OTC opens with industry in Gulf at a crossroads
New administration, sinking oil demand and COVID fuel uncertainty
WASHINGTON — For most of the 80-year history of drilling in the Gulf of Mexico, oil companies could rest assured that demand for their product, though subject to short-term swings, was assured in the decades to come.
But certainty that the world will always need more oil has waned, as governments worldwide push to reduce dependence on fossil fuels in a bid to address climate change. Even as oil prices have climbed back up in recent months, exploration in the Gulf of Mexico remains down and offshore drilling rigs are getting scrapped.
“Everybody’s trying to figure out what the future demands look like,” said Erik Milito, president of the trade group National Ocean Industries Association. “(The forecasts) are all over
the place right now.”
As energy executives, exhibitors and sales representatives head for NRG Park in Houston Monday for the annual Offshore Technology Conference — the largest trade show of its kind in the world — they find their industry at an uncertain crossroads. The rapid spread of the delta variant of coronavirus, which has led attendees to cancel reservations and a major exhibitor, the oil field services giant Schlumberger, to pull out, has added to that uncertainty, renewing worries about economic growth and energy demand.
Oil prices, which rose to a recent peak of about $76 a barrel, the highest in three years, have fallen below $70 a barrel amid another surge in COVID-19 infections. Prices are likely to recover in the short term as the latest wave of the pandemic is brought under control and the economy regains momentum, but long-term prospects for oil and offshore drilling are dimming as climate change drives the world to drastically reduce its consumption of fossil fuels.
OTC returns to Houston for the first time since 2019, after the coronavirus pandemic forced the cancellation of last year’s event. In between, the offshore sector, which was just beginning to recover from the two-year oil bust that ended in 2016, took some of the hardest blows from last year’s historic collapse in demand. Prices of some grades of oil in the United States briefly went negative last spring.
But this year’s rally in oil markets — even with the recent retreat — has spurred optimism that projects in the Gulf of Mexico put on hold during the worst of the pandemic could get underway before the end of the year, said Justin Rostant, an analyst with the research firm Wood Mackenzie.
Analysts are predicting that Royal Dutch Shell will begin drilling its Whale project in the deepwater Gulf of Mexico later this year, as will Total on its North Platte project. And an announcement is expected any day on Beacon Offshore Development’s Shenandoah field, after the company signed a deal with Williams Co. in June to pipe natural gas to shore.
“The offshore (sector) is recovering from the low level of 2020, when a lot of capital was pulled out of the industry,” Rostant said. “We’re seeing companies returning to investing, which is exciting to see.”
It’s not all rosy, however. Though companies are beginning development of projects they have worked on for years, they have not returned to searching the Gulf of Mexico for the next generation of oil and gas fields, Rostant said.
Much of that hesitancy comes from Wall Street, which has increased pressure on the oil and gas industry to slow spending and reign in debt, to return more money to shareholders, but that thriftiness could well be temporary. The oil and gas industry has a long history of cutting back capital spending, only to throw caution to the wind once oil-price forecasts show money to be made.
“We went through a long, difficult period with the commodity price, but we’re coming out of that,” Milito said. “When you go through an extended period of low pricing, that leads to significant underinvestment in exploration projects.”
Wild card
The wild card this time, compared to previous oil busts, is climate change.
Scientists are warning that if the world doesn’t begin dramatically slashing greenhouse gas emissions, the world risks unleashing the dramatic and destructive effects of global warming by 2040, including flooded coastlines, crop failures and wildfires.
To avoid that scenario, most of the world’s major economies, including the United States, have pledged to lower greenhouse gas emissions to net zero by 2050. Governments are still debating how to accomplish what amounts to a complete overhaul of the world’s energy system in less than three decades, but momentum continues to grow, with corporations, cities and states also pledging to do their parts.
The question is how quickly these efforts will begin affecting oil demand, which is expected to rise to 67.7 million barrels a day next year. In May, the International Energy Agency, which advises the world’s major economies, warned governments that to meet the goal of the Paris climate agreement, new oil and gas development needed to halt immediately.
Offshore projects, which cost billions of dollars and are expected to produce oil and gas for decades to come, are most threatened under such a scenario, said Mike Sommers, president of the American Petroleum Institute. But he dismissed the notion that drilling in the Gulf of Mexico, one of the world’s largest offshore oil fields, would come to an end anytime soon.
“Offshore continues to be a key foundation for U.S. oil and gas,” he said. “About 15 percent of U.S. (crude) production is offshore. That’s a significant portion.”
Just days after taking office, President Joe Biden announced he was putting a pause on oil and gas leasing on federal lands and waters, including the Gulf, while officials reviewed those operations’ contribution to climate change. In June, a federal judge in Louisiana ruled that Biden had to end the pause — a ruling with which the Department of Interior said it would comply.
That will not stop Biden’s review of federal leasing practices, but neither is that process preordained. A 2016 review of the U.S. offshore drilling industry by the Obama administration found that greenhouse gas emissions would actually increase if leasing were halted because more oil and gas from carbonintensive fields abroad would need to be imported.
That message is one oil lobbyists are pushing with the administration, but what success they’re having is unclear, Milito said.
“I don’t really know the answer,” he said. “On the permitting side, they’ve done what they’re supposed to do, and as a result these major projects are coming online. We are very supportive of (addressing) climate change, and we’re trying to educate the administration that as long as you’re using oil and gas the best place to get them in terms of emissions is the U.S. offshore.”
The White House declined to comment.
Next big thing
In the meantime, the Gulf of Mexico’s oil and gas industry remains on edge. Beyond climate change, the Gulf faces competition from oil fields off the coasts of Brazil, Guayana and Suriname, which are attracting a lot of hype from oil analysts who see South America as the world’s next big oil and gas play.
The Gulf is still considered attractive because of the amount of infrastructure and expertise established there over the past century. At the same time, however, finding oil and gas there is getting ever more difficult, requiring ever more powerful drilling rigs to reach the Gulf ’s greatest depths.
Though production there is still expected to grow for a couple more years, forecasts show the amount of oil and gas coming out of the Gulf will begin declining by the early 2030s, Rostant said.