Pipebuzz Podcast: The Future of Offshore vs. Onshore in the Oil & Gas Industry

What you need to know about the U.S. future energy policy for the offshore sector. Will it come back to it’s former glory as the 90’s roaring hydrocarbon producing area or will it fade away due to high costs of production and ultra-long-term project depth?

Let’s see what we have in store, so the better you can understand oil & gas pros, the better you can align yourselves to make better decisions with vital info for the future of your oil & gas goals.

Listen to the full podcast with oil and gas expert Jared Head in the player below.

First, the U.S. government is currently throwing out the Atlantic Lease 260 sale from the planned five-year offshore oil and gas lease sale program for 2017-2022. Even scarier, U.S. leaders have directed that the government tighten pollution protocol standards for offshore drilling. The elimination of the Atlantic 260 lease sale program may sound like a backward idea of what the Obama Administration proposed to clear ways for oil & gas exploration of the Gulf Coast, but it marks the 2nd time that this has happened to be knocked for the 5 year lease program. The U.S. probably would have opened up East Coast exploration if it wasn’t for the massive BP spill that happened, but ultimately pulled out due to the Macondo Blowout.

So what does this mean for oil & gas industry professionals? You remember Obama’s March 15, 2012 speech about the “all-of-the-above” energy policy for a more stabilized economic American society? Well, this report from this policy showed that the U.S. is extracting more oil & gas, more renewables from wind & solar, consuming less petroleum, and using the same amount of electricity. AND this is lower co2 emissions that have endangered climate change. We are just getting better at being more efficient with energy….rapidly.

What’s even more mind-boggling is that an environmental company that will remain unidentified has been setting sites with and ultimately celebrating the abandonment of the Atlantic lease sale, then declared the removal of the 5 Artic leases due to wildlife & marine conservations. Despite of most states being in majority favor of the sale of the lease by the people, the American government decided to step in due to problems with business & government shipping. The government swoops in and decides to offer lease sales for offshore wind energy with large structures well above the surface that could fall over like the leaning tower of Pisa, even though most drilling wells and equipment are submerged to the ocean floor. Whhaaaaaattttt????

That’s where, The Bureau of Ocean Energy Management (BOEM), which is the compliance regulation institution that will foresee of whether or not operators offshore meet the necessary requirements to stay operating or have to be removed. Here’s how it goes: 1) financial capability; 2) projected strength; 3) business stability; 4) reliability; and 5) record of compliance with laws and lease terms.

What does that mean for the small guys? These changes is that each co-lessee in an offshore job will have to have plentiful cash or surety bonds to front the total costs of a decommissioning concern. The changed effect will be an eruption in offshore bonding compliance regulation to the point that there may be less bonding capacity available. That point will drive the cost of bonding immensely. For smaller operators who do not have the cash flow to help their decommissioning expenses or be able to capture the essential bonds, they will pack their bags and leave offshore.

Let me get this straight, BOEM changing bonding rules to require EACH of the integrated operators involved in a lease to be 100% bonded for the full decommissioning cost of the project? The possibility or the future decommissioning cost could be 5X over funded correspondence to bonding? Outrageously high!

Plus, for the offshore service companies that can remain doing business in the big sea, since they are now liable for violations their insurance coverage skyrockets up, which means more costs on the operator’s bills. Doesn’t look worth it to drill offshore now does it?

Onshore the way to go? Seems like it!

During this slow nagging downturn, companies are having their fastest returns from shale plays. This is because the onshore game is run by quick returns and low costs to produce.

Plus, because of the lightning fast efficiency of onshore E&P, the offshore industry can’t keep up with the rapid pace of innovation, which can take up to 10 years with offshore projects. Simply put, offshore companies will die if they are below $50/bbl.

This is where to take notes: during this downturn companies will focus on fast ROI not growth projects. This will kill operational models that are long-term with deep-water and international, oil sands, MLPs, and bottom half of hydrocarbon enriched shale plays.

Public companies have less money with a lot of land to work with. This means less advanced assets to gain revenue which will require more time & revenue which will eliminate the private equity buy-flip strategies.

There will be more price volatility & Mergers & Acquisitions, more companies taking low-margin jobs just to keep revenue streams balanced, and borrowers/lenders alike will be intensely aware of where their budgets, P&L forecasts, and cash flow will look like.

Originally published at Pipebuzz