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Will Oil Majors Really Sink Money Into America’s Waters?


Energy dominance begins at home, and that includes any beachfront property you might have.

The Interior Department unveiled on Thursday a draft proposal for leasing areas of the U.S. outer continental shelf for oil and gas drilling between 2019 and 2024. As five-year plans go, it’s an ambitious one, envisaging leasing on fully 25 out of 26 planning areas — from sea to shining sea, as it were:

ClearView Energy Partners (which provided the data for that chart) points out in a report published on Friday morning that the proposal is probably padded for a purpose. Interior knows the list will get whittled down over time, so it’s starting bigly.

For an oil and gas industry seeking new prospects, that makes the proposal at least partly a mirage.

It’s not that there aren’t potentially good prospects out there. Alaska and the Gulf of Mexico are obviously well-developed in certain areas already. The waters off southern California are also tempting. Meanwhile, using a little Pangaean jigsaw-puzzling, West Africa’s prolific fields suggest there may be similar riches off the Eastern Seaboard.

And it’s not like major oil companies are brimming with exploration prospects right now. The energy crash crushed spending on discoveries, with 2017 seeing the fewest on record, according to Rystad Energy, a consultancy. Another firm, Wood Mackenzie, estimates just $37 billion will be spent on exploration this year, down more than 60 percent from 2015.

There are two big complications when it comes to capitalizing on America’s federal waters, though: politics and time.

Kevin Book of ClearView Energy Partners says one of the biggest potential prizes is the eastern Gulf of Mexico. This is, roughly speaking, the area to the right of an imaginary line drawn down from the border of Alabama and Florida. These waters have the advantage of relative proximity to both the known geology and infrastructure of existing fields elsewhere in the Gulf.

Unfortunately for the oil industry, they also have proximity to Florida. On Thursday, Governor Rick Scott, not widely known as a bleeding heart, joined other state politicians in opposing the proposal. He has good reason to, given he is expected to challenge Democrat Bill Nelson for his Senate seat in November and the two will likely duke it out to see who can portray themselves as the more valiant defender of Florida’s beaches.

Furthermore, in keeping with the padding strategy in Interior’s proposal, the White House may well be willing to cut a deal that keeps the region out of bounds if it helps Scott win an extra Senate seat, given Republicans’ recent loss in Alabama took them to a razor-thin majority in the chamber. It may seem strange to join a set of dots that somehow link President Donald Trump, Steve Bannon, Roy Moore, and the continued absence of rigs in sight of Sarasota, but all I can say is: 2018, baby.

Much of the East and West Coasts also constitute politically hostile, or at least difficult, territory. In theory, a driller could develop a prospect using a self-contained floating, production, storage and offloading vessel, dispensing with the need to secure state permission for pipelines and terminals to bring oil and gas ashore. In practice, that would be prohibitively expensive, even with oil having crept back above $60 a barrel.

Apart from absolute dollars of expense, it’s the risk premium that would deter a rush into many of these areas. An oil company bidding for a lease off the coast of, say, Georgia, would have to factor in the best part of a decade for exploration and development, even before factoring in the brake of legal challenges. And if a lot can change in just a year or so, then a hell of a lot can change in five or 10 years.

Exacerbating this timing issue is the industry’s own recent experience. As I wrote here, oil majors paid a heavy price for tying up capital in giant, multi-year projects, trashing their returns and threatening their dividends when prices crashed. Added to this, intimations of oil demand’s eventual mortality have crept into strategic thinking. Mega-projects are decidedly unfashionable at this point. Short production schedules — such as in shale — are hot.

You can see that in spending trends. While capital expenditure in North America by both independent exploration and production companies and oil majors fell heavily in 2016, the region accounted for the vast majority of extra spending last year. And most of it came from smaller E&P companies focused on shale:

Offshore spending isn’t dead. Some operators, such as Norway’s Statoil ASA, have worked hard to cut costs and shorten schedules to make projects work at lower prices.

In the Gulf of Mexico, William Turner of Wood Mackenzie authored a recent report forecasting oil and gas production to reach a record of 1.94 million barrels of oil equivalent per day in 2018.

However, he cautions that exploration spending there will remain flat this year and activity will focus on less-ambitious projects, such as those tying back to existing fields and infrastructure. Current energy pricing, and the renewed focus on staying nimble when it comes to deploying capital, are powerful restraints.

And these challenges would be magnified in new, relatively undeveloped areas. Turner points out, for example, that the swiftness of the Gulf Stream, a wide current running parallel to the Eastern Seaboard, could present big challenges to drilling on the Atlantic shelf.

These are the obstacles confronting the administration’s latest push to advance its “energy dominance” mantra, especially in the near term. Similar to what we’ve seen with efforts to revive coal in the face of cheap natural gas the immediate political gratification is obvious. Translating it into reality in the face of an implacable marketplace is altogether different.


9 Comments on "Will Oil Majors Really Sink Money Into America’s Waters?"

  1. Bug on Sat, 6th Jan 2018 10:05 am 

    Shell block 93 (off the eastern shore of Va, where i live) was drilled on 7/14/84 and spudded 11/7/84. Drilling was done to 17740 ft, deepest by drillship Discoverer Seven Seas at that time.
    Shell and it’s partners relinquished this lease 1/32/86.
    Samples were not porous enough and only trace hydrocarbon shows were encountered.
    Shell , Murphy and Tenneco drilled 47 wells from NJ to Va,and all showed little hydrocarbons and all skidded and plugged.

