Department of the Interior (DOI) Secretary Ryan Zinke announced on Wednesday morning that the just-conducted Gulf of Mexico lease sale - which DOI has billed as the largest in history - garnered $124.8 million in lease bonus bids. When combined with bonus bids from a slightly smaller lease sale held last August, DOI has now raked in almost a quarter of a billion dollars from bids on a total of 240 offshore blocks in the last 9 months. Among the 33 companies who submitted bids were majors like Shell, BP, Chevron and Total.
While the total bids were just about $3 million more than those received last August, the number of blocks leased by DOI rose dramatically, from 90 last summer to 148 in Tuesday's sale. Secretary Zinke obviously considered this week's sale a very important event for his Department, telling reporters earlier in March that "This sale is going to be a bellwether in many ways. We'll see what the future of offshore is in comparison to the Permian" Basin, the hottest current onshore development region in the U.S.
DOI's aggressive lease sale activity, along with Sec. Zinke's comments, exemplify the different attitude towards oil and gas production in the U.S. offshore by the Trump Administration when compared to the preceding administration of President Barack Obama. Zinke and his department are treating their stewardship of the federal offshore province as being in competition with other oil and gas producing regions to attract capital investment from private producers.
By contrast, the Obama Administration, particularly following the Deepwater Horizon disaster in 2010, treated the Gulf of Mexico and other U.S. offshore waters as more of a nuisance that needed to be more and more heavily-regulated. In 2016, the Obama DOI also increased royalty rates on offshore production, from a typical rate of 16.67 percent to the current prevailing 18.75 percent. It was obvious that DOI in those years was not especially concerned that production from the Gulf of Mexico trended steadily downward from 2010 through 2016.
Not everyone is happy with Zinke's program, of course. The left-leaning Center for American Progress (CAP) said in a statement that “Offering a nearly unrestricted supply in a low demand market with a cut rate royalty and almost no competition is bad policy and an inexcusable waste of taxpayer resources."
As the CAP statement implies, the Trump Administration's new, more competitive approach to encouraging oil and gas production from the federal offshore is not limited to more aggressive leasing. In early March, Sec. Zinke also received a recommendation from the DOI Royalty Policy Committee (RPC) - a committee on which I served as chairman in 1999-2000 - to lower the royalty rate on new deepwater wells to 12.5 percent. While this proposal was met with opposition from some congressional Democrats, it actually is a scaled-back repeat of the strategy towards deepwater development adopted 23 years ago by the Bill Clinton Administration, when Bruce Babbitt was DOI Secretary.
In 1995, President Clinton signed the Deepwater Royalty Relief Act into law. That statute provided not just a lower royalty rate for qualifying leases, but a complete suspension of royalty obligations on a certain volume of production that was designed to allow lessees to recoup a great deal of the massive costs inherent in drilling for oil and gas in waters greater than 200 meters in depth.
While also controversial, the program was very successful in stimulating growth in oil and gas development of the deepwater sections of the Gulf of Mexico, and was ultimately extended into the early years of the 21st century. Assuming Sec. Zinke acts on the recommendation, it remains to be seen if the more conservative reduction recommended by the RPC will have a similarly stimulative impact.
By the same token, it also remains to be seen if the Trump Administration's efforts to make the Gulf of Mexico more competitive with the Permian Basin and other onshore regions in its ability to attract new capital investment. The number of bidders and participation by four of the largest privately-owned major oil companies in Tuesday's sale is encouraging, but the acquisition of leases is just the first step in a years-long and extremely capital-intensive process before new offshore wells are drilled and oil or natural gas begins to flow.
In a few years we'll find out whether Sec. Zinke's boosterism can expand the U.S. oil and gas boom into the Gulf of Mexico.
