US should consider new measures to boost deepwater exploration

The latest US Gulf of Mexico lease sale, with record acreage up for bid and tweaked fiscal terms, was positioned by authorities as one that would boost regional investment in a low-price environment. The results suggest that authorities may need to consider new measures, especially considering the emerging competition from Mexico, Brazil, and other regions that are aggressively seeking new investments.

The US GoM Lease Sale 250, held last month, drew $124.7 million in high bids for 148 tracts covering 815,403 acres in the Western, Central, and Eastern Planning Areas. Thirty-three companies submitted 159 bids that totaled $139.1 million. The sale included 14,474 unleased blocks, from 3 to 231 mi (5 to 372 km) offshore in water depths ranging from 9 to more than 11,115 ft (3 to 3,400 m).

The total number of bids and participating companies in this sale were up from the region-wide US GoM Lease Sale 249, held last August. But, despite a 60% increase in the acreage available for lease this round, total high bids increased by only $3 million.

Most of the bidding activity focused in areas where the plays are known, and the infrastructure is well-established. International majors BP, Chevron, and Shell exceeded by far all other bidders in the total number of high bids and sum of high bids.

Shelf bidding improved this round, possibly led by the lowering of the royalty rate last year from 18.75% to 12.5% for leases in less than 656-ft (200-m) water depth. All other leases were subject to an 18.75% royalty rate. For blocks in 0 to 656-ft water depth, the number of bids increased by 77% and total high bids were up by more than $6.5 million.

Commenting on the results of this latest lease round, William Turner, senior research analyst at Wood Mackenzie, said: “Although we are in a climate where a lot of projects begin to make sense again in the Gulf of Mexico, operators appear to still be in a ‘wait and see’ mentality when it comes to exploration, looking for stability in oil prices. Meanwhile, some patient but dedicated operators are on the brink of cracking the code on ultra-high-pressure developments. Once the industry sees some proven developments in fields like Anchor, others will follow suit and we will begin to see the return of significant volumes being discovered and developed in the region.”

A new report by Wood Mackenzie that assesses the future cost of new oil supply finds the breakeven of deepwater GoM much higher up on the cost curve compared to deepwater Brazil. The report estimates that the increase in future production from offshore conventional green fields will be led by Brazil and Guyana, with average breakevens of $48/bbl and $40/bbl respectively.

While the production of oil and gas from the deepwater GoM may reach an all-time high this year, US authorities should consider the possibility of an impending production decline if the trend in low exploration drilling continues. Improving the fiscal terms for deepwater development, such as lowering the royalty rate for future lease sales, could help boost new investments and promote competition with other nations that are aggressively seeking to develop domestic resources.

Lease Sale 250 was the second offshore sale held under the national OCS program for 2017-2022. Under this program, 10 region-wide lease sales are scheduled for the GoM. Two lease sales will be held each year and include all available blocks in the combined Western, Central, and Eastern GoM Planning Areas.

In January of this year, Secretary of the Interior Ryan Zinke announced a draft proposed program for a new national OCS program for 2019-2024. The draft proposed program makes more than 90% of the total OCS acreage and more than 98% of undiscovered, technically recoverable oil and gas resources in federal offshore areas available to consider for future exploration and development. The 60-day public comment period for the draft ended on March 9. The BOEM will develop and publish a proposed program for public comment later this year, followed by the proposed final program expected in 2019.

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