    This is from an overview paper I found while working as a Shell contractor while on a Tidewater OSV, IN 1988.

    WHY wouldn’t new explorers call The 3 comps. mentioned and ask what they think?

  2. Paul on Sat, 6th Jan 2018 2:26 pm 

    I believe it was during this oil exploration that the Chesapeake Bay impact crater was discovered.

  3. Makati1 on Sat, 6th Jan 2018 5:25 pm 

    “Will Oil Majors Really Sink Money Into America‚Äôs Waters?”

    Answer: Only if it will be profitable, but I doubt that it will be in time to be useful.

    When the US financial system goes down, the change in the US lifestyle will be radically different in a negative way. Consumer capitalism will be dead. I cannot image what will replace it at this point. Some form of communism with American characteristics? A lord and serf economy, which seems to be developing currently? Interesting times.

  4. MASTERMIND on Sat, 6th Jan 2018 6:14 pm 

    How are they going to invest when they have cut around two trillion dollars of future capex already! This is why we are going to have a major oil shortage in a few years.

  5. Thomas Ballentine on Sat, 6th Jan 2018 7:20 pm 

    Off the west coast of Florida (the eastern Gulf of Mexico) are thousands of feet of highly porous carbonate rocks with no impervious cap rock on top and metamprphic-crystalline basement rocks below. Where are the source rocks that would have supplied hydrocarbons? And if there are a smattering of such source rocks, how would the hydrocarbons have been retained for millions of years in porous carbonates with no cap rock? So why all the fuss and concern about drilling near the west coast of Florida?

    I’m sort of the opinion that drilling here is only for votes during critical elections. The environmentalists mobilizing their voters with “NO DRILLING OFF FLORIDA” and the right wingers mobilizing on the belief that there’s so much oil out there that gasoline will be a dollar a gallon.

    I also think it’s a real opportunity for investment scam artists that are drilling for suckers’ cash knowing full well that drilling for hydrocarbons is a fools errand. Since the drilling of the Destin Dome decades ago there has been no real interest by real oil companies in drilling for oil off the west coast of Florida.

    It’s different in the Gulf west of a north south line centered on Appalachicola. There, the fine sediments from the Mississippi and other rivers flowing south off of the Appalachians have deposited the organic rich fine sediments that could have created viable source rocks.

    Maybe Rockman, a real expert, could chime in here and provide a more knowledgeable opinion as to what the hydrocarbon potential is, or isn’t, in this portion of the Gulf.

  6. Glenn Morton on Sun, 7th Jan 2018 1:22 pm 

    I was Area Geophysicist for the East Coast of the United States for ARCO in the mid-1980s, the last time the East coast was up for grabs. Geologically from a pangean view, the US east coast lines up with the part of Morocco offshore that has no oil. There are few faults in the sediment behind the continental shelf edge where oil can be trapped. Mostly it is just a wedge of sands and shales with no structural traps nor fault traps.

    If one drills below the mid-Cretaceous unconformity one finds grade 4 metamorphics–it is cooked to hades. Just about every structure was drilled in the early 1980s (go look up the Great Stone Dome) and the only interesting thing found was a half TCF of gas in the Hudson bay planning area block 684??? can’t quite recall, but it was uneconomic that far offshore. As I recall it was a Texaco discovery that went nowhere.

    In Georges Bank offshore Massachusetts, things that we though were reefs turned out to be diabase-an igneous rock.

    ARCO paid money to get the well results from a well drilled offshore NJ which was a 10 mile wide 50 mile long anticline (a buried hill), and while I was gone from the group by the time the well was drilled, I was told it found immature source rocks and a sniff of gas.

    In offshore Florida, the carbonate rocks are filled with fresh rainwater draining off Florida land and flushing out via underground caves to the sea. This freshwater flush is really bad for oil deposits because it brings biodegradation bacteria to any oil that might be found.
    All in all, I would advise anyone thinking about the East Coast of the US to flee for the hills.

  7. Glenn Morton on Sun, 7th Jan 2018 1:34 pm 

    Oh yeah, and anytime we wanted to do anything on the east coast, we got sued by every nearby state. They apparently didn’t want the well paying jobs that oil brings.

  8. rockman on Mon, 8th Jan 2018 10:21 am 

    Thomas – Not an expert on that area. But d recall after drill enough wells out there Destin Dome was renamed “DUSTin Dome” by the oil patch. LOL. You can never say never when it comes to oil exploration. But the lack of potential for SIGNIFICANT oil potential in the eastern Gulf has been fairly well established.

  9. rockman on Mon, 8th Jan 2018 10:28 am 

    As far as the east coast potential the most common damning evidence wasn’t the lack of commercial oil accumulations but the discovery of the lack of a thermal history in the shale drilled that would have allowed oil generation. Every commercial trend ever developed had an “oil window” where oil was GENERATED and accumulated. I might be wrong but I don’t recall any company reporting the discovery of an oil window in the US waters off the east coast.

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