$65 price isn't boosting offshore energy work

Dressed in work boots, blue overalls and a hard hat, Rep. Steve Scalise, the U.S. House majority whip, took in the view from the drill shack of Shell’s Olympus, the Gulf of Mexico’s largest floating deepwater platform, 77 miles south of Venice.
At 406 feet tall and weighing more than 126,000 tons, the platform operates as a floating city of nearly 200 men and women working in two-week cycles, reaching oil reservoirs that are 27,000 feet below the sea floor.
“Out in the middle of the ocean,” Scalise said to some fellow lawmakers joining him on the visit. “This is how our energy’s produced.”
And yet, this was not where the nation’s oil rebound is happening. Crude prices have climbed $16 a barrel over the past year, now hovering around $65, and federal forecasters expect domestic production will hit a record 10.7 million barrels a day this year.
But in the Gulf, oil producers are proceeding cautiously, aware of the industry’s repeated boom-and-bust cycles and of the potential competition from lower-cost production at shale formations being developed onshore.
That attitude was apparent in March, when vast areas of the Gulf were put up for auction for offshore oil and gas drilling. The 77-million-acre lease sale, billed as the largest in U.S. history, saw only a tiny fraction of the available acreage draw offers. High bids averaged 35 percent below last year’s levels.
“What we saw (at the auction) is that interest is relatively slim,” said Pavel Molchanov, an energy analyst with Raymond James. “Not zero, but slim, and the results of the auction illustrate that point.”
Analysts and other experts see the tepid response as a signal that, if oil prices stay about where they are now, significant drilling in Louisiana isn’t likely in the near future. Instead, any slight increase in price could spur a rush of cheaper shale production elsewhere, which could benefit some Louisiana-based companies but ultimately saturate the oil market and cause prices to fall again.
“It used to be that companies would very aggressively increase capital investment after a (price) downturn like this,” Molchanov said.
Now, under shareholder pressure, companies have become “more disciplined, more conservative in their capital investment decisions, and that influences, among other things, investment in new acreage,” he said.
Other experts, including David Dismukes, executive director of the LSU Center for Energy Studies, say that’s not surprising.
With prices having been stagnant for so long, the shift to quicker-earning shale oil production represents a “paradigm shift” in the business, he said, bearing less risk because companies can quickly pivot away from it as crude prices change.
“Offering more acreage isn’t going to do a whole lot in terms of moving the whole market,” Dismukes said. “The market is going to dictate the attractiveness of offshore drilling, and the market dynamics for it aren’t there at this point.”
In addition to unfavorable market conditions, there isn’t much sense of urgency driving new deepwater investment decisions in the Gulf in part because companies have so much undeveloped acreage already under lease.
“There’s a lot of acreage that’s already in hand by some of these companies that has yet to be explored or fully drilled to get things to production. So, there’s a lot of places for them to go already,” said Chett Chiasson, executive director of the Greater Lafourche Port Commission, which operates Port Fourchon, the nation’s leading energy supply port.
In fact, activity has picked up lately at Port Fourchon, including three waterfront leases signed last year. Those were the first in three years.
Still, that recent activity comes with trade-offs: Port Fourchon has cut its rental rates 20 percent since early 2015, costing the port about $10 million in total lost revenue.
“Until we start to see more actual drilling in the Gulf, our business in the port and the businesses that serve the offshore industry are going to struggle a bit,” Chiasson said.
After the legislators’ platform tour, Port Fourchon hosted Scalise and his contingent for a roundtable discussion with local energy business owners and others in the industry, to hear feedback about the challenges they face.
Some expressed anxiety over President Donald Trump’s plan to implement tariffs on much foreign-made steel and aluminum. Tariffs could push up costs and potentially put a damper on any positive growth that could occur if oil prices keep trending upward.
“Everything that’s built for the industry is made with steel, from a bulkhead built at the port to a vessel to service it, to all of the platforms and the rigs,” Chiasson said. “We’re finally at a point where maybe we’re going to see more business, and then the price of everything goes up.”
But the roundtable also drew support for Trump’s much-discussed efforts to pare back drilling industry regulations. That includes reconsidering Obama-era rules that targeted equipment that failed during the 2010 Deepwater Horizon disaster.
“I think they’re anxious to come out of this regulation-induced recession, if you will, that surrounds the fossil fuels and the fossil fuels industry. They’re very anxious,” said Deputy Secretary of Energy Dan Brouillette, who was on the congressional tour.
Many experts say only higher energy prices can restore the thousands of jobs shed over the past few years.
This year’s trip was Scalise’s 10th time leading a congressional delegation on an offshore tour. Still recovering after being shot last year, he appeared at ease and in good spirits on the rig. He walked slowly through the platform’s inner hallways or up and down its myriad steps, clutching a handrail with one hand and hanging onto his purple crutch with the other.
Seeing drilling activity up close, Scalise said, gives other lawmakers a fresh image to draw from when they’re making decisions that could affect the future of the industry and its workers.
“It’s one thing to read about an issue, to see a PowerPoint presentation,” he said, “but it’s a whole other thing to go and see it in person.”