The Last Barrel

Since his inauguration, President Trump has made a concerted effort to enact several major pieces of legislation designed to help the oil and gas business. In his first week in office, he issued an order to ensure the completion of the Dakota Access Pipeline and the northern extension of the Keystone XL Pipeline. 

Focused legislation. Most recently, the administration introduced its America First tax plan with far reaching implications for independent producers who drill the majority of oil and gas wells in the U.S. The package will lower tax rates and allow accelerated depreciation or outright expensing of capital costs. It will improve the ability of companies to raise the capital required to increase domestic production. Mr. Trump has accomplished this in the face of an outright media assault, aggressive obstruction from congressional Democrats, and with only limited cooperation from congressional Republicans. 

However, the legislation is not as favorable to companies that drill outside the U.S. and may restrict major domestic operators, too. Caps on debt-interest payments and cuts to deductions from previous years’ losses may hurt companies drilling capital-intensive projects with borrowed money. “This is an America first tax plan, so oil and gas companies that have the majority of their business in the U.S. are going to do better than multinationals generally,” said Bloomberg analyst Andrew Silverman. 

Consummate industry champion. Mr. Trump is the only President, during my 36-year oilfield career, who has had the courage to support and defend the E&P industry, outright. He has done this without regard for the political fallout from the 40 non/low-producing states that thrive on cheap energy. During the Great Oil Bust of 1986–89, there was not one single U.S. government initiative (that I was aware of) designed to support prices or displaced oilfield workers, who suffered through four years of $10–$12/bbl oil. Cheap fuel and low-cost gasoline were great for every state, except Texas, Louisiana and Oklahoma. And electoral votes from those states are not enough to swing an election, so why bother?

Death throes. During the most recent bust, the U.S. oil industry’s outlook was dismal. Collapsing crude markets seemed to be headed to single digits, and increasingly restrictive federal regulation threatened to choke any hope of a recovery. This, coupled with diminished access to capital and restrictions on building transportation infrastructure, had the once -mighty U.S. oil industry on the ropes. The green activists cheered at the demise of our industry and the prospect of Hillary Clinton in the Oval Office. 

Crazy like a fox. Just six months after his election, President Trump, acting mostly on his own accord, has changed the industry’s outlook. We now have greater predictability, more access to capital, new pipeline infrastructure and the capability to export oil to other countries. Mr. Trump is incredibly savvy, and a master of manipulating the media to influence domestic and international decision-makers. His use of Twitter appears non-presidential, but actually, it’s a clever method to plant the seeds required to grow his agenda, which is perfectly aligned with the U.S. oil industry. 

Deepwater GOM outlook. At last year’s OTC conference, BP’s Richard Morrison said he changed the company’s business plan, to ensure the deepwater GOM region could break even at $40/bbl. The initiative slashed costs, reduced the number of service vessels and cut administrative staff by 50%. But, “with help from new technologies, deep water can be profitable at $50/bbl.” Mr. Morrison stressed that a  resurgence had begun, and the deepwater GOM can compete with onshore tight oil.

It was hard for me to understand how deep water could possibly compete with the relatively low-cost shale plays developed with established technologies, factory style drilling and systematic completions. When Transocean scrapped six floating deepwater rigs, costing the company $1.4 billion, it appeared the deepwater portion of the industry would come to a standstill.

Shell catches whale in GOM. Yet, Shell has released the details of one of its largest U.S. GOM finds in the last 10 years. The company’s Whale deepwater well encountered 1,400 net ft of oil-bearing Paleogene pay. Evaluation of the discovery is ongoing, and appraisal drilling is underway to delineate the discovery. “Deep water is an important growth priority, as we reshape Shell into a world-class investment case,” said Shell Upstream Director Andy Brown. The Whale well is 3 mi northeast of Silvertip field and approximately 10 mi from the Perdido platform. Shell is also perusing three other GOM deepwater projects at Appomattox, Kaikias and Coulomb.

Shell also active in Mexican GOM. In the deepwater bidding round for the Mexican GOM, Shell won four exploration blocks independently, one with its partner Pemex and four with Qatar Petroleum. “For Shell, today’s win marks a competitive, deepwater entry in Mexico,” said Andy Brown. “The proximity and technical similarity of this opportunity to our position in the U.S. GOM will allow us to build on our experience in the region.”

Chevron’s GOM discovery. Chevron announced a major deepwater discovery at the Ballymore prospect, U.S. GOM. The well reached a total MD of 29,194 ft and encountered 670 ft of net Norphlet oil pay, with excellent reservoir and fluid characteristics. A sidetrack underway to assess the discovery. “The deepwater GOM is an integral part of our company’s long-term strategy,” said Chevron’s Jeff Shellebarger.

Trump card. After three years of restricted activity, the GOM is set to stage a comeback this year, according to Wood Mackenzie’s William Turner. The U.S. tax overhaul “drastically increased the fiscal competitiveness of deepwater GOM. Although the region has taken a beating, the industry has clawed its way back by significantly cutting costs, improving efficiencies and tightening up the supply chain.” 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com