Gas prices continue to rise and there is a call for more drilling but there is uncertainty about the Gulf. Even if they started drilling today it would be years to get the first gallon of gas.
Just like the brownish-green water near the Louisiana coast, the Gulf of Mexico’s energy outlook is a bit murky heading into the rest of 2022 and beyond. Gasoline prices are still through the roof, so there’s plenty of interest from consumers and government officials to increase the world’s oil supply. The Gulf of Mexico has long been a rich source of crude oil and natural gas, as well as controversy surrounding drillers’ environmental impacts. But the battle for the Gulf has intensified the last two years as fossil fuel advocates and the federal government have clashed over offshore oil and gas leasing. Amid pushes from environmental groups to curb drilling, the Biden administration has interrupted efforts to lease federal lands and waters to exploration companies. As of Thursday, industry observers were still waiting for the Bureau of Ocean Energy Management, the federal agency that oversees offshore lease sales, to release a new five-year leasing schedule for the outer continental shelf. In addition, the result of the only Gulf lease sale to happen under President Joe Biden, which took place in November, is tied up in court, and the federal government canceled two other planned Gulf sales this year.
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The state, down two refineries, is pumping as fast as they can but is it helping?
With leasing uncertainty looming, industry leaders said producers and refiners in Louisiana are pumping as much as they can, even with the state down two refineries. They also claimed headwinds from the Biden administration will hamper their ability to drill in the future. As the price of gasoline stays high amid global constraints made worse by Russia’s invasion of Ukraine, the struggle for the Gulf is likely to stay hot for the foreseeable future as the lease sales hang in the balance. “I don’t have a crystal ball, but I do know there is a supply and demand imbalance,” said Mike Moncla, president of the Louisiana Oil and Gas Association. “As long as that imbalance remains, I think high (gas) prices are here for a little while.”
At the beginning of the year, extraction was up and the price was what most could afford.
Even with the lease battles, interest in extraction was already up at the beginning of the year, when oil was hovering around $80 to $90 per barrel, well above the pandemic’s worst levels. That’s just about the sweet spot for producers, who can reap profits in that range without hurting consumers’ wallets too much, Moncla said. The price ballooned as high as $130 when supply became limited following Russia’s invasion of Ukraine. It has hovered around $110 in the last week, according to MarketWatch. The number of rigs exploring for oil and gas in Louisiana has also surged past pre-pandemic levels, according to data from Baker Hughes, which tracks U.S. drilling activity. On average, 30 rigs were exploring in Louisiana lands and waters in July 2020, including 10 offshore, down from 55 total rigs in January that year. The tallies gradually climbed in the following months but dropped to 39 total rigs — and four offshore — in September 2021 as the state battled the delta variant of the coronavirus. The average count grew to 55 total, including 17 offshore, in January and crossed the 60-rig threshold in May. “It’s much busier than it was a year ago,” Moncla said.
At the same time, the global surplus was down – mostly because of the cuts in Russian production.
But the U.S. Energy Information Administration said the global surplus capacity for crude oil — the maximum existing capacity that can be brought to market within 30 days — is down by 80% in non-OPEC countries. The bulk of that decrease is attributed to bans on Russia’s oil. Further complicating matters, the EIA said, is decreased U.S. refinery capacity the last two years. Biden has blamed lagging refinery output, and not supply levels, for high gas prices. Louisiana’s total refinery capacity is about 2.9 million barrels per day in 2022, down from about 3.4 million barrels per day in 2020, according to the EIA. The state has lost two refineries in the last two years: Shell’s Convent facility in 2020, and the Phillips 66 Plaquemines Parish complex in 2021. Gifford Briggs, Gulf Coast region director for the American Petroleum Institute, countered that U.S. refineries are running at 95% of their capacity rate. “To increase our refining capacity is not simply going and putting another storage tank at a facility,” he said. “These are multiyear projects that are multiple billions of dollars and decisions that companies make with a look to the long-term and not as a reactionary measure.”
The battle lines are drawn. The industry wants Gulf leas sales. There is headwind against that.
Industry advocates made it clear their top focus, aside from output, is the lease sale battle in the Gulf of Mexico. Biden and fossil fuel advocates have dueled over oil and gas leases ever since his tenure began in 2021. Republican attorneys general, including Louisiana’s Jeff Landry, won an injunction that paved the way for the November lease sale in the Gulf. However, a federal judge invalidated the sale, and an appeals court is still deciding its fate. Fossil fuel advocates are also wrestling with environmental justice groups on the issue. A report from Earthjustice, an environmental law nonprofit, claims pausing leases would have little to no effect on the U.S. economy. The report said that while a five-year delay in leases would lead to a loss of 60,000 jobs, greater investments in net-zero emissions projects would lead to a net increase of at least 300,000 jobs. The report also claims fossil fuel advocates have inflated estimated production losses should leases be paused, and that a five-year delay would increase pump prices by a penny per gallon. “This analysis confirms that more offshore leases would have no positive economic impact, and benefit no one but the fossil fuel industry,” Drew Caputo, vice president of litigation at Earthjustice, said in a statement. “The Biden administration needs to honor its climate promises by ending new offshore oil leasing in its five-year program.”
Gulf leasing has many benefits to many different areas.
Additional Gulf leasing is critical not only for producers, but for Louisiana, Moncla said. In addition to severance taxes, the state also receives a share of leasing revenues through the Gulf of Mexico Energy Security Act, or GOMESA, for coastal restoration efforts. The producers also argue more leases are needed for future exploration. Once awarded a lease, an exploration company must undertake years’ worth of surveying and exploratory drilling before it can extract oil, said Tommy Faucheux, president of the Louisiana Mid-Continent Oil and Gas Association. “Just because a company is awarded a lease doesn’t mean they’re guaranteed to find oil and gas underneath the ground,” Faucheux said. Losing lease sales would have a ripple effect on Louisiana’s economy, Briggs said. “You’ve got companies that are trying to make decisions on long-term investments, both on the exploration side and what their future holds in the Gulf, but also on the service side,” Briggs said. “For Louisiana, that’s the most important sector, all of the small companies that service all of these offshore platforms or the people that work there.”
As we get more EV’s and hybrids on the road, the need for gas goes down. Is it better to suffer a bit in the short term to benefit in the long term?
