Will divided government chill the offshore energy industry?

Recovery for the offshore world has been slow, inconsistent, uneven and long awaited. If slow and steady wins the race, 2018 pointed to an upsurge in offshore activity in 2019. Prices crept up, costs scaled down and confidence, with some swagger, re-emerged at offshore industry meetings. But both economics and federal policies will dictate the success of our industry.

Recovery forthe offshore world has been slow, inconsistent, uneven and long awaited. If slow and steady wins the race, 2018 pointed to an upsurge in offshore activity in 2019. Prices crept up, costs scaled down and confidence, with some swagger, re-emerged at offshore industry meetings.

But both economics and federal policies will dictate the success of our industry. The economics of the commodity prices has the most obvious impact. For the most part, prices continued an upward trend until the end of last year. Of course, decisions regarding global oil output by OPEC and Russia impact the stability and volatility of the oil market, but economic growth in non-OECD countries and the China/Asian market also foreshadow the price of energy. Simply put, the stronger those economies are, the more energy, particularly oil and natural gas, will be needed; and commodity prices will continue to climb.

Thanks to a change in US policy, foreign markets are open for business to US producers. Oil and LNG exports are expected to increase as the world economy demands more energy. Renewables will continue to garner an increased share of that expected energy market, but most experts predict that the lion’s share will remain with traditional fuel sources for the foreseeable future.

The real competition with the US offshore market comes from two sources: onshore production and activity offshore Mexico and South America. Many US producers, particularly majors, make investment opportunities based upon estimated returns; these opportunities can be onshore or offshore. Large offshore plays have been producing more oil for the Gulf of Mexico, but the investment decisions for those projects were made up to 10 years ago. As onshore plays have become more profitable, investment dollars have literally dried up for many offshore areas. The silver lining of low commodity prices resulted from producers and service companies cutting expenses, therefore creating some scenarios where existing fields and tieback projects are increasingly competitive with new onshore prospects. Many on the service company side would say that these innovations and cost-cutting measures were not voluntary, but were needed to survive, and are not sustainable over the long term. While overall higher prices will ease tension, producers and service companies must continue joint efforts to find ways to survive in the US offshore market.

Brazil is once again attracting companies to their offshore space. In addition, the seemingly endless potential of making giant discoveries offshore Guyana will draw more international attention. The “newness” of the Guyanese market provides an opportunity for developing a legal and regulatory scheme designed for today’s technology and economic realities.

Where does that leave the US offshore market? I would say at a crossroads: one road leading to retreat, the other leading to American energy dominance in the international arena. But there is an obstacle to a resurgent US offshore energy market – the “no new access” philosophy. Currently, 94% of the US outer continental shelf (OCS) is closed to exploration and development. I do not know of another country with an active offshore energy program that has closed off 94% of its potential. The release and approval of the new Five Year Program will hopefully reverse that 1970s mindset.

Frankly, government policies dictate the success or failure of offshore energy. One of the most glaring areas of improvement could be the royalty rate charged by the US government. Over the past generation, bonus bids (the amount paid by companies to receive offshore leases) have been competitive and reflected the market. When prices and demand were high, so were the bonus bids.

The US consumer, federal and state treasuries all benefit from the payment of bonus bids. However, the current 18.75% royalty rate should be re-evaluated. Onshore royalties at 12.5% and the current 18.75% offshore rate will not encourage the development of new deepwater plays. Royalty reform may be the most meaningful change that could actually boost US offshore exploration.

Other federal policies that should make a difference in 2019 include the final well control rule; a round of discussion on the new air quality permitting; another stab at a consistent logical supplemental bonding and financial assurance program; and continual improvement in the rigs-to-reefs process.

The 2018 elections brought back a divided government. The administration’s efforts to clarify and reduce the regulatory burden on energy development will be questioned, examined, and likely stalled in the House of Representatives. The good news is that the Senate is unlikely to go along with many of the measures that will be passed by the House. Compromise will be necessary on the basics, including a budget, appropriations for government functions, and policy direction.

While divided government is not new, it is still a challenge. The only guarantee at this time is that it will not be boring. •

Randall Luthi
President
National Ocean Industries Association (NOIA)

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