Trump's offshore oil bonanza
The administration has proposed a sweeping opening of America's waters to oil drilling. But politics and industry realities will rein in the ambitions
The Trump administration has rolled out its first five-year offshore lease plan, a highly ambitious programme that would open nearly every mile of America's coastline from California to Maine to Alaska to Florida to oil and gas drilling.
It's a typically Trumpian opening gambit—flood the zone with an audacious initial proposal knowing the end result will get chopped down.
The draft proposal, which covers the five years from 2019 to 2024, will now go through rounds of public hearings and negotiations with state and local politicians. The federal government has wide leeway to regulate waters more than 3 miles off the nation's coastline, but local authorities can make life difficult, if not impossible, for drilling to take place in practice. The governors of California, Oregon, Washington, Florida and Virginia, among other prominent state officials, swiftly pushed back against any effort to open federal waters off their coasts to drilling. It was a first sign of the fights ahead.
The Trump administration isn't the first to try to open new areas to drilling. But similar efforts from recent administrations, though none pushed so aggressively, stumbled. Early in his first term, George W Bush tried to open Florida's coast to new drilling in 2010, but dropped the proposal because of opposition from the governor at the time, his brother Jeb Bush. The Obama administration then proposed opening vast tracts of waters off the Atlantic coast from Virginia to Florida to drilling in a bid to reduce oil imports and win backing for a cap-and-trade programme. But it quickly pulled the plan when, just weeks after its release, BP's Macondo well blew out, killing 11 onboard the Deepwater Horizon rig and unleashing the worst environmental disaster in the nation's history.
How are things likely to play out this time? The plan will not survive the coming negotiations and public consultations intact, but there is still likely going to be a significant expansion in the amount of acreage open to offshore drilling.
The Pacific Coast and much of the Atlantic will likely prove politically or practically unviable. Southern California, for instance, likely holds significant amounts of oil off its coast. The Interior Department, in the draft proposal, pointed to estimates of more than 5bn barrels of crude, more than any other area outside the Gulf of Mexico and Alaska's Arctic waters. But the public and state politicians are staunchly opposed to new offshore drilling, though there are several platforms still producing in shallow state waters off Huntington Beach and Santa Barbara.
Even if the Trump administration pushed ahead with a lease sale in the face of the opposition, those communities would come out in force to make offshore drilling as difficult as possible, adding a potentially insurmountable amount of political risk to the already high risks that come along with any frontier search for oil. Locals can block pipelines to shore and make it difficult to site the sorts of large-scale onshore logistical hubs that are needed to support offshore exploration and production campaigns. In theory, a producer could deploy a floating production storage and offloading (FPSO) vessel to get around onshore opposition, but that would be costly. In short, the odds of a major offshore oil campaign off the shores of Los Angeles or Seattle are vanishingly small.
America's northeast potential as a fruitful oil province hasn't historically drawn much interest, although recent discoveries across the Atlantic off Africa's northwest coast has some geologists wondering if the same sort of deposits exist off the US. But the industry would likely run into the same sort of local opposition as in the Pacific states that would make life difficult.
However, there are also areas where resource potential, political will and industry interest could line up to open new acreage to drilling. Alaska will likely prove the most straightforward case. The state is highly supportive of oil and gas drilling and the industry has broadly been interested in expanding operations in the state, though the prospects of new Arctic work look dim following Shell's disastrous experience and oil at $60 a barrel.
The Eastern Gulf of Mexico is the most significant prize for the oil industry, but its fate is highly uncertain. Sitting east of the border that separates Alabama and Florida, the Eastern Gulf of Mexico area is thought to hold billions of barrels of crude and sizable natural gas reserves. It is also near existing Gulf Coast infrastructure and its geology is relatively well known, making it a natural extension for the industry's operations in the rest of the Gulf of Mexico.
But staunch opposition from Florida, whose economy counts on tourists flocking to its coastlines, has long stymied efforts to drill in the waters. That opposition hasn't waned. The political timing is also not favourable for a new opening. As Liam Denning pointed out in a recent Bloomberg column, Governor Rick Scott is expected to challenge the sitting Democrat Senator for a seat in Congress in 2018. Winning that seat will be a political priority for Trump, whose Republicans narrowly control the Senate, and he won't want to do anything to imperil Scott's chances. A deal is possible that would only open blocks far from Florida's shores and closer to the Alabama state line, which could be operated largely from infrastructure outside Florida, minimising the impact.
Working more broadly against the oil opening is the industry's retreat from frontier offshore exploration, especially in the US where the vast majority of investment has shifted to onshore plays. The cash that has been spent offshore in recent years has been on more conservative projects, mostly tying smaller existing finds into infrastructure already in place. The industry wants all areas on the table as a matter of principle, and a number of companies lobbied the Trump administration to open up all of America's waters to drilling. But without a major step up in the oil price, investment isn't likely to match these ambitions.