The offshore world is ready for a turnaround

This year’s elections not only turned the political pundit world upside down, they also set the stage for an offshore energy turnaround.

Run-up to the drop-off. Following the recession of 2009, the energy industry led economic recovery, providing thousands of new jobs and catapulting the U.S. to the top of the list of the world’s oil and gas producing nations. The result was a boon to U.S. consumers, as pump prices fell and manufacturing opportunities increased. However, when it comes to the energy markets, history shows that what goes up will come down. After the surge of oil and natural gas on the world market in 2010, commodity prices did, in fact, fall. While this is not unprecedented in a boom-and-bust industry, the severity of the price drop and the length of the price slump are setting new records.

Sluggish economic growth in the U.S., and elsewhere, combined with abundant supplies of oil and natural gas, created the perfect storm to keep commodity prices low in 2015 and gains relatively modest in 2016. The industry adjusted to market conditions by cutting capital expenditures, exploration and personnel. Both onshore and offshore operators are hunkered down in survival mode until prices return to a profitable margin. The latest projections point to a market recovery and industry turnaround, beginning sometime in calendar year 2017.

Political/regulatory interference. In the U.S., economic challenges have been exacerbated by politics. Hyperbolic climate change rhetoric and low pump prices gave rise to the “Keep It in the Ground” movement that became a hook for celebrities and politicians, alike. Apparently embracing the movement, the current administration initiated a regulatory and policy juggernaut against fossil fuels. Major regulations were promulgated that greatly increase the cost of exploration and production of oil, coal and natural gas, while providing questionable environmental and safety benefits, at best.

The offshore oil and gas industry was clearly a target of many of these policy and regulatory efforts. Extensive new regulations on drilling and subsea production safety systems; new requirements for seismic work; additional upfront financial bonding thresholds; and the premature consideration of new air quality emission standards are ratcheting up the cost of doing business. In addition, the administration backtracked on opening up portions of the Atlantic and then removed the Beaufort Sea and Chukchi Sea in the recently released 2017–2022 Proposed Final OCS Oil and Gas Leasing Program. Today, operators are faced with higher costs of doing business, and no new access to resources beyond the Gulf of Mexico. Riding the “Keep It in the Ground” movement, the Hillary Clinton campaign promised more of the same.

A change of federal attitudes. Fortunately, Americans elected an administration that is supportive of a comprehensive, broad, and well-balanced energy policy, to keep the U.S. at the forefront of energy producing nations. The incoming Trump administration can remove some obstacles to allow U.S. producers to be a part of the coming energy resurgence. Low-hanging fruit includes policies and regulatory
efforts currently underway, such as the proposed offshore Air Quality Rule. Underlying studies for this rule are yet to be completed, and affected states have not had adequate consultation. A new administration could halt the rule and start over, taking the time required for an enforceable, effective rule-making process.

Implementation of the Notice to Lessees (NTL) on the new financial assurance and bonding requirements also should be halted. The NTL was rushed out by agencies struggling with staffing and management of information regarding the actual need for additional bonding, and the real-world amount required. In fact, information concerning facility ownership, operating interests, estimated decommissioning costs and liability appears to be incorrect in many cases. Both the industry and the federal regulators share the goal of decommissioning facilities in a safe, efficient manner, without any cost to the individual taxpayer. A coordinated approach, where industry and government jointly identify a priority list of proposed decommissioning projects, will help bring order to the process. A stay on implementation of the NTL would allow both parties more time to get things right.

On the legislative front, Congress and the incoming administration are assessing the use of the Congressional Review Act to roll back regulations that were rushed out in the twilight of the Obama administration. The Trump team promises efficiency, new thinking and an outside-the-Beltway bent. That, combined with key experienced personnel, can make a world of difference in how the federal government relates to you and me, citizens of the U.S.

The take-home message is that the energy industry is ready for the turnaround. While painful, low commodity prices have necessitated increased efficiency, more efficient business plans employing innovative technologies and greater standardization will yield production increases at lower costs. A new administration seeking to work with, rather than against, industry in 2017 and beyond will lead to job creation, increased federal and state revenue, and strengthened U.S. energy security.