The Fuse

Low Oil Prices Force Industry to Spurn Gulf of Mexico Lease Sale

by Nick Cunningham | March 24, 2016

The U.S. Bureau of Ocean Energy Management (BOEM), an agency within the Department of Interior, held an auction on March 23 in New Orleans for the rights to drill for oil and gas in the Gulf of Mexico, and the results were disappointing. The agency auctioned off leases in the Central Planning Area (CPA), a swathe of territory in the central Gulf of Mexico off the coast of Louisiana, Mississippi and Alabama. The lease sale yielded a disappointing $156 million in high bids, covering 128 tracts across a little over 693,000 acres. Shell Offshore led its competitors with 12 high bids, totaling $24 million. Given the current state of the oil markets, it shouldn’t come as a surprise interest was so low.

The results from the BOEM’s auction this week were disappointing. The weak interest in the Gulf of Mexico from the industry stems mostly from the current low oil price environment.

The Outer Continental Shelf in Gulf is a major source of U.S. oil production, and it is one of the few areas of the country that has held up during the oil price downturn. Offshore drilling projects are capital-intensive multiyear propositions that do not stop on a dime, even when oil prices crash. In fact, while the shale industry is in decline, the EIA expects offshore oil production to continue to rise, jumping from 1.63 million barrels per day (mbd) in 2016 to 1.91 mbd by the end of next year. Royal Dutch Shell expects that its Stones project will come online this year, adding 50,000 barrels per day to the company’s output more than ten years after its initial discovery. Noble Energy’s Gunflint field was discovered in 2008, a project the company is putting the finishing touches on in 2016.


The oil fields of tomorrow

Longer-term expensive projects are likely to become increasingly rare as the oil industry looks to repair balance sheets after years of overspending, which has become untenable with the crash in oil prices. Still, when compared to risky exploration regions such as the Arctic, the Gulf of Mexico is a known entity. Oil explorers are still interested in the Gulf even though oil prices remain low.

Longer-term expensive projects are likely to become increasingly rare as the oil industry looks to repair balance sheets after years of overspending.

Nonetheless, Wednesday’s auction was the fourth worst result for the CPA, dating back to 1983. The previous eight lease sales as part of the 2012-2017 five-year program raked in a combined $3 billion on 1,071 successful leases. Even worse than the CPA, the auction for the Eastern Planning Area (EPA) – off the coast of southeastern Alabama and West of Florida – received no bids. Much of the EPA remains off limits due to a congressional moratorium that will remain in place until 2022.

“Though these sales reflect today’s market conditions and industry’s current development strategy, they underscore the President’s commitment to create jobs and home-grown energy through the safe and responsible exploration and development of our offshore energy resources,” Interior’s Assistant Secretary for Land and Minerals Management, Janice Schneider, said in a statement.

Opposition to offshore drilling on display

The Interior Department was disappointed with the sale results, but one thing the agency failed to mention in its press release was that it struggled to even administer the auction. Protesters loudly disrupted the proceedings at New Orleans’ Super Dome on March 23.

A collection of local activists, national environmental organizations, and indigenous rights groups held placards, marched and shouted “shut it down” during the auction, drowning out government officials. The news spread quickly across social media on Wednesday, and shows how environmental groups have been gaining ground on the industry in recent years. Though President Obama has frustrated them at times, he appears increasingly willing to block energy development as he eyes his environmental legacy. The Obama administration cancelled a lease sale in the Arctic in October 2015 after Shell decided to pull the plug on its ill-fated drilling campaign in the Chukchi Sea. The Interior Department cited “market conditions,” but many viewed the decision as a victory for environmentalists. A month later, President Obama also put an end to the dragged out Keystone XL affair, delivering a loss to TransCanada. More recently, the Obama administration ruled out lease sales in the Atlantic Ocean as part of its 2017-2022 five-year program, a reversal after several years in which the Interior Department appeared to be slowly preparing for the opening of the Atlantic Basin to oil and exploration.

Offshore drilling not a priority

Still, the poor results from the March 2016 BOEM offshore auction cannot be attributed to the protests – the dismal state of the oil markets deserve much more credit. Oil explorers can always return to the Gulf of Mexico, but for now they are playing it safe.

The poor results from the March 2016 BOEM offshore auction cannot be attributed to the protests – the dismal state of the oil markets deserve much more credit.

The oil industry has put off $230 billion in investment in at least 63 major oil and gas projects, according to a January 2016 assessment from the Oslo-based Rystad Energy. Those delayed projects represent about 3 mbd in peak production. Wood Mackenzie says the sum of deferred investment reaches a much higher $380 billion.

In fact, the dearth of upstream investment could be felt sooner than many realize. Rystad Energy predicts that the lack of new production will fail to compensate for natural depletion from existing fields in 2016, a negative balance that could persist through the rest of the decade. A shortfall in output will likely drive up prices once the current supply overhang is worked through.

The International Energy Agency (IEA) backed up that sentiment. “We need a lot of investments just to stand still,” Neil Atkinson, the head of the IEA’s Oil Industry and Markets Division, said at an energy conference in Singapore on March 23. “There’s danger as we are reaching a point where we are barely investing upstream. If investment doesn’t resume in 2017 and 2018, we can see a spike in oil prices as oil supply can’t meet demand.”