Gulf of Mexico’s oil riches pose climate question for Biden

Construction crews are putting the last touches on a 20-storey oil platform at a Texas dock. This month it will be towed 75 miles off the coast of Louisiana to suck 100,000 barrels a day from an undersea oilfield in the Gulf of Mexico.

The project operated by Shell is one of several new multibillion-dollar projects that will start pumping crude from federal waters offshore this year. How many will follow in the future is a treacherous question facing President Joe Biden’s administration.

This month the administration set out proposals for new oil lease auctions in federally-controlled waters over the next five years. The government’s options range from as many as 10 lease sales in the Gulf, plus another off Alaska, to holding no new lease sales at all.

The statutorily mandated auction plans have prompted fierce backlash from environmentalists and the oil industry alike. Both see the lease sales as a litmus test for the administration’s energy and climate policy.

Environmental groups, an important constituency that helped propel Biden to the presidency in 2020, said the president is backing down from the climate fight in the face of high petrol prices. Biden had pledged to end oil leasing in federal lands and waters when he was a presidential candidate.

“We are devastated that the administration continues to capitulate to fossil fuel interests,” said Hallie Templeton, legal director at Friends of the Earth. “President Biden’s empty climate promises expose him as yet another leader who cares more about polluters than about a liveable future for people and the planet.”

But the oil industry also believes there is a risk that the administration could sharply cut back the number of lease sales it offers, or end them altogether. Advocates said this will damage their businesses, undermine US oil supply and force the country to import more crude.

“If you remove production, without removing demand, you need to fill that demand from somewhere and it will come from overseas, and that oil has higher carbon intensity when it’s landed here,” said Paul Goodfellow, who heads the US Gulf of Mexico business for UK-based Shell.

The Gulf of Mexico is a foundation of US energy supply. Producers there are pumping about 2.2mn barrels of oil equivalent a day, accounting for about 15 per cent of total domestic US output, according to the consultancy Wood Mackenzie. Offshore Gulf supply is higher than that of smaller Opec producers such as Nigeria and Angola.

Despite the uncertainty around future leases, output from the Gulf of Mexico is headed to “record production levels” over the next couple of years, said Justin Rostant, a Wood Mackenzie analyst.

Shell’s project, known as Vito, is expected to pump 300mn barrels of oil over its lifetime operating in waters 4,000ft deep. Big offshore projects like Vito and BP’s Mad Dog 2, both authorised before the pandemic, will push offshore Gulf output to 2.5mn boe/d in 2025, he said.

Goodfellow said that without new leases, the company’s process of developing new fields, which can take a decade or more to bring into production, “comes to a grinding halt”. He warned that the uncertainty created by the administration “raises questions” about future investments in the Gulf.

Shell has pledged to reach net zero carbon emissions by 2050. In Goodfellow’s view, the Gulf will provide “some of the last barrels standing” as Shell starts to reduce its overall oil production this decade. Shell is the top operator in the Gulf and Goodfellow said its production from the region will hold steady in the coming years even as output falls elsewhere.

The new projects such as Vito also reflect big changes in the offshore oil industry over the past decade, which has been rocked by BP’s Deepwater Horizon disaster in 2010 and a series of dramatic price declines. Investors have also grown more sceptical of big oil and gas projects that take years to pay off given the uncertainty of future fossil fuel demand as government’s around the world look to slash greenhouse gas emissions.

In response, companies have scaled back developments to keep a lid on costs. Vito is a slimmed-down version of the original design from several years ago that was built at about a third of the initial estimated cost. The company said the project can remain profitable even if crude prices fall to $35 a barrel from current levels of about $100.

As part of its drive to standardise, Shell said its next big Gulf of Mexico project, the Whale development that is expected to start producing in 2024, is a near identical copy to the Vito platform. That is a big change for an industry that used to go back to the drawing board for every new project, which led to persistently high costs.

“We need to be like the fast-food sector of the oil and gas industry, not the bespoke unique high-end restaurant sector, which is where we were,” said Goodfellow.

Shell is betting big on new deep water developments in the US and around the world, with about 70 per cent of the company’s spending on new oil production going to offshore developments. Last year, it sold its holdings in the vast onshore Permian Basin shale oilfields in Texas and New Mexico to ConocoPhillips for $9.5bn.

While oil production continues to rise in the Gulf of Mexico, Wood Mackenzie’s Rostant said that was likely to reverse in the second half of this decade if new oil leasing is scaled back or reversed.

That might suit the Biden administration, which has made it clear it sees the Gulf as a key hub for the US’s energy transition. While new oil and gas leasing is on hold, the administration is accelerating plans to hold the region’s first offshore lease sale for wind power developers next year.

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