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Prices, Not Policy Hampering Gulf Of Mexico Interest: Interior Official

Feb 29, 2016

The Obama administration is committed to further oil and gas drilling in the Gulf of Mexico, but persistently low oil prices are hampering near-term interest in the basin, a key administration official said Friday. 

"We'll continue with our leasing program in the Gulf of Mexico, there's no question about that, but what the demand is for new leases and new acreage ... is an interesting question," said Tommy Beaudreau, the US Department of the Interior's chief of staff. 

During an appearance at Columbia University's Center on Global Energy Policy, Beaudreau said with producers slashing capital spending amid a global supply glut and prices near $30/b there is little current interest in Gulf of Mexico leases. 

Despite operators seeing the Gulf as a "very reliable investment," and new geological data and drilling techniques boosting the Gulf's supply potential, Beaudreau said drilling there is comparatively costly amid the current price decline. 

"The challenge there is that it's expensive," he said. 

Beaudreau's comments come roughly a month before the administration will hold two consecutive federal Gulf lease sales offering about 45 million acres. Those sales, Central Planning Area Lease Sale 241 and Eastern Planning Lease Sale 226, are scheduled for March 23 and expected to attract limited interest. 

The last Gulf sale, a Western Gulf sale held in August, yielded total high bids of $22.7 million, the smallest Western sale in over 30 years and just 20% of the $110 million yielded in last year's comparable sale. 

Beaudreau, the former director of Interior's Bureau of Ocean Energy Management, said he expects interest in the Gulf to pick up as prices recover and the market rebalances. 

"There's very little doubt in my mind that the Gulf of Mexico is here to stay," he said. "I do expect that while investment in leases and major outlays for new development may be more scrutinized in the near term, the Gulf of Mexico's not going anywhere over the long term." 

The apparent decline in interest for new Gulf leases comes as Gulf production has become one of the rare areas of climbing US supply. According to the US Energy Information Administration's latest Short-Term Energy Outlook, the Gulf of Mexico is one of the few areas where US supply is expected to grow in the near term. 

"Several projects in the Gulf that began operations or will begin operations in 2014-16 will push up production from an average of 1.5 million b/d in 2015 to 1.8 million b/d in the fourth quarter of 2017," EIA said. "It is possible some projects will start production later than expected, potentially shifting some of the anticipated production gains from late 2017 into early 2018." 

EIA forecasts overall US crude production to fall from 9.43 million b/d in 2015 to 8.69 million b/d this year and to 8.46 million b/d in 2017.