Is Offshore Oil Exploration In Gulf Of Mexico Being Dented By High U.S. Royalties?

There is increasing evidence that the U.S. sector of the Gulf of Mexico is facing a decline in interest from oil and gas companies in the wake of more lucrative onshore shale basins stateside, Mexico's shallow water plays and more favorable terms from other exploration basins worldwide.

In a competitive high risk, high reward industry that is understandable, but part of the blame lies with the Interior Department, according to sources in Houston's legal circles. The deep U.S. Gulf acreages carry a royalty rate of 18.75%, while shallow blocks carry a 12.5% levy.

It appears that for better parts of 12 months, oil and gas companies have been lobbying hard for lower royalty payments for deepwater acreage on account of long lead times and high project cost exposure, in a rocky, albeit relatively better, oil price climate.

Some felt progress had been achieved when an advisory panel recommended lower rates to the department, and given that U.S. President Donald Trump has been broadly supportive of the oil and gas sector. However, much to the industry's surprise, the Interior Department rejected its proposal.

End result is that for the second time this year, oil companies bid on less than 1% of the blocks on offer in a sweeping auction of U.S. Gulf oexploration leases on Wednesday (August 15). Agreed, that it is not all down to the royalties issue alone, but the Department's stance clearly didn't help.

Here are the raw figures, published by the U.S. Bureau of Ocean Energy Management – there were 14,575 blocks available in the latest auction, but only 144 received bids. That's less than 1% of those on offer and even lower than the March auction which attracted 148 bids.

However, there was an improvement in dollar terms with $178 million worth of high bids, up from $124 million in the last auction in the spring. Among the standout figures to report – ExxonMobil bagged 25 blocks, the largest of any of the bidders, at a cost of $40.5 million. BP bagged 19 blocks, while Hess and Equinor got 16 each.

The remainder of 144 received bids were scattered around smaller operators including Houston Energy, Talos Energy Offshore and W&T Offshore, with the total number of companies bidding coming in at 23.

Predictably, the popular Green Canyon area, well serviced by existing infrastructure, received the most bids. Mississippi Canyon received Hess' highest single bid on a block ($25.9 million).

But none of the above figures make for pleasant reading if higher royalty earning was the Interior Department's primary objective in rejecting a plea for lower rates that could have potentially attracted more bidders.

Source: Forbes
Date: Aug 17, 2018