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Is there a future for offshore drilling in US?

UNITED STATES (OBSERVATORY) –┬áThe administration of Donald Trump will have to drastically reduce his expectations about drilling offshore oil wells.

Despite the aggressive marketing and lush rhetoric from the White House, the oil sector showed minimal interest in this form of oil production.

At the auction held in March (the largest in the history of the United States), oil and gas companies purchased only 1% of the lots offered for sale. Even discounted royalty rates did not help.

It’s no coincidence that US Secretary of the Interior Ryan Zinke, during the congressional hearings last week, already used a restrained tone, which was in sharp contrast to the lush presentation of the offshore drilling plan in January that negatively met most of the coastal states.

“It is important what the states think, it is important how ordinary people and governors react on the ground,” Zinke told lawmakers. – We listen to all points of view. That’s why we are adjusting our plan. We are modifying it. It’s not a law, it’s just a plan.”

Negative attitudes were shown by the coastal states, which are under the control of Republicans and Democrats.

Open political resistance, as well as the high cost of production in completely new areas, while frightening off investments, recognized Zinka.

“It should also be borne in mind that drilling in the sea is more risky than on land. Today, investments are mainly directed to the shale deposits of the Perm basin, which is less risky, “he explained. “Unlike the Persian Gulf, we do not have an underwater infrastructure.” All have to start from scratch. ”

However, the new report of the Center for Global Energy Policy at Columbia University believes that the results of the auction are not as bad as they seem at first glance. The results look bad against the backdrop of the “unreasonably high hopes” of the White House, explains the author of the report, Tomi Bodro, former director of the Bureau of Ocean Energy Management.

In fact, the results were “relatively good and reflect trends in the development of shelf strategies and market conditions that have developed over the past few years and are likely to continue in the near future.”

The recovery in oil prices occurred quite recently, and several years of low prices “dealt a powerful blow to capital expenditures,” the study notes.

In addition, offshore drilling in the Gulf of Mexico must compete with other oil assets around the world, including land shale deposits in the US, which require much less preparation, is an important advantage for oil companies that lack cash, especially when the long-term market forecast remains highly uncertain.

“This competition was not ten years ago, when the Gulf of Mexico accounted for a higher share of domestic oil and gas production in America,” Boudreau points out.

He also believes that the sector has sharply reduced production costs and development has become more disciplined. This means that instead of buying speculative plots at auctions, as in the past, oil companies are increasingly resorting to leasing options, which leads to disastrous results at auctions.

“Companies focus on leased blocks that are in the most promising areas, fit well into their portfolios and are close to existing infrastructure facilities,” he said.

In his opinion, the March auction is a reflection of a new era in which companies follow a more methodical approach .

The Trump administration is trying to cement American “energy dominance” and the large-scale shelf expansion was an important part of this plan. Even if the sector’s interest remains relatively high, the costs of offshore exploration and production will probably not return to the level of the beginning of the shale revolution.