana, whose waters account for the bulk of the U.S.'s offshore production, will see the biggest share.
"The thought is by lowering the (federal royalty) percentage it would result in more exploration in federal water which would in turn result in more revenue," Gov. John Bel Edwards' office said in a statement. "However, there is no guarantee that will happen — and the proposal will likely result in more uncertainty on the amount of revenue the state would receive through GOMESA."
Louisiana has earmarked GOMESA revenue for projects designed to slow coastal land-loss and strengthen flood and hurricane protections.
And while the state's GOMESA cut won't come near covering the cost of Louisiana's ambitious 50-year coastal master plan, it is currently the only major, settled funding stream aside from the state's settlement with BP over the 2012 Deepwater Horizon disaster.
U.S. Rep. Garret Graves, a Baton Rouge Republican who led the state's Coastal Protection and Restoration Authority under former Gov. Bobby Jindal before running for Congress, said it's possible charging oil companies lower royalties might entice them to drill and produce more — resulting in more federal revenue despite the lower rates.
That's what happened after President Bill Clinton signed the Deep Water Royalty Relief Act in 1995, Graves said. And lower royalties might also spur companies to offer the federal government more up-front, guaranteed cash for leases, sending more immediate money into the federal and Louisiana coffers.
Looming potential changes in deep-water royalty rates could dampen interest in the upcoming March 21 auction, Graves said, with companies potentially holding off for better deals down the line — something the congressman likened to shopping just before Black Friday.
Graves said any changes in royalties need to be carefully calibrated "to make sure taxpayers are getting the full value for their assets."
"I wish they didn’t have to cut royalties — that hurts Louisiana. It can mean, depending on how they structure the offer, less money for Louisiana," said U.S. Sen. John Kennedy, R-Louisiana. "But the only thing worse than less money is no money and, right now, the appetite for oil and gas drilling in deep water is not what it was."
The Governor's Office said they fear that the small change in royalty rates will not affect the overall equation for companies that are competing and making decisions in a complex, global marketplace.
"We support more exploration off of our coast, as we have shown for many years, but any policy that takes away money from our coast is uninformed and irresponsible," the Governor's Office said, "especially when you consider the fact that it’s Louisiana’s coast that supports the infrastructure which allows the exploration to occur in the first place."
Oil-industry analysts who spoke with The Advocate said cutting royalty rates would alter corporate calculations of potential risks — but were skeptical that rate changes would fundamentally alter industry interest in the Gulf of Mexico.
"I don’t know if that would sway a company to bid or not but it would probably encourage ones that are bidding to be more aggressive," said Brian Youngberg, a senior energy analyst for the investment firm Edward Jones.
Most oil companies are going to approach potential Gulf of Mexico projects relatively conservatively, Youngberg said, "stress-testing" potential investments to ensure at least modest profits even if oil prices drop further in coming years.
But oil prices aren’t the only thing driving investment decisions for large, multi-national oil companies. Most want a diversified portfolio of projects, Youngberg said.
Although big players like Chevron have put growing money in the shale fields, Youngberg said, large corporations “don’t want to put all their eggs in one basket. (...) The Gulf of Mexico could work in this environment.”
Kevin Book, managing director for ClearView Energy Partners, said a number of the major oil corporations are also looking to make major investments to replace dwindling older projects and avoid a potential shortfall in coming years.
Although Book said oil companies will probably continue to prefer shale plays — particularly in the Permian Shale in Texas and New Mexico — they’ll also continue investing in big offshore projects as well.
“The lease offering is important because it opens up the next wave of investment if that wave is ready to open up,” Book said. “Shale can’t do it all and, at some level, operators are going to have to start putting money to work to replace reserves in the future and support demand.”
The deep-pocketed oil companies with the resources to undertake deepwater Gulf of Mexico projects, Book said, are global players looking at other promising areas for new oil and gas development, including vast shale deposits in Argentina and offshore plays in Brazil and Mexico.
The Trump administration has also vowed to open up domestic oil-rich areas in northern Alaska and the Arctic in addition to controversial proposals to allow drilling along the Atlantic and Pacific coasts.
But the extensive oil-producing infrastructure in the western Gulf of Mexico — including existing pipelines, refineries and ports — make it a much easier and cheaper area to develop, Book said.
Yet any hopes of a new drilling bonanza in the Gulf of Mexico would be badly misplaced, said David Dismukes, executive director of the LSU Center for Energy Studies. Lower prices and competition from shale wells — which can be developed faster and cheaper than offshore oil — will keep a lid on enthusiasm.
“At the end of the day, while you can have supportive public policies that help facilitate oil and gas drilling, you can’t undermine the market,” said Dismukes.
Dismukes likened the Trump administration's efforts to boost offshore development with other initiatives to prop up domestic coal production, an industry buffeted by competition from cheaper natural gas and renewable energy sources.
Short of banning hydraulic fracturing — the method drillers developed in recent decades to unlock oil and gas from shale formations — Dismukes saw little chance of a return to the boom days in the Gulf.
"The market prices aren't high enough to sustain the investments that are required to drill out in" deep-water areas of the Gulf of Mexico, Dismukes said. "You’re going to get some interest out there but it’s not going to be like 1997 all over again."
The record-breaking auction comes ahead of an ambitious — and controversial — five-year leasing plan proposed by Interior Secretary Zinke and the Trump administration which would open nearly all federal U.S. coastal waters to energy development.
The plan, which calls for dozens of auctions beginning in 2019, has faced pushback from states up and down the Atlantic Coast and in Florida, where offshore drilling is unpopular and pristine beaches attract throngs of tourists.
Politicians from both parties have come out against the proposal, with Republican and Democratic governors of Atlantic states seeking exemptions for their coastlines.
In Louisiana, where offshore oil rigs and other energy infrastructure already crowd the coastline, politicians and local leaders have been largely enthusiastic about expanded development.
But local and national environmental groups have staunchly opposed additional drilling and have vowed to fight some of administration's proposals in court.
“Rolling back vital safety measures while expanding offshore leasing is a recipe for a disaster. The oil and gas industry has shown time and time again that it is unwilling or unable to prevent spills and accidents here in the Gulf and now the Trump administration is putting even more communities at risk,” said Raleigh Hoke, campaign director with the Louisiana-based Gulf Restoration Network, in a statement opposing the lease auction. “It’s time to end all new offshore leasing in the Gulf and beyond.”
Athan Manuel, director of the Lands Protection Project for the Sierra Club, likened using oil revenue to restore the state's coast to "smoking more cigarettes to try to cure your lung cancer."
Manuel argued that oil and gas development has contributed mightily to coastal erosion and that rising seas triggered by climate change are now the biggest threat to the state.
"We know what causes global warming: the burning of fossil fuels," Manuel said.