OPINION: With the price of US crude creeping back up to $60 per barrel, in normal times we could expect an air of optimism in the Gulf of Mexico.

Drilling plans, put on the back burner by the Covid-19-created slump, would have been dusted down in preparation for a restart.

But there is no return to “normal times” even with vaccines brightening the prospects for economic revival.

Oil and gas demand may be on the rise while supply has been hit by Arctic weather in Texas, which has frozen pipelines and closed refineries.

US President Joe Biden, however, is determined to slam the brakes on his country’s own future oil and gas output.

For the wider task of tackling global warming, the White House has suspended the award of any new leases on federal land or water.

It is a temporary ban at present, but could become permanent as part of a wider US energy transition strategy.

Permitting questions

Existing leases are thought secure, but no-one quite knows whether there will be new restrictions on how they are permitted.

A permanent ban on leases would have an immediate impact on the US Gulf and threaten its future as an oil and gas province.

It would “quickly gut jobs, investment, energy production and environmental protection”, said Erik Milito, president of the National Ocean Industries Association, according to Rigzone.

Longer term, a permanent leasing ban would push US Gulf oil and gas production down from 2.34 million barrels of oil equivalent per day today to just over 900,000 boepd by 2040, NOIA says.

Potential impacts

Norwegian consultancy Rystad Energy believes exploration would continue unhindered for the next five or six years but quickly decline after that, under a permanent new-lease ban.

The deep waters of the US Gulf are entirely owned by the US government, as are vast swathes of onshore New Mexico.

Oil and gas drilling could be expected to migrate to those hydrocarbon-rich states such as Texas and North Dakota, where land is mainly in private hands.

Chevron has already issued a veiled warning to the White House that “if conditions in the US become so onerous that it really disincentivizes investment, we’ve got other places we can take those dollars”.

The mood among oil operators remains cautious, even with oil prices bouncing back.

Shell's Whale

But Shell recently signaled it would proceed this year with a final investment decision for the previously delayed Whale discovery in the US Gulf.

This project can succeed at $35 per barrel partly because it will use standardized methods used on the nearby Vito field, according to Shell.

The US Gulf has a lot of infrastructure in place, which makes it easy to develop tie-in projects even if new leases are now allowed.

Edinburgh-based consultancy Wood Mackenzie describes the US offshore province as a “low-risk frontier” in these terms.

Wider picture challenged

Biden's suspension of new federal leases challenges the wider picture and leaves an air of uncertainty.

The supposed quid pro quo from Biden comes by way of his plan to spend around $2 trillion revamping energy infrastructure in a greener way.

Certainly, the Texas deep freeze has graphically illustrated the need for more resilience to be built into the system.

With more uncertain weather predicted due to the changing climate, Biden could argue energy transition can wait no longer.

So the Gulf of Mexico is now ground zero for US climate action, but hydrocarbon exploration and development may just be exported abroad.

(This is an Upstream opinion article.)