Lack of Medium-Term Lease Program Makes Planning Difficult
By Lori Musser
In a feature story from Issue 3, 2023 of Breakbulk Magazine, we examine the prospects for US fossil fuel projects in the coming years, and some of the regulatory challenges that will need to be overcome.
On the heels of some inflated oil prices, hopes are high along oil and gas project cargo pipelines for a resurgence in exploration and production. But all that glitters is not black gold.
It comes as no surprise that oil and natural gas are America’s leading fuels today, and the US Energy Information Administration reports that oil and gas will continue to be the front runners in 2050, according to its Annual Energy Outlook, or AEO, released in March 2023. The AEO said that the U.S. will also remain a net exporter of petroleum products and of natural gas through 2050, under all case scenarios. However, that doesn’t mean there will be a rush of new exploration and production. The Energy Information Agency expects U.S. production of crude oil to grow a little over 4 percent in 2023 and expects natural gas production to stay flat.
Port Houston, the largest breakbulk and project cargo complex in the U.S., keeps close tabs on the oil and gas industry. Spokesperson Lisa AshleyDaniels said to Breakbulk: “Although domestic demand is expected to stay flat, international demand for U.S. crude product is rising. It is expected that production will increase while exploration blows off some steam following 2022 activity.”
Higher crude oil prices could pave the way for additional rigs in 2023. At the end of March 2023, the U.S. had 83 more active rigs than it had at the same time in 2022.
Because the flow of energy related project and general cargoes through Port Houston is highly correlated with the demand for new oil and gas production, when permitting and rig count increase, there is also an increase in cargo.
Garrett Golding is a business economist in the Research Department at the Federal Reserve Bank of Dallas, or Dallas Fed. He said to Breakbulk: “It’s hard to expect any significant resurgence in U.S. oil and gas exploration this year. What we’ve seen from company announcements thus far likely leads to a repeat of 2022, with steady increases in drilling activity and a slightly lower year-over-year increase in production volumes.”
Unwelcome Surprises
After the first weekend in April 2023, when OPEC+ announced a collective production cut of more than 1.2 million barrels of crude oil per day following Russia’s move to cut 500,000 starting in March, oil prices surged to the highest level since January.
Amanda Eversole called it a Sunday surprise. And not a particularly welcome one. The new cuts add up to more than 1 percent of world oil supplies, worsening an already low supply.
Eversole is the American Petroleum Institute’s executive vice president and chief advocacy officer. She said the API wants U.S. policymakers to find ways to bolster U.S. energy production, with “smart, bipartisan energy policymaking that puts the focus on long-term solutions and stability,” to ensure U.S. energy security.
She acknowledged that unforeseen events, more energy cuts and foreign action are outside of the control of the U.S., but, she said, there are ways to “help insulate America from decisions made half a world away.”
From the API’s perspective, bolstering American energy leadership includes reforming infrastructure permitting processes; increasing access to offshore resources; supporting American production; and taking steps to help unlock access to capital.
Eversole said begging other countries to produce more oil or cutting U.S. energy exports is not an answer because these actions would further reduce America’s leadership in global markets and hurt allies.
Offshore Opportunity
In late March 2023, the U.S. Bureau of Ocean Energy Management, or BOEM, held Lease Sale 259 for the Gulf of Mexico. BOEM reported 32 participants, and US$310 million in total bids, for tracts covering 1.6 million acres in the Gulf.
A second lease sale is scheduled for late September. It is mandated, as was the Lease Sale 259, by the U.S. Inflation Reduction Act, or IRA. The offshore planning and production industry has expressed concern that there are no other future lease sales scheduled, ever.
Pietro Ferreira, senior regional analyst, Americas, at the Energy Industries Council, is more optimistic. He said: “Looking at the exploration side, the results of the Lease Sale 259 … demonstrated there is enthusiasm for E&P work in the Gulf of Mexico. BOEM received a total of 353 bids for 313 blocks, with Chevron and BP winning various blocks. Looking ahead, the IRA provision associating new offshore wind leases to oil and gas auctions is also a good sign for future E&P work.”
There are Gulf projects in the offing. “In the short term, offshore oil and gas production in the Gulf of Mexico will see a boost with new projects coming online, such as BP’s Mad Dog II and Shell’s Rydberg and Dover tie-backs. Indeed, operators such as Shell, Chevron, BP and Talos provide a robust portfolio of new field development projects, which will keep the supply chain busy in the coming years,” Ferreira said. Activity is also ramping up in the Permian basin and Haynesville shale, driving investment in new midstream infrastructure to accommodate increased output, according to Ferreira.
