In a striking about-face, the Interior Department announced yesterday that it wants to allow drilling in nearly all U.S. waters, the single largest expansion of offshore oil and gas leasing ever proposed by the federal government.
The agency said it will hold 47 lease sales in every region of the outer continental shelf but one between 2019 and 2024. The updated five-year plan, required by President Trump in an executive order in April, puts regions that were long off-limits to oil and gas development back in play.
Planning areas in the Pacific Ocean and the eastern Gulf of Mexico are included in the new plan, as well as more than 100 million acres in the Arctic and along much of the Eastern Seaboard. Former President Obama placed the latter two regions under a drilling moratorium in the last weeks of his presidency.
"This is a start on looking at American energy dominance and looking at our offshore assets and beginning a dialogue of when, how, where and how fast those offshore assets should be or could be developed," Interior Secretary Ryan Zinke said in a call with reporters.
Industry groups applauded the vast expansion and said the plan, which opens 90 percent of the outer continental shelf to drilling, places America on its way to achieving Trump's desired "energy dominance."
"This is going to be an amazing plan. This really is a statement to the entire world," said Tim Charters, senior director of governmental and political affairs with the National Ocean Industries Association.
While the oil and gas industry cheered, analysts and even some industry representatives cautioned that the plan's signal may not immediately boost offshore development.
Low oil prices and plentiful supply from onshore plays in Texas' Permian Basin and in North Dakota remain a quicker and cheaper bet for oil companies, experts said. While the new drilling plan provides a plethora of options for development, investing in regions like the Atlantic Ocean — where little drilling has occurred — could cost billions of dollars in new infrastructure. Additional costs could also come from litigation initiated by state attorneys general and environmental groups, which fiercly oppose the expansion.
"If you do think you have a discovery there, how are you going to get it to shore? Are you going to tanker it in? Are you going to build a subsea pipeline?" an oil and gas industry source said. "You're looking at potentially billions and billions of dollars in some of these frontier areas that don't have any existing infrastructure."
That also raises a fundamental question for oil and gas companies: Are they willing to invest in expensive projects with long timelines as some analysts project constrained global oil demand and an emergence of climate policies?
In the draft proposed plan, Interior's Bureau of Ocean Energy Management (BOEM) noted that major industry players, including Chevron Corp., Anadarko Petroleum Corp., Statoil ASA and BP PLC, have expressed interest in unexplored areas. But it could take years to tap those regions for oil.
"You want to be able to get the resources to the market," the oil and gas industry source said. "The demand is going to be there, for sure — maybe 15 to 20 years down the road; it's hard to say. It will be interesting to see how that all plays out given the long timelines you need for these projects."
Some shareholders have pushed major oil and gas companies to disclose the risks their assets face due to climate policies. The idea is that as governments become increasingly concerned about rising temperatures, policies to restrict carbon emissions may follow. Reserves that companies had been banking on for future revenue could potentially be devalued, becoming so-called stranded assets.
Charters said he thinks the projections of a downward trend in oil demand are overblown. He pointed to a Wood Mackenzie study released last month that showed the emergence of electric vehicles would displace 1.8 million barrels per day of oil demand in 2035. Combined with instability in oil-producing countries like Iran and Venezuela, Charters said, there's plenty of reason to believe new investments will be needed.
"I think everybody has been dealing with that stuff differently," Charters said of stranded assets.
For now, oil and gas companies are putting the issue of stranded assets on the back burner. They would rather have the option of bidding on leases and deciding whether to explore and produce at a later date. After all, the understanding of oil markets and the policy picture could change significantly between now and 2024, the final year covered in the draft plan floated yesterday.
"While general assumptions about declining future oil demand are consistent with our long-term view of the energy transition that is underway, declining oil demand is not a condition we are experiencing today," Royal Dutch Shell PLC spokesman Curtis Smith said in an email. "In fact, it's quite challenging to keep up with current demand while production from offshore fields naturally declines year over year. Even if global demand were to remain flat, continuous investment — including robust lease sales and new exploration — will be required to keep pace."
That said, some of the lease sales and new exploration considered in the draft plan come with sizable challenges. The Atlantic Seaboard is one of them. There is strong opposition to opening the coastline to oil and gas development, with more than 1,200 local, state and federal officials having raised concerns that it could jeopardize fishing and tourism.
Opponents include the governors of New Jersey, Delaware, Maryland, Virginia, North Carolina, South Carolina, California, Oregon and Washington; more than 150 coastal municipalities; and an alliance of more than 41,000 businesses and 500,000 fishing families.
Pavel Molchanov, an energy analyst at financial firm Raymond James, said those are just some of the factors that could deter most oil companies from investing in "frontier exploration" or places like the Atlantic where development has been limited.
"Companies are not going to drill just because the government said those areas are available to drill," he said. "There has to be an economic justification for companies to invest capital, particularly when it comes to high-risk opportunities."
Smith said Shell pursues "economically resilient projects that are scoped, designed and safely operated to withstand the unpredictable ups and downs of the oil market" and added that "deep water is a growth priority."
The main point of the draft plan is that it's important to maintain an opportunity to bid on leases and explore untapped areas, said Christopher Guith, senior vice president of the U.S. Chamber of Commerce's Global Energy Institute.
"This isn't about January 4th, 2018," Guith said. "I think it's pointless to look at today's prices and think they have any material impact on industry interest 15 or 20 years from now. But as a matter of policy, that's not the government's job. ... The federal government's job is to provide a more energy-secure future, and making more federal energy sources available does that."
Guith said some areas are likely to be more attractive than others.
The Arctic already has drawn suitors, as the Trump administration gave Eni US, a subsidiary of the Italian energy firm, permission to explore for oil in the Beaufort Sea. The Atlantic might be a tougher sell, though. Drilling has been off-limits there for nearly four decades, so there's a dearth of information on what's actually beneath the ocean floor.
Interior has taken additional steps to reduce the financial burdens facing offshore developers in the hope of boosting investment. Last month, the agency announced it intends to rescind key safety regulations enacted by the Obama administration in 2016 to prevent another Deepwater Horizon oil spill disaster. Earlier this year, BOEM slashed royalty rates from 18.5 percent to 12.5 percent for leases in water less than 200 meters deep in the Gulf of Mexico. It was an attempt to "reflect recent market conditions," according to a press release.
Molchanov is unconvinced that deregulatory measures could increase interest in offshore oil and gas development.
"It's simply the fact that the economics of drilling shale resources in places like the Permian Basin and in North Dakota, those areas offer better geology and therefore better economics than exploring in areas no one has explored before," he said. "When companies drill in these shale areas, those wells begin to generate cash flow almost instantaneously within weeks, whereas if companies were to drill hypothetically off the coast of Florida, let's say, there is no infrastructure, and all of the equipment would have to be brought in from scratch."
It will take at least a year before any final decisions about leasing areas are finalized, the agency said. It noted that areas can be removed from the five-year plan, but not added. The release of the draft yesterday kicks off a 60-day public comment period. BOEM has scheduled 23 public meetings to gather in-person comment and will have to conduct a full environmental assessment.
Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.