US lease sale cancellations leave offshore in limbo

Offshore operators must wait until at least 2023 to acquire new drilling rights in the US Gulf of Mexico, after President Joe Biden's administration cancelled two final sales in the basin transactedunder an expiring five-year leasing plan.

The administration on 11 May called off two lease sales that would have given operators such as Chevron, BP, Shell and ExxonMobil their last chance to acquire drilling rights in the region before the existing leasing plan expires. Gulf of Mexico leasing will not be allowed to resume until federal regulator Boem finishes a new leasing plan — a time-consuming process that can take more than two years.

Lease sales 259 and 261 would have been of particular importance because a federal judge on 27 January threw out last year's $192mn lease sale in the Gulf after finding regulators failed to adequately scrutinise the effects on climate change. The most recent successful offshore lease sale took place in November 2020 under former president Donald Trump.

The Biden administration blamed "delays due to factors including conflicting court rulings" for deferring staff work required to hold the two Gulf lease sales before the 30 June expiry of the 2017-22 leasing plan. The administration at the same time also called off a proposed 4,000km² lease sale in Alaska's Cook Inlet because of a "lack of industry interest". Three of the previous four sales in the Cook Inlet since 2004 were also cancelled because of a lack of interest.

Interior secretary Deb Haaland has yet to offer a timeline for a new five-year leasing plan and last month said that a "significant amount of internal work" still needs to be done. If the administration starts from scratch, it will have to write draft, proposed and final programmes. The leasing delays have fuelled concerns among moderate Democrats, who earlier this month warned Biden the move could cause "future energy crises". Halting lease sales carries the risk that voters will punish Democrats in upcoming elections for high fuel prices and inflation. Regular gasoline pump prices hit a record $4.32/USG in the week to 9 May, according to the EIA.

Calling off the remaining lease sales will be "devastating to Americans" by reducing energy supplies, killing jobs and increasing reliance on foreign imports, offshore group NOIA president Erik Milito says. He also talks up the energy security concerns that the Ukraine invasion has brought to the fore. "The adverse consequences of the explicit decision to suspend US oil and gas development are being felt in a very hard way by everyday Americans and by our allies around the world."

Reasonable expectations

US Gulf operators produced 1.7mn b/d of crude last year and hold nearly 2,000 active leases covering more than 40,000km². In 2017-20, operators paid nearly $1.3bn for about 1,150 leases, allowing the industry to develop new areas and replace leases that expire within 5-10 years if they are not actively producing.

Offshore producers snapped up leases in the months before Biden's inauguration, but industry officials say they need a steady stream of new leases given the long lead time with offshore drilling. The industry invested billions of dollars in the Gulf based on the "reasonable expectation" operators would have the chance to keep leasing adjacent tracts needed to finish projects or expand, a coalition of industry groups wrote in a 6 May court filing.

Louisiana and other states last year successfully asked a judge to dissolve Biden's "pause" on leasing and required some lease sales to resume, but the Biden administration is appealing against the decision. A three-judge panel on the 5th US Circuit Court of Appeals, at oral arguments on the case last week, appeared receptive to the Biden administration's arguments that the judge might have overstepped in requiring specific lease sales to go ahead.

By Chris Knight