Washington — A Trump administration plan to expand offshore oil and natural gas leasing to nearly all federal waters will likely be scrapped and redrawn, with the industry instead pushing for more favorable leasing terms and drilling approval in the eastern Gulf of Mexico over a larger opening of US waters, sources told S&P Global Platts this week.
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"We would like to see a concerted effort to make the Gulf of Mexico really economical," said Randall Luthi, president of the National Ocean Industries Association. "We want [the Trump administration] to look at how would you get someone to drill a new well?"
Luthi said the industry is pushing the administration to consider reducing offshore federal royalty rates, particularly in offshore frontier areas. Luthi suggested that royalties on the first 50 million barrels produced from certain wells could be reduced from the current rate of 18.75% to 12.5%, as an incentive for additional investment in Gulf production.
Related story: US offshore oil plan on pause, potentially for years
In 2017, the Interior Department announced it would lower royalty rates for certain shallow water leases to 12.5% and last year Interior's now disbanded Royalty Policy Committee recommended lowering all offshore royalty rates to 12.5% to spur production. Faced with opposition from lawmakers concerned about reduced royalty payments to the government, then-Interior Secretary Ryan Zinke never pursued the plan.
Erik Milito, the American Petroleum Institute's vice president of upstream and industry operations, said industry is pursuing more flexibility in lease terms, including extending certain leases beyond 10 years and lowering royalty rates in potentially more costly frontier areas.
"A lot of the projects can be successful at 18.75%, but if you're getting into some of these frontier areas, where it requires new technologies, it's worth looking at ways to create some flexibility there," Milito said.
In January 2018, Interior released a draft proposed lease sale program that called for 47 separate sales in nearly all federal program areas between 2019 and 2024. But a court decision and widespread opposition from lawmakers compelled Interior Secretary David Bernhardt to pause the plan and will likely lead to Interior developing a plan for lease sales to begin in 2022, when the current plan, finalized during the Obama administration, expires, Milito said.
Rather than pushing for a significant expansion of available waters, the industry now appears largely focused on getting approvals to drilling in portion of the eastern Gulf of Mexico, under a drilling moratorium until 2022.
"That's priority one," Milito said.
Industry is particularly interested in the deepwater Norphlet trend, which straddles the border between eastern and central Gulf waters. On Thursday, Shell announced that production started at its Appomattox floating production system in the Norphlet.
"Appomattox creates a core long-term hub for Shell in the Norphlet through which we can tie back several already discovered fields as well as future discoveries," Andy Brown, Shell's upstream director, said in a statement.
The Appomattox has an expected production of 175,000 boe/d, Shell said.
Luthi said the industry is focused on expanding access to the Norphlet play into eastern Gulf waters.
"You've got the infrastructure there, you've got companies in place, you have a little more data at least close to that area," Luthi said. "So that's clearly the greatest area of interest right now."
Currently, oil and gas leasing is prohibited within 125 miles of Florida's west coast, under a moratorium that runs to 2022.
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 those talks ultimately fell apart over disputes on 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.
At a Senate Appropriations subcommittee hearing Wednesday, Senator Marco Rubio, Republican-Florida, said there is "virtually no support for drilling" offshore Florida.
But, Milito told Platts: "There is room here for a compromise. We can have it that the Florida delegation has some level of buffer and they can go back to their constituents and show that there would not be development in a number of miles and at the same time Gulf Coast operators would get opportunities in the Norphlet."
After falling below 1.72 million b/d in February, US Gulf oil output is expected to average a record 2.04 million b/d this month and climb to nearly 2.17 million b/d in February 2020, according to the US Energy Information Administration.
Platts Analytics forecasts US Gulf production to average nearly 1.9 million b/d this year and then climb to over 2.03 million b/d in 2020.
But Milito sees output peaking in the near term if the eastern Gulf says closed to exploration and production.
"We've had a significant resurgence in the Gulf of Mexico," he said. "That can't continue if we don't have new areas to pursue for investment."
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