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Expansion of US offshore drilling focused on eastern Gulf of Mexico

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Operators focused on expanding access to the Gulf's Norphlet field

Washington — A push by the Trump administration to expand oil and natural gas drilling into federal waters is increasingly focused on future production in the eastern Gulf of Mexico, particularly in untapped portions of the Norphlet Field in waters off limits to development until at least 2022.

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"The eastern Gulf is really 99% of what all the operators care about," said Christopher Guith, a senior vice president for policy at the US Chamber of Commerce's Global Energy Institute. "It's really all that matters. It's what they have the most data on, there's some exploration at play and, more importantly, there's some ancillary data from the existing exploration in the central Gulf."

Members of the House and Senate from states bordering the Gulf had been negotiating a plan for months to extend that eastern Gulf drilling moratorium beyond 2022 while allowing some drilling in areas currently off limits. But talks stalled this summer over disputes over where the boundaries of a new moratorium would be drawn and changes to federal revenue sharing policy, sources said. The strongest opposition came from Florida lawmakers who object to drilling anywhere near Florida's Gulf coast, sources said.

Still, Gulf state Republicans and offshore industry lobbyists are growing increasingly nervous that the prohibitions on eastern Gulf drilling could be extended for years if Democrats take control of Congress in the November 6 mid-term elections, setting up the possibility that the negotiations may need to be quickly revived next month and an agreement reached during a lame-duck session before the next congress takes over on January 3.

"We're going to have to wait and see how the election turns out," a Republican House committee aide involved in the discussions said Thursday. "It would take a lot of work to get to a solution. It's a tricky issue."

Currently, oil and gas leasing is prohibited within 125 miles of Florida's west coast, under a moratorium that runs to 2022. There are no talks of lifting that moratorium early, but the Trump administration has proposed federal oil and gas lease sales in those eastern Gulf waters in 2023 and 2024 as part of its draft program lease sale schedule for 2019 through 2024. A proposed lease sale will be released before the end of the year and finalized in 2019, according to the Bureau of Ocean Energy Management.

The draft proposed leasing plan currently includes 19 sales in federal waters offshore Alaska, 12 in the Gulf of Mexico, nine in the Atlantic and seven in Pacific waters offshore the West Coast.

US Interior Secretary Ryan Zinke has said that waters offshore Florida will be exempt from the plan, but Interior has given no guidance on which specific areas will be exempt.

Industry sources said that they see offshore sales in the Pacific and much of the Atlantic as unlikely due to widespread opposition from East and West Coast governors to drilling off their coasts. In addition, there may be limited interest in federal leases offshore most of Alaska, sources said.

Nearly all industry interest, it appears, is on potential future sales in the eastern Gulf.

Randall Luthi, president of the National Ocean Industries Association, called leasing the eastern Gulf the "most logical place" for US oil and gas operators looking to expand offshore production.

"That's closest to existing infrastructure, closer to the companies that are currently situated there and has some seismic work, certainly more than the Atlantic has," Luthi said.

The deepwater Norphlet trend, which straddles the border between eastern and central Gulf waters has received considerable interest and lobbyists for the offshore industry have been keen to keep all of it out of any future moratorium on drilling in the eastern Gulf. This year, Shell and Total announced large deepwater discoveries in the Norphlet.

According to BOEM, the eastern Gulf has between 2.55 billion and 3.19 billion barrels of unleased undiscovered economically recoverable oil under price scenarios from $40/b to $160/b. By comparison, the Central Gulf has between 17.2 billion and 21.9 billion barrels and the Western Gulf has between 6.99 billion and 9.1 billion barrels under those same price scenarios.

Oil production in the Gulf is expected to peak early next decade, averaging just over 1.9 million b/d in 2020, up about 170,000 b/d from this year, before falling to about 1.83 million b/d in 2022, according to S&P Global Platts Analytics.

"New projects are starting but not enough to significantly offset decline of existing production," said Rene Santos, an analyst with Platts Analytics.

US Gulf oil production has slowly grown, but accounts for an increasingly smaller proportion of overall US supply as US shale production has taken off. In 2009, US Gulf output averaged 1.56 million b/d, roughly 30% of overall output, according to the US Energy Information Administration. By 2019, US Gulf production is forecast to average 1.82 million b/d, just 15% of overall domestic supply, according to EIA.

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com