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Gulf of Mexico oil and gas drillers could see some relief from a more industry-friendly White House, according to a major energy consulting firm.
That relief probably would not come from Donald Trump‘s vows to open federal waters to drilling, which could take many years to produce results, if they do so at all. Instead, the president-elect could tweak policy in three areas to make it easier for offshore drillers to turn a profit at a time when oil prices are low, says consultancy Wood Mackenzie.
“Under a Trump administration, operators may have a sympathetic ear,” wrote Wood Mackenzie Senior Manager Imran Khan in a note to clients.
Here are the three things Wood Mackenzie believes Trump could do to help offshore drillers.
1. Reduce royalty rates
Reducing the royalty rates offshore drillers pay the federal government could give them extra money to drill more small satellite wells known as tiebacks, which connect to large, deepwater facilities. Tiebacks allow drillers to use infrastructure that costs billions of dollars and years to construct to incrementally and economically raise output.
Oil majors like Exxon Mobil and Royal Dutch Shell, as well as independent drillers like Anadarko Petroleum and Noble Energy, have used that strategy in the Gulf of Mexico even as oil prices languish below $50 a barrel, the Wall Street Journal reported this summer.
Khan cautions that any change in royalty rates would have to be substantial if it’s going to alter the industry’s investment in the Gulf. For example, reverting from the current rate of 18.75 percent to the 2007 level of 16.66 percent would only lower the break-even cost of drilling a small tieback by about 4 percent.
Offering big oil deeper cuts, however, could cause a public outcry, Khan warned.
But even a small cut could convince drillers to develop some projects that might otherwise be shelved, Khan said. Wood Mackenzie estimates a tieback that produces 65 million barrels of oil equivalent at the lower rate could generate $860 million in government royalty revenues and create new jobs.
Trump could go even further by introducing a royalty relief program that phases out or reduces royalties toward the end of a well’s life cycle. That would encourage drillers to extend the well’s production and keep infrastructure in place, according to Khan.
2. Ease bonding requirements
The White House could ease requirements on companies that own oil and gas facilities in federal waters, which were tightened this year. The rules affect the funds that drillers must commit to cover the cost of decommissioning facilities in case they are abandoned and left to the government to handle.
The Bureau of Ocean Energy Management said it was requiring additional financial security measures because decommissioning costs have increased as drillers push into deepwater fields. Risks have also grown now that large companies are transferring old facilities to smaller, less experienced firms, BOEM said.
Total decommissioning liabilities in the U.S. Outer Continental Shelf now total $40 billion, according to BOEM.
The new bonding rules have made offshore drilling more challenging, said Poe Leggette, co-leader of law firm BakerHostetler’s national energy industry team.
“What the government is doing in the main is going to increase the amount of money on balance sheets tied up in bonds, shrinking the borrowing base,” he told CNBC in September. “It’s going to put a lot more pressure on companies. Basically they’re going to find it difficult to meet these bonding obligations.”
But this is another area where the public could strongly oppose such a move, Khan said. The memory of the 2010 Deepwater Horizon disaster in the Gulf makes cutting well control rules and general safety regulations a tough sell.
3. Extend leases
Trump could extend leasing terms, which currently require drillers to begin operations in 5 to 10 years. The two-year price rout has forced companies to concentrate their drilling in only their most economic acreage. Longer lease terms would let them hold onto land they’ve already spent money exploring.
In addition to the larger players, such a policy change could help smaller companies in the Gulf. Those include Talos Energy, Deep Gulf Energy and LLOG Exploration, Khan told CNBC.
This summer, Wood Mackenzie reported that oil and gas companies had slashed planned exploration and production spending around the world by $1 trillion.
“Some deepwater exploration spend has been protected by long rig contracts, but as these unwind we expect sharper cuts than in non-deepwater,” Andrew Latham, vice president of exploration research said in a statement.