Congressional Republicans and the Trump administration are poised to offer up a bevy of new opportunities for oil exploration in lands and waters owned by the government.
They happen to be doing it, however, at a time when a glutted oil market has companies less eager to find new sites to drill.
Continue Reading Below
The tax bill moving through Congress includes a provision to lease most of the coastal plain in the Arctic National Wildlife Refuge. And the Department of Interior is also pushing to expand offshore drilling. Millions of acres could be opened to oil extraction for the first time.
The actions are part of a Trump administration push to lower costs for the U.S. oil industry in hopes of making it even more competitive globally. That has been welcome among Republicans in Congress, whose approval is needed to overturn protections on the Arctic refuge that date to 1980. Republican Sen. Lisa Murkowski of Alaska has spent her career advocating for more Alaskan drilling and was considered a swing vote on the tax overhaul until she was able to attach a provision opening the refuge.
Some supporters in the oil industry do believe rising prices since this summer signal a turning point. Cutbacks have whittled away at surplus stocks this year, and a lack of investment could create shortages later that make big prospects like Alaska and offshore fields more alluring. Ms. Murkowski, speaking on the Senate floor Tuesday night, said getting ANWR ready now could help avoid major price spikes in the next decade.
Yet many investors and analysts expect only tepid interest if Congress and the Trump administration follow through on plans to lease out what some think are the biggest untapped oil fields left in the U.S. Though promising, the lands up for consideration in offshore ocean waters and the Alaskan Arctic haven't been the sort to attract companies in recent years.
"We have long supported access. I can't guarantee any companies will show up," said Kara Moriarty, leader of the Alaska Oil and Gas Association, one of a number of advocacy groups and oil companies that have pushed for the changes. "It is the government's responsibility to offer the lease sale and let the market decide if there is interest."
The industry is still recovering from a world-wide glut that has slashed prices since 2014 when scientific advances caused U.S. output to skyrocket. With so much oil available, companies cut their exploration budgets by more than half in the years since, to $40 billion from a 2014 peak of $95 billion, according to the energy consultancy Wood Mackenzie. It is at a record low share of their investment budgets, just 8%.
That trend is likely to undermine any lease sale the government holds, especially for more remote or environmentally-sensitive areas like Alaska and offshore fields. The costs and risks there are high, so oil companies have abandoned them as they figured out how to pump more cheaply from places like Texas and North Dakota.
"These projects will probably be at the end of the line," said Dimitry Dayen, senior research analyst at ClearBridge Investments, which manages $131 billion in assets. "Companies are not resource poor. They're resource rich."
The Congressional Budget Office forecast earlier this month that the leasing the refuge alone would produce $2.2 billion in total bid revenue for the Alaskan and federal governments to split between 2018 and 2027. The federal share of that money is to offset some of the tax cuts that could add $1 trillion to the deficit.
Many analysts doubt Congress's estimate. To reach it, the lease sales would have to produce seven to 13 times the amount returned from leasing in neighboring regions of Alaska's North Slope, which averaged $194 an acre between 2010 and 2016, according to an analysis of federal data commissioned by the Alaska Wilderness League, which opposes refuge drilling.
A lease sale in that region just this month returned only $1.2 million from seven bids on less than 1% of the land offered. The Mexican government has also been leasing out Gulf of Mexico oil rights for the first time, and to little interest at first, though bidding has become more competitive since 2016, analysts said. Mr. Dayen estimated that leasing more U.S. offshore acres would return just tens of millions of dollars.
Advocates for expanding exploration claim those aren't fair comparisons. Rough government and analysts' estimates -- all based on data about 20 years old -- suggest the refuge is sitting on anywhere from 5 billion to 18 billion barrels of oil, making it one of the biggest prospects out there. Royal Dutch Shell PLC and BP PLC also spent $2 billion in 2012 to lease land off Nova Scotia, which some geologists say is the first of several potential big Atlantic Coast finds.
But most of the province's lease sales since then haven't received any bids. Low oil prices have pushed companies to cut back. Investors are pressuring them to stop spending and start turning profits from the best land they already control. Many would probably balk at the high costs and environmental risk if oil companies pursued more Alaskan or offshore land, investors said.
"Those types of projects are for a different time of higher oil prices," said Todd Heltman senior research analyst at Neuberger Berman Group LLC, which manages $284 billion in assets, including shares in oil companies. "We found a lower-cost source that needs to be exhausted first."
Write to Timothy Puko at firstname.lastname@example.org
(END) Dow Jones Newswires
December 20, 2017 05:44 ET (10:44 GMT)