April 2016

Offshore in depth

Offshore reality checks
Ron Bitto / Contributing Editor

Three recent developments in the U.S. offshore sector could be construed as reality checks on the industry’s role in relation to the environment, regulatory politics and the economy. (Editor’s note: Some of the statements in this column are strictly the author’s opinion, and do not necessarily reflect World Oil’s stance.)

Global consensus on climate change. For the past 200 years, the world has depended on coal, oil and natural gas to power civilization and raise the standard of living for much of humanity. But let’s face it: numerous reputable scientists agree that burning fossil fuels creates emissions that are warming the atmosphere and changing the climate at an accelerated pace. Oil and gas leaders can’t shrug off this inconvenient truth.

Efforts to undermine the Paris Climate Accord, by scoffing that it is not legally binding, or that India and China will ignore it, miss the point. In fact, there is a global consensus that climate change is a real problem, and that all nations need to join collectively to head off the catastrophe. The responsible path for the United States, as the world’s largest economy and the only current super-power, is to take a leading role in this cause. The oil and gas industry, which will remain essential to the global economy into the next century, can be a responsible participant in protecting the planet, while simultaneously providing hydrocarbons and the technologies required to extract and use them with the least possible impact on the environment.

Atlantic is off-limits, for now. The current oversupply of oil and gas, and expectations for a long period of low commodity prices, have resulted in substantial cuts in E&P budgets. Deepwater projects that require $60-$70/bbl oil to be economic have been deferred or cancelled. It is a strange world, when the industry can’t find places to store crude oil, and analysts believe that a substantial production decline is just what we need to increase prices and set the oil patch back on its feet.

In this context, the U.S. Department of the Interior announced on March 15 that it had dropped the proposed lease sales for the Mid- and South Atlantic offshore areas from the 2017-2022 leasing program. Interior Secretary Sally Jewell commented, “When you factor in conflicts with national defense, economic activities such as fishing and tourism, and opposition from many local communities, it simply doesn’t make sense to move forward with any lease sales in the coming five years.” The Interior Department estimates that there may be 3.3 Bbbl and 31.3 Tcf of recoverable oil and gas reserves off the Atlantic coast. Some 51 wells were drilled off the Atlantic coast through 1984, discovering hydrocarbons but no commercial reservoirs.  Current seismic technology and a reasonable number of exploratory wells could help establish the local offshore industry favored by coastal state governors. But, by bowing to concerns from the U.S. Navy about structures in navigable waters and coastal communities’ fears of another Deepwater Horizon disaster, the Interior has essentially delayed more drilling in these waters, well into the next decade.

Proposed air quality regulations. On March 17, the BOEM set off alarms in oil and gas industry groups by announcing proposed, updated, air quality regulations, for a full range of emissions from offshore activity in federal waters of the Gulf of Mexico and Arctic Ocean. Last updated in 1980, the new regulations would ensure that operators use current standards in evaluating air quality impacts; require measurement of air quality 3 mi offshore, instead of at the coastline; aggregate emissions from closely grouped facilities owned by the same leaseholder; and consider the impact of supply vessels during their entire transit to and from deepwater areas. BSEE is charged with assessing air quality compliance for OCS operations, while the EPA enforces air quality everywhere else. Comments on the proposed regulations can be submitted during a 60-day period.

An API spokesman reacted, saying that “the agency should not get ahead of the science and propose a rule without the necessary data to justify costly regulatory changes.” The API has every right to present its opinion in the media or during the official comment period. However, we should expect that oil and gas activity will be held to the same strict environmental standards as other large-scale industries, especially if there is a new Clinton administration in 2017.

Tepid bidding for Gulf lease sales. The third sobering development for the offshore industry was the tepid level of bidding in the two lease sales conducted by BOEM on March 23 for the Central and Eastern areas of the Gulf of Mexico. Operators typically bid actively in the Central area, which contains most producing fields. Central Gulf Lease Sale 241 received 148 bids from 30 companies, with $156 million in high bids. (No one bid on acreage in the Eastern Gulf Lease Sale 226.) The Central sale bidding was the fourth-lowest since 1983. Last year’s Central Lease Sale 235 brought $538.7 million in high bids, which was down from $850.8 million in high bids received in Sale 231, conducted in March 2014. While 41 deepwater blocks, mainly in the Mississippi Canyon area, received bids, the overall decline in interest does not portend well for mid-term exploration activity in the Gulf.

Another sign of the times was a demonstration by environmental protesters, who approached the Superdome stage and shouted while BOEM officials announced the bidding results. While their demands for a moratorium on leasing will have little effect on future Gulf sales, a long period of low oil prices likely will continue to dampen E&P company interest in bidding. wo-box_blue.gif 

About the Authors
Ron Bitto
Contributing Editor
Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM
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