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Offshore oil industry stands to lose big under Biden

National Journal

Originally from the National Journal...

A federal review of the U.S. oil and gas leasing program is generating a fierce backlash from the hundreds of companies that operate fracking operations in the vast expanses of the Western U.S.

Ahead of the formal launch of that Interior Department process Thursday—an event that will feature opening remarks from newly minted Secretary Deb Haaland followed by hours of testimony from stakeholders—environmental groups are putting their weight behind proposals to raise royalty rates and increase minimum bids, arguing that the climate-change-inducing fossil-fuel sector has gotten a sweetheart deal for decades.

But flying under the radar is a juggernaut U.S. offshore fossil-fuel industry that slipped roughly 25 percent in production between October and December, compared to that time period in 2019, according to data from the Energy Information Administration. Further decline in the offshore industry could upend U.S. revenue generation.

Annually, offshore producers infuse federal coffers with tons of cash, paying for many government programs including the Land and Water Conservation Fund, the holy grail of U.S. conservation initiatives. In recent months, however, federal revenue generated from the offshore industry has dipped below onshore revenue, a marked flip in historical trends.

Offshore production generated roughly $220 million in federal revenue in January compared to $325 million from onshore operations. In November, onshore drilling generated more than three times the offshore revenue, according to the Interior Department’s Office of Natural Resources Revenue.

“The offshore market is continuing on the same downturn that we’ve been in for the last six years, but you throw the COVID downturn on top of that ... that hurt things,” said Mike Moncla, head of the Louisiana Oil and Gas Association.

Moncla and other industry experts also link the recent decrease in offshore production to the most prolific hurricane season in recorded history.

But the backdrop is a decade-old onshore fracking boom that has arguably edged out some market share in the offshore sector, which relies on bigger projects and more capital.

“The focus [of the oil and gas leasing review] has been onshore because that’s where, you know, this great revival of U.S. production really took place,” said Jim Burkhard, vice president and head of research for oil markets, energy, and mobility at IHS Markit. “But the Gulf of Mexico, which is essentially nearly all of federal offshore production, has been really a pillar of U.S. production for decades.

“That’s really where I think this matters most, at least in terms of the volumes of where we get production from federal waters and lands,” Burkhard said.

In fiscal 2020, offshore companies, which include industry majors like Shell and BP, produced nearly 653 million barrels of oil, compared to 300 million barrels produced on public lands, ONRR data shows.

A week after taking office, President Biden released an executive order that halted new offshore and onshore lease sales. In line with that, the Bureau of Ocean Energy Management, the Interior agency that conducts offshore sales, nixed an auction scheduled to take place last week that would have offered more than 78 million acres.

Biden, who has vowed to conserve 30 percent of all U.S. public lands and waters, says the review is a critical plank in a comprehensive strategy to combat climate change. The Intergovernmental Panel on Climate Change, a body of the United Nations, says global temperatures need to increase no more than 1.5 degrees Celsius in the coming decades above pre-industrial levels to avoid the most severe climate forecasts.

But now, Gulf of Mexico states are bristling. Jeff Landry, the Republican attorney general of Louisiana, is leading a dozen other Republican states in a lawsuit filed Wednesday that aims to force lease sales in the Gulf of Mexico, the Cook Inlet Planning Area in Alaska, and Western states.

“That stated policy of banning new drilling permits contravenes congressional commands,” the lawsuit says. “The Department of the Interior has for decades issued leases for the development of oil and natural gas on public lands and offshore waters.”

In the waning weeks of President Obama’s tenure, his administration released a five-year lease plan for the Outer Continental Shelf that paved the way for multiple Gulf of Mexico lease sales through 2021. The Trump administration aimed to revise that program, proposing to open up virtually all areas of the Atlantic, Pacific, and Alaskan coasts. Trump left office without finalizing the regulation.

Environmental groups argue that the Outer Continental Shelf Lands Act gives the Interior Department authority to scrap lease sales all together, pointing to language in the 1953 statute that says leasing should serve “national energy needs” and consider “environmental damage.”

“Continued offshore oil and gas leasing is completely antithetical to our national needs," said Kristen Monsell, senior attorney at the Center for Biological Diversity. "We need to stop not only new leasing activities but phase out existing activity as well in order to address the climate crisis and stave off the most catastrophic impacts of climate change.

“I think there are several provisions in OCSLA that can be used to curb existing activity in the interest of national security, for example,” Monsell said. “Invoking those authorities would be one way [the administration] could do so under existing law, but if, for example, President Biden declared a climate emergency under the National Emergencies Act it would further open up the government’s ability to do so.”

Last week, Monsell filed a 42-page petition to Haaland, urging a new leasing program that “contains no new leases in any region or planning area of the Outer Continental Shelf.” The leasing-review event Thursday will host a wide range of stakeholders, from the American Petroleum Institute to the United Association of Plumbers and Pipefitters and the NAACP.

The administration is already signaling interest in an unprecedented overhaul of the leasing system.

“The federal oil and gas program is not serving the American public well," said Principal Deputy Assistant Interior Secretary Laura Daniel-Davis in the announcement of the March 25 event. "It’s time to take a close look at how to best manage our nation’s natural resources with current and future generations in mind.” New regulations are likely still months away.

Oil and gas companies that produce on public lands are already starting to move to private lands, where the majority of crude oil nationwide is drilled. Offshore producers don’t have that luxury.

“The federal waters are where the action is. And if the federal government says, ‘You can’t drill here’—well, there’s not another option,” Burkhard said. “That’s why I think it’s particularly important for the offshore industry as to what happens here.”

National Journal

National Journal
Louisiana Oil & Gas Association