The energy industry is expected to target the eastern Gulf of Mexico as the Trump administration plans to open almost all federal waters to oil and natural gas drilling.
“Of all the areas, the eastern Gulf of Mexico is the crown jewel,” said William Turner, a senior research analyst at energy consultant Wood Mackenzie. “It would gather the most interest because it seems it has the least amount of political risk, and technically, it is an area the industry knows, the way the waters behave, what geology is expected.”
The government currently has a moratorium on offshore drilling in the eastern Gulf until June 30, 2022, imposed partly because the Pentagon worries oil development would interfere with military testing and training in the area.
Oil and gas production in the Gulf of Mexico, which accounts for almost all current U.S. offshore production, is expected to hit a record high in 2018, after suffering three years of losses. Opening up areas east toward the coast of Florida would offer companies strong prospects for oil and gas and easy connections to existing infrastructure.
“There is more applicable data in the Gulf than anywhere else, which reduces the risk significantly,” said Christopher Guith, senior vice president of the Global Energy Institute at the U.S. Chamber of Commerce.
Under the Interior Department's draft proposal, spanning 2019 to 2024, more than 90 percent of the total acres on the Outer Continental Shelf would be made available for leasing. It proposes 47 potential offshore lease sales, the most ever over a five-year period, including 19 sales off the Alaska coast, 12 in the Gulf of Mexico, nine in the Atlantic Ocean and seven in the Pacific.
The industry faces stronger obstacles in the other areas the Trump administration offered for offshore drilling.
The Arctic is remote and expensive. The last offshore lease sale for the East Coast was in 1983 and for the West Coast in 1984.
Coastal governors and other political leaders along the Atlantic and Pacific coasts, worried about potential spills, have said they oppose Interior Secretary Ryan Zinke’s plans, and some have vowed to block drilling.
Former President Barack Obama had considered opening portions of the Arctic and Atlantic oceans to oil and gas exploration, but local pushback convinced his administration to reverse course. Obama in his last days in office shielded from drilling more than 100 million offshore acres along the Arctic and eastern seaboard.
Turner said the Atlantic’s rapid currents prevent companies from safely floating drill rigs, making it more difficult to navigate than in the Gulf, and forcing drillers to consider acres closer to shore.
Eric Molito, director of upstream and industry operations at the American Petroleum Institute, counters that some of his group’s members could be interested in drilling in the mid- and southern-Atlantic, because of successful wells drilled in similar geology off Brazil, Africa, Venezuela and Canada.
“There has been a lot of success in the Atlantic,” Molito said. “These geological trends may not continue in the U.S., but in these other countries, they have found a way to develop oil and gas fields that don't require there to be vast new infrastructure put in place.”
Potential drilling in the Pacific may present the most contentious case.
The federal portion of the Pacific contains plentiful hydrocarbons, and wells offshore are producing oil from leases sold decades ago, according to energy experts.
“The Pacific wells are the ones that matter,” Book said. “The wells exist and are producing plenty of oil. There could be more wells if there are more leases.”
The state is wary of offshore energy since the 1969 oil spill in Santa Barbara that at the time was the worst in the country’s history. That was followed by the Exxon Valdez spill two decades later.
State and local officials in California have authority to create impediments to offshore drilling in federal waters, such as preventing companies from connecting their equipment to infrastructure in state-controlled areas.
Washington Gov. Jay Inslee, California Gov. Jerry Brown and Oregon Gov. Kate Brown issued a joint statement opposing Zinke's plan, blasting it as a “political decision that flies in the face of decades of strong opposition from Republicans and Democrats alike.”
How strongly companies consider political risk will depend on the price of oil, experts say.
Oil prices have risen steadily in recent weeks, exceeding $65, far above the lows of the last several years.
“If the question is whether politics or petroleum win, the answer is, what is the petroleum price?” Book said. “The risks that come with trying to establish new production in the face of local government opposition are likely to be untenable at today's oil prices, but they might be worth it at a higher price.”
Offshore energy also is being challenged by cheap and easier-to-access onshore fracking shale regions.
“Offshore requires companies to tie up a lot of money and do so for a long time,” said Kevin Book, a researcher at ClearView Energy Partners. “Onshore fracking turns around cash a lot faster, but you have to keep doing it. Today, a lot of oil companies are more comfortable with fast-turned fracked wells.”
Some experts say it could take more than two years for the Trump administration to finish and implement the plan, especially if environmental groups or states file lawsuits, as expected. Even then, the timeframe between leasing and production can be a decade.
Industry groups are amplifying that wait-and-see message, arguing the Trump administration is smart to keep its offshore options open, even if it all won’t come to fruition.
“What we are seeing is a paradigm shift,” said Christopher Guith, senior vice president of the Global Energy Institute at the U.S. Chamber of Commerce. “This is not, let’s drill everywhere. This is, let’s start the process with everything on the table and figure out what we ultimately want to include. It's very possible there will be certain areas where there is no industry interest at any particular time. I would argue it's better policy to put the areas out there for consideration, rather than not have access to it at all.”
