Oil and gas companies in Gulf of Mexico could flourish under Trump presidency
Oil and gas companies in the Gulf of Mexico could be set for bigger profits under the President-elect Donald Trump’s industry-friendly administration, claims a leading energy industry consulting firm.
While any oil and gas boom is unlikely to come from Trump’s promise to open up federal waters to exploration and drilling in the future, which would take years to yield significant results, there are several ways in which the incoming administration could make things easier for companies to turn profit in an era of lowly priced oil, says Imran Khan, senior manager at Scottish-based consultancy firm Wood MacKenzie.
“Under a Trump administration, operators may have a sympathetic ear,” wrote Khan in a note to clients that was shared Friday by CNBC.
Royalties
Reducing royalty rates paid to the U.S. government could encourage energy companies to drill deeper wells with harder-to-get oil reserves and build more satellite wells known as tiebacks. In doing so, those companies would create additional jobs and possibly even increase the cash value of overall royalties to the government, according to the note. However, Khan said that if the Trump administration wanted to encourage investment in the region it would have to make significant reductions in the royalties, potentially cutting back from the current rate of 18.75 percent to 2007’s rate of 16.66 percent.
Such a rate cut would only lower the break-even cost of a tieback by 4 percent, but could create as much as $860 million in government royalties on a 65 million barrel production, for example.
It’s also believed that Trump could introduce a royalty relief program, which would reduce royalties paid to the government as the life-cycle of the well reaches its end. Instead of closing down the well before it becomes unprofitable, oil and gas companies would be able to extend well production and keep infrastructure and jobs in place.
Ease Decommissioning Bonds
The Trump administration could also ease bonding requirements, the costs paid by oil and gas companies to the federal government to help pay for the decommission of old drilling platforms and wells in the event they are abandoned.
Decommissioning costs have gone up in recent years because of an increase in deepwater fields in the Gulf of Mexico, accordingto the Bureau of Ocean Management. The current decommissioning liabilities stand at around $40 billion in total.
If Trump eases the bond on decommissioning it would ensure oil and gas companies have more money to borrow. In essence, there would be additional funds for exploration, infrastructure and drilling in fields where the hard-to-get oil and gas is.
“What the [current] government is doing in the main is going to increase the amount of money on balance sheets tied up in bonds, shrinking the borrowing base,” Poe Leggette, co-leader of law firm the BakerHostetler’s national energy industry team, told CNBC in September. “It’s going to put a lot more pressure on companies. Basically they’re going to find it difficult to meet these bonding obligations.”
But according to Khan, scaling back on such regulations would be unpopular given the 2010 Deepwater Horizon disaster.
Long-term Leases
Lastly, Trump’s administration could extend leases for oil and gas companies on areas that they’ve already spent money exploring. Current rules dictate that lease holders begin operations within five to 10 years, but because of the significant drop in the price of oil over the last two years, companies have been forced to concentrate production on only the most profitable areas, largely abandoning new exploration fields.
Oil and gas companies had slashed planned exploration and production spending around the world by $1 trillion, according to a summer 2016 report by Wood MacKenzie.
“Some deepwater exploration spend has been protected by long rig contracts, but as these unwind we expect sharper cuts than in non-deepwater,” Andrew Latham, vice president of exploration research said in a statement.
That could mean a future cut in investment and jobs.
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