Royalty relief key to protecting Gulf of Mexico, U.S. energy dominance
For much of the past 50 years, the United States has relied on foreign oil imports to power our economy. But thanks to American innovation and improved technology, we have reversed that status by and become an energy superpower.
The shale revolution dramatically expanded our production in a short period of time, but a critical piece of our longer term superpower status is oil production in the Gulf of Mexico, which is home to some of the best reserves in the world. In 2013, production on federal leases in the Gulf yielded 1.1 million barrels a day. Thanks to innovation and ingenuity, production is now up to 2 million barrels a day. Today, the Gulf accounts for 17 percent of American oil output.
It’s proof that the Gulf of Mexico is a reliable anchor of the American oil portfolio and is a key reason why the United States became a net oil exporter for the first-time last year. With the right policies, we can solidify that status for decades to come.
Put a different way: we cannot be an energy superpower without the Gulf of Mexico.
Our superpower status is in jeopardy, and not because American innovation somehow stalled overnight. We still have the best and brightest engineers and technicians on the planet.
Instead, we’re threatened by the COVID-19 pandemic that has severely curtailed demand as governments around the world combat the outbreak. Social distancing and work-from-home orders mean energy consumption across the board is down.
Prices crater
Adding to the unprecedented market conditions, American production is dealing with the fallout from the price war between Russia and Saudi Arabia. An artificial glut of oil generated by state-backed companies has flooded the market, and cratered prices below the breakeven price for free market companies.
Normally, global demand is around 100 million barrels a day. It’s now estimated to have dropped to 65 to 80 million barrels a day. The result is that West Texas Intermediate has dropped from $61 a barrel at the start of the year to the May futures contract going negative, and June and July contracts hovering around $20 a barrel.
That’s an unprecedented decline with catastrophic consequences. With historically low prices, operators can’t break even, which means capital-intensive operations in the Gulf – such a critical part of our domestic energy portfolio – could shutter for good.
It’s time for the private sector and the government to work together to address this challenge.
Oil companies drill on federal leases in the Gulf of Mexico, and in normal times, royalties are paid to the federal government to help support key public priorities like coastal restoration. But these are assuredly abnormal times.
Royalty relief
Fortunately, the Interior secretary can grant relief under the existing law, providing immediate support to our Gulf economy. Temporary royalty relief can ensure that American offshore production survives, and continues to provide revenues for the federal government, coastal states and programs like the Land & Water Conservation Fund. Otherwise, there won’t be royalties because there will not be production. Royalty relief for companies operating in the Gulf of Mexico is not just about the producers. Protecting this critical source of American energy will protect service and supply companies and manufacturing across the Gulf Coast.
Throughout the Gulf of Mexico service and supply chain, drilling contractors, marine vessels and construction firms and hundreds of other types of companies are part of the energy ecosystem. Forty-nine states have companies that support offshore production. Not to mention hotels and restaurants throughout the Gulf states depend on the health of the energy industry.
Life or death
Relief that happens now versus relief that doesn’t come until later could be the difference between an American company that survives the storm and one that shuts down for good. It’s the difference between an economy that’s powered by Americanmade energy and one that’s dependent on imports.
The hundreds of thousands hardworking men and women who make up the Gulf of Mexico energy ecosystem are a critical part of our economy and our national security. While the Trump administration has taken remarkable steps in the nearterm to help them, more action is needed in the long-term. We cannot afford to leave these workers behind.