U.S. Aims to Capitalize on Offshore Barrels

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

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Summary

With low break-even prices relative to shale, U.S. oil from offshore is the only real source of production gains this year. The federal government aims to draw on that with another lease sale off the U.S. Gulf Coast.

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Gulf Barrels Up, for Now

With the coastal waters of the United States showing the only real potential for an increase in crude oil production, the federal government is hoping to draw industry interest again with a second round of offshore leases.

U.S. crude oil production may be slowing down, an end to a near-two decade run for shale oil developments. On Wednesday, the U.S. Department of Energy published data showing total U.S. crude oil production averaged 13.2 million barrels per day (BBL/d) over the seven-day period ending January 30.

In its short-term market report for January, the government said it expected total crude oil production to average 13.6 million BBL/d for the year, unchanged from year-ago levels. For the last week of January, meanwhile, production volumes were down 3% from the same period last year.

It's unclear if the impact of Winter Storm Fern curtailed crude oil production. While the natural gas sector experienced issues last week, there were few refinery problems associated with the storm.

For more on the weather, see this piece on the risks from Fern.

The future of the U.S. oil sector is uncertain. Crude oil prices are creating financial pressures on drillers and Harold Hamm, the founder of shale driller Continental Resources, said upstream activity in North Dakota may be idled until markets improve.

In terms of overall production, federal data point to volatility. Production from the Lower 48 states is expected to average 11.1 million BBL/d this year, a 1.5% decline from year-ago levels. Production is expected to drop another 1.3% by next year to average 10.9 million BBL/d. Offshore production, meanwhile, is expected to post a 4.7% increase annually to average 2 million BBL/d for 2026. That falls, however, by 5.5% next year.

Nevertheless, in pursuit of U.S. President Donald Trump's strategy of energy dominance, the federal government this week announced plans for another licensing round for offshore drillers.

"This proposed sale aims to ensure continued investment in the U.S. Outer Continental Shelf and support American energy independence," said Matt Giacona, the acting director of the Bureau of Ocean Energy Management (BOEM).

The proposed lease would cover some 15,000 blocks covering 80 million acres off the U.S. Gulf Coast. BOEM estimates the entire region holds nearly 30 billion barrels of undiscovered, technically recoverable oil and 55 trillion cubic feet of natural gas.

Under Trump's signature spending bill from last year, BOEM is mandated to hold 30 offshore lease sales over the coming years. The first lease under the program generated more than $300 million in high bids.

A Pulse, Even Without New Leases

In 2023, the last lease under former U.S. President Joe Biden generated high bids of $382 million.

Momentum is continuing, with or without new lease sales. In December, deep-water focused Seadrill said it awarded LLOG Exploration a contract to use the West Neptune rig for drilling off the U.S. Gulf Coast.

Shell, meanwhile, reached a final investment decision (FID) on a waterflood project at its Kaikias field in the U.S. Gulf late last year. Waterflooding is a secondary method of oil recovery that's used to repressurize a depleted reserve enough to move oil to adjacent production wells.

Subscribers to Industrial Info's Global Market Intelligence (GMI) Oil & Gas Project and Plant databases can learn more about Kaikias--including capacities, investment values and necessary equipment--in a project report.

The break-even price for U.S. offshore operations is generally lower than for shale, with an average of around $58 per barrel, though it's as low as $20 in some places. West Texas Intermediate, the U.S. benchmark for the price of oil, is expected to average $52.21 per barrel this year. It was trading at $63 per barrel early Thursday.

With a 30-day comment period closing on Thursday, the government said it expects the lease to take place on March 11.

By the Numbers

• $58 break-even for U.S. offshore
• 30 billion barrels of undiscovered, technically recoverable oil available
• 15,000 blocks up for grabs

Key Takeaways

• U.S. offshore oil production expanding year-on-year
• Low break-evens could incentivize drillers
• Work continues offshore, even without new leases

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About IIR News Intelligence
IIR News Intelligence is a trusted source of news for the industrial process and energy markets, powered by Industrial Info Resources' Global Market Intelligence (GMI).

About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 250,000 current and future projects worth $30.2 Trillion (USD).