Supply-Side Concerns Follow Lackluster Gulf Lease Sale

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

The third of the 30 auctions planned for the U.S. territorial waters of the Gulf of Mexico drew in far less monetary interest than the first one from December. That comes as production trends point downward amid global supply-side concerns.

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IEA Sounds Alarm on Oil Supply

With ongoing supply-side concerns stemming from the war in the Middle East, a U.S. auction for offshore drilling rights turned in only mediocre results as government data show Gulf of Mexico production could be on the decline.

Industrial Info Resources in a note to clients on Thursday reported that Qatar Energy was running its Ras Laffan refinery at reduced rates because storage tanks are full due to export restrictions through the Strait of Hormuz.

The condensate refinery can produce around 292,000 barrels per day (bpd) and is running at around 50% capacity. Supplies from regional producers are limited. In the United States, refiners looking for heavier slates of crude oil from the Middle East are facing setbacks.

With export arteries that can avoid the Strait of Hormuz, Saudi Arabia managed to deliver 100,000 bpd on average to U.S. refiners over the week ending August 7, federal data show. That's compared to no barrels at all over the prior two weeks.

The 400,000-bpd Jazan refinery complex in Saudi Arabia is likely to remain offline through August following a drone attack last week from the Houthi rebel group at the refinery.

Some U.S. refiners have expressed concern about the lack of supplies coming in from the Middle East. Meanwhile, the International Energy Agency (IEA) said it expects global supplies to shrink by around 4% annually, or 4.3 million bpd, because of the ongoing fighting.

"Regional exports, including routes bypassing the Strait of Hormuz, fell by a sharp 2.1 million bpd to 15 million after the key passageway was effectively closed again in early July and oil infrastructure and tankers came under attack," a report published Wednesday read.

Supply side concerns are prevalent elsewhere as emergency supplies dwindle. In a weekly report, the federal government showed there were 298 million barrels left in the Strategic Petroleum Reserve, meaning the stockpile is more than halfway depleted.

Parties to the IEA have agreed to release oil from their strategic stockpiles to help offset war-related shortages.

Mediocre Interest in Offshore Drilling

Elsewhere, bidders put nearly $83 million on the table on Wednesday to secure rights for drilling in the U.S. territorial waters of the Gulf of Mexico.

"A strong offshore leasing program benefits every American," said Erik Milito, the president of the National Ocean Industries Association, a group that advocates for offshore energy. "More domestic energy production means a more secure nation, a stronger economy, and a more affordable and reliable energy future."

Drilling projects in U.S. territorial waters of the Gulf could help lift overall crude oil production. The largest by investment value is the Kaskida development, led by BP. With production slated to begin in 2029, the six wells from the first phase of operations could yield 80,000 bpd, the company estimated.

The latest lease sale, the third of the 30 mandated by the federal government under U.S. President Donald Trump's second term, drew more bids than the $47 million from an auction in March, though both are far lower than a lease sale from December, that saw $279.4 million in high bids.

The U.S. territorial waters of the Gulf of Mexico account for around 15% of total domestic crude oil production. A monthly report from the U.S. Department of Energy shows offshore production is expected to decline by around 4.5% annually to average 1.89 million bpd next year.

By the Numbers

• 4.5% annual decline in U.S. offshore production expected
• 4% supply-side blow expected from the war, the IEA said

Key Takeaways

• A bid for U.S. offshore drilling rights showed lower monetary interest than before.
• The U.S. strategic reserve is more than halfway depleted.

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