Dissecting yesterday’s offshore lease sale

Pumping up the offshore industry has been a key goal of the Trump administration. While it has little control over oil and gas prices, it can affect industry regulation and access.

Improving access to hydrocarbon resources and reducing regulation have been objectives of the Trump administration. So while the results of this week’s Gulf of Mexico lease sale may have been less than earth shattering, they do reflect recognition of a slowly recovering future for the oil and gas business in our offshore waters.

Expanding offshore exploration and development activity along U.S. coasts has been a goal of President Trump. This runs into opposition from many coastal state governors and state legislatures of both political parties. The prospect of visual pollution and fear of actual pollution has swayed these opponents. There is nothing industry or federal government officials can do to change these opponents’ minds. Thus, the offshore oil and gas industry is stuck drilling and producing in the offshore regions it has traditionally explored.

The nearly $125 million in high bids for tracts in yesterday’s sale, was slightly better than the total from a smaller lease sale last August. There were few competitive tracts, as many of the oil company buyers were merely adding offsetting acreage to plays they already have established, so competitors had no reason to compete for these tracts. Think of this outcome as akin to operators’ aggregation of shale acreage to facilitate the drilling of extended laterals, sometimes ranging up to three miles long.

Some media pointed out that the high bid of $7 million by Italian oil company Total, paled in comparison to the $68.8 million high bid in a Gulf lease sale in early 2015. While oil prices had already collapsed by that time, the industry was hoping for a quick oil price rebound, only to be disappointed by the magnitude of the global oil supply/demand imbalance. That reality was captured in BP plc’s CEO Robert Dudley’s comment about preparing for “lower for longer” oil prices.

Before writing the Gulf of Mexico’s obituary, let’s reflect on this history. In May, the industry will celebrate the 50th anniversary of the Offshore Technology Conference, which began about 20 years after the offshore industry’s first out-of-sight-of-land offshore well was drilled in the Gulf of Mexico. That pioneering offshore well came nearly 90 years after the U.S. oil and gas industry was born in Titusville, Pa. Over this span, the U.S. offshore industry has extended operations to every corner of the world.

From the calm, shallow waters of the Gulf of Mexico to the harshest environments of the North Sea and to the deep waters off Brazil, the industry has demonstrated its “can-do” capability. Adjusting to varying operating challenges and economic volatility has been the hallmark of this industry. It is still adjusting to the 2014 OPEC oil shock, but this lease sale showed the industry continues looking ahead to better days.

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

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