The Five-Year Program Lapse
However, for the better part of a year now, the U.S. has not had a fiveyear offshore leasing program. The program’s lapse creates “risk for future declines in production from one of the country’s most important oil and natural gas production zones – given that offshore oil made up nearly 15 percent of U.S. production in 2022, and the vast majority of it came from the Gulf,” according to API blogger Mark Green.
Not knowing where and when lease programs will be conducted hamstrings U.S. oil and gas producers and their supply chain partners. A fiveyear plan would provide a roadmap and some predictability – vital to an industry with long lead times and high price tags like offshore oil and gas.
An Energy & Industrial Advisory Partners’ study entitled The Economic Impacts of a 5-Year Leasing Program Delay for the Gulf of Mexico Oil and Natural Gas Industry, confirmed that a lapse in the leasing program could signal disaster for U.S. energy security and could eliminate jobs by the thousands.
It could result in no lease sales taking place for several years. “Leasing is critical to the oil and natural gas industry. For example, before a lease is obtained, oil and natural gas companies cannot drill exploratory wells. This potential delay is projected to significantly impact Gulf of Mexico oil and natural gas industry activity. This reduction in leasing activity could lead to reduced industry spending, supported employment and GDP, government revenues, and oil and natural gas production,” according to the EIAP study, which was commissioned by the API and National Ocean Industries Association.
Industry Uncertainty
A Dallas Fed energy survey published in June 2022 collected comments from exploration and production firms on the state of the industry. On the topic of supply chain effectiveness, some companies reported significant delays in obtaining materials and services, as well as costs that were increasing substantially. There were concerns that supply chain issues were materially impacting capital allocation decisions.
Other factors mentioned that might shutter projects included the Biden administration’s so-called “anti-oil, anti-gas, anti-pipeline” stance, a new level of hesitation from investors, and ongoing labor shortages. However, this year’s approval of ConocoPhillips’ massive Willow oil drilling project on Alaska’s North Slope flies in the face of much of that.
One respondent summarized escalating uncertainties in the industry as being strictly aboveground issues: politics, windfall profits tax, surtaxes, leasing bans, product prices, inflation, supply times, material availabilities, contractor availabilities and capital availability.
Survey respondents expressed concern about making obligations based on high prices that would have to be fulfilled when low prices return, especially because industry prices, once adjusted for inflation, aren’t that high.
“The industry is still firmly in the mode of generating returns and maintaining capital discipline and not ramping up drilling activity in response to higher oil prices. Additionally, the inventory of quality drilling locations across U.S. basins is dwindling. These two factors mean production growth in the U.S. is slowing down and will likely level out and start to decline in the next few years,” Dallas Fed’s Golding said.
The Energy Industries Council’s Ferreira added: “We have seen project activity impacted by the inflationary surge in capex costs, which has led Final Investment Decisions to be postponed across global oil and gas markets as developers work on optimizing their projects. I would also highlight the relevance placed on energy security following the Russian invasion of Ukraine, which has put pressure on producers to ramp up output to meet demand.”
On the positive side, “the oil and gas industry will likely enter 2023 with its healthiest balance sheet yet and with continued capital discipline. This could help companies overcome the energy underinvestment of recent years and help enable an accelerated energy transition,” according to Port Houston’s Ashley-Daniels.
Regulatory Mountains
The API shared with Breakbulk that it is currently tracking more than 40 regulatory actions that could impede the U.S. oil and natural gas industry’s license to operate and to distribute energy. A mountain of federal regulatory proposals will, undoubtedly, slow overall energy production and delay the approval of oil and gas infrastructure projects. Despite solid prices, some new oil and gas projects will be impeded by a confluence of many factors, chief of which is political will. Nevertheless, the sheer importance of the industry to the U.S. will ensure that oil and gas will continue to be America’s leading fuels for decades to come. The project pipeline may embrace growing volumes of renewable energy components, but it would do well to save some room for its traditional energy project cargoes too.
Breakbulk Europe 2023 will be hosting a "Global Project Review" main stage session on Thursday 8 June from 12:00-12:30. The session will be presented by Neil Golding, director of market intelligence at the Energy Industries Council. Click here for this year's full programme.
PHOTO: bp’s Mad Dog II Argos platform arriving in Texas. Mad Dog II is one of several projects coming online in the Gulf of Mexico. CREDIT: bp
