Deepwater Appetite Tested in U.S. Drilling Auction

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--More than 70 million acres in the federal U.S. waters of the Gulf of Mexico went on the auction block on Wednesday, testing both investor appetite and showcasing the difficulty of navigating an effective energy transition.

President Joe Biden entered office in 2021 with a moratorium on new drilling. But a global pandemic and the biggest escalation of conflict in Europe since the end of World War II has largely changed the equation.

It's time to end the "war on nature," said U.N. Secretary-General Antonio Guterres, and U.N.-backed climate panels are warning that time is running out to avert a global environmental crisis.

On the other hand, BP's (NYSE:BP) (London, England) Chief Executive Bernard Looney, and even Biden himself, said that the world still needs the low-hanging fruit of fossil fuels while technologies from fusion to hydrogen come to scale.

Offshore production accounts for about 15% of total crude oil production, or around 1.8 million barrels per day. The Bureau of Ocean Energy Management (BOEM) considers the Gulf of Mexico to be among the world's most prolific hydrocarbon basins, and most of that comes from deepwater reserves rather than shallow-water prospects closer to shore.

Full-year 2019 production was 596.9 million barrels, which brought in $5.7 billion in direct government revenues, a revenue stream that BOEM said was a record.

Today's auction was triggered by provisions in the bloated Inflation Reduction Act (IRA), which mandated the lease sale before March 31 and increased the royalty rate from 12.5% to as high as 18.75%.

"The 18.75% cap is commensurate with the minimum offshore royalty rate for leases in water depth exceeding 200 meters (656 feet)," the Project on Government Oversight found. "Similar to the increase in onshore oil and gas royalty rates, this provision in the IRA will go far in honoring the federal government's fiduciary obligation to taxpayers to ensure a fair market value for natural resources."

Lease terms are for five to 10 years, depending on water depth. And unlike shale deposits, where short lead times mean heightened exposure to market volatility, offshore is relatively insulated.

Federal data show Texas crude oil production pivoted from year-on-year growth rate of more than 20% at times to negative growth year-on-year in 2016. Not including the pandemic, production offshore has been a bit more stable, with year-on-year growth trajectories relatively consistent at around 5% or so year-on-year.

Analysis, meanwhile, from consultant group Wood Mackenzie finds it may be better to get oil from offshore than it would be to import that oil from foreign nations. Oil offshore is different from the ultra-light grade found in U.S. shale oil deposits, and Wood Mackenzie finds it also has a lower carbon footprint.

"Current U.S. imports are mostly barrels of heavier blends required to optimize the U.S. refining crude slate," Wood Mac found. "These heavier barrels tend to have higher extraction emissions, so it is not an apples-to-apples comparison on crude qualities, but much of the crude imported has a higher emissions profile than Gulf of Mexico deepwater oil."

Biden, meanwhile, is taking it on the chin for flip-flopping on energy policy, particularly after sanctioning the Willow oil project in the Alaskan tundra. Subscribers to Industrial Info's Global Market Intelligence (GMI) Production Project Database can click here for related reports. Against that critique, however, much of the provisions in the Inflation Reduction Act target a clean-energy future and a made-at-home manufacturing base for the energy of the future, while also mandating offshore leases.

Apart from oil, meanwhile, the White House is prepping for the first-ever lease sale for wind energy developments in the Gulf of Mexico. The administration wants to have 30 gigawatts of offshore wind installed by 2030 and acreage offshore Texas and Louisiana could have a wind energy capacity to meet the demands of 1.3 million households.

The government said that 32 companies took part in the offshore oil and gas lease sale, submitted $309 million in total bids, more than double the bids from the previous lease.

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 200,000 current and future projects worth $17.8 Trillion (USD).