Drillers give mixed response to Trump's latest lease auctions

Drillers give mixed response to Trump's latest lease auctions
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A pair of federal sales for oil and natural gas drilling rights this week yielded vastly different results, calling into question the attainability of the Trump administration’s push for “energy dominance.”

On the one hand, an auction in southern Utah showed that opening areas that the previous administration thought were too culturally important for drilling could yield solid interest from the oil industry. 

But in an offshore drilling sale for the Gulf of Mexico — an area where the Interior Department wants to expand drilling access for companies — the administration’s outreach to industry didn’t spur an impressive outcome.

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The mixed result casts doubt on whether President TrumpDonald John TrumpAverage tax refunds down double-digits, IRS data shows White House warns Maduro as Venezuela orders partial closure of border with Colombia Trump administration directs 1,000 more troops to Mexican border MORE’s policies will boost oil and gas production and create enough leading revenue to finance a number of Interior projects. 

On Tuesday, Interior’s Bureau of Land Management successfully sold off all the 43 available parcels it had put up for oil and gas leasing in Utah, a shock to some industry experts who long believed the region held limited oil supplies and would generate little industry interest.

A number of the parcels bordered national monuments, including Hovenweep and newly shrunk Bears Ears.

“I was surprised some people paid some serious money into those leases — in that kind of area,” said Kathleen Sgamma, president of the Western Energy Alliance, a lobbying association. “Obviously if you are in the sweet spot of the Permian Basin, you are paying thousands. But we are talking about a less developed area on federal land.” 

The plots, which sold for between $2 and $93 an acre, are expected to bring in about $1.5 million in revenue — a boon for an administration that has floated using drilling leases and royalty rates to finance federal infrastructure projects.

Sgamma said the strong interest in the parcels showed enough oil and gas companies are willing to test out a new region for drilling with hopes that it will pay off. In 2017, only four parcels in the region were auctioned. 

“I think the results show that these were legitimate nominations that there is interest in that area, others people wouldn’t be paying $93 dollars an acre,” she said. “But it does show that there are some companies that think there are some resources out there worth pursuing.” 

Kevin Book, managing partner at ClearView Energy Partners, said the sales indicated that industry was eager to get its hands on land not previously available for oil exploration. He added that the sales affirmed the administration’s decision to auction more land around Bears Ears. 

“It tells us that there was oil and gas interest in an area that was off-limits,” Book said. “This goes back to the question: Did the government provide access? Did the administration deliver on its promise to give industry access to resources? And the answer is, yes they did.” 

The day after the Utah sale, Interior’s Bureau of Ocean Energy Management held its biannual drilling rights lease sale for the Gulf of Mexico in New Orleans. 

That yielded $124.8 million worth of winning bids, an increase of just under 3 percent from the last sale in August, but less than half of the March 2017 sale. Furthermore, all but 10 of the 148 areas sold had just one bid. The average winning bid was $153 per acre, about one third less than last year's levels.

Analysts had expected more.

Zinke himself had boosted expectations in the run-up to the sale, emphasizing its history as the biggest offshore lease sale in history in terms of acreage available and declaring it to be a “bellwether” for the next decade of oil and gas drilling. 

Environmentalists jumped on the results to argue that Zinke’s policies had failed. 

“If you compare today’s lease sale with the results of Gulf of Mexico lease sales since 2012, it was — by all measures — a complete flop,” said Matt Lee-Ashley, a senior fellow at the Center for American Progress. “Taxpayers received a below-average return per acre, fewer-than-average total acres sold, and more than 90 percent of parcels received only a single bid.”

The industry saw room for optimism. 

“[The National Offshore Industries Association] is encouraged by the results of today’s Gulf of Mexico Lease Sale, which show a promising trajectory towards the future,” said Randall Luthi, the group's president. “While the bidding activity today reflects improving, yet still lower than desired commodity prices, both the number of bids submitted and the total amount of high bids received are up compared to the August 2017 sale figures.”

Experts said both results are almost completely a reflection of an oil market where prices are still relatively low — about $65 per barrel Wednesday — and how little the Trump administration can do to drum up demand. 

“I think the response was subdued by all accounts, and that’s consistent with how we view the market,” said Pavel Molchanov, a research analyst at Raymond James & Associates. 

“Companies are being very careful about where they invest and how much, and the higher-risk opportunities with most distant cashflow potential are towards the bottom of the priority list,” he said.

Offshore drilling is a much bigger, though longer-term, investment for companies than onshore. 

Book said the Trump administration lived up to its promises by making the whole Gulf of Mexico available, but it can’t change the market. 

“Operators are still only a couple of years out from an incredibly painful oil crash. There’s a lot of reluctance on the part of [executives] to commit assets to long life-cycle projects when they can get faster, if not better, returns onshore,” Book said. “A stable oil price in the 60s is not ‘Drill, Baby, Drill’ territory.”

The sales in Utah and the Gulf of Mexico show that when it comes down to investments, companies may be satisfied with Trump’s policies, but that doesn’t mean they’ll be willing to invest in leases while oil prices remain low. 

“There is very little that Washington can do to change the fact that capital investment is tight,” Molchanov said of the offshore sale. “Companies are being disciplined and appetite for new Gulf of Mexico acreage is not very high.”

Lease sales may also not be a strong indicator of how much revenue might ultimately be generated for the U.S. While the country will get lease revenue, it’s not guaranteed it will reap any revenue if companies opt not to drill.

According to Sgamma, fewer than 50 percent leases ever produce usually because oil reserves are limited or the bureaucratic hurdles of leasing on federal land are too many for companies to overcome.

“A lease is never a green light, it’s always a definite maybe — maybe you will find economic quantities of oil and natural gas, maybe you will get through all of the regulatory hoops,” she said.

Nonetheless, Book said Interior is likely to stick to its strategy of making more areas available for drilling in the future.

“I suppose they can conclude that the market isn’t demanding a lot of real estate,” he said. “But the Interior Department said that this is the plan, to do area-wide sales and let the leases that people want get sold.”