How will regulatory changes affect fields in the Gulf of Mexico?

Regulatory environment softens in deepwater GoM

The Bureau of Safety and Environmental Enforcement (BSEE) has changed an important aspect of the leasing terms in deepwater GoM. Previously, a lease that is beyond its primary term required either drilling, workovers or production within every 180 days to keep the lease active. Any leases that were within 180 days of termination also required operations to keep the lease from expiring. The new provision changes the time to 365 days and went into effect on June 9.

The change is likely to affect fields that have been appraised or are being appraised, and where leases are past their primary term or close to expiring. Several major fields could benefit from the change including North Platte (NPV 10: US$1.38 billion), Rydberg (NPV 10: US$280 million) and Shenandoah (NPV 10: US$172 million). Over US$1.5 billion has been spent appraising the three fields but the leases expire within the next 12 months. Formulating the development plans could be lengthy because of the complex nature of the projects. The extra six months give the operators much needed flexibility in determining the next steps without the imminent threat of the leases expiring or getting a suspension of operations (SOO) request approved, which can be difficult.

The update to the rules reflects a changing regulatory environment as government agencies come up with an effective response to a slowdown in deepwater investment. Capex has dropped to $10.4 billion in 2017, a 34% decline since 2015. At the start of 2017, BSEE also paused NTL 2016 — N01 (Requiring Additional Security), which was set to take effect in January 2017. The Joint and Several Liability clause of the notice to lessees was especially burdensome for smaller companies. It required each partner in a lease to be responsible for 100% of the project abandonment liability. A more equitable sharing agreement will free up capital for investment.

A change in the royalty rate and/or bringing back royalty suspension could also help spur growth. Lowering the royalty rate to 12.5% (from its current 18.75%) would impact the smaller, lower cost fields the most. Breakevens could decrease by 19% to US$25.61 (NPV 10), giving another encouraging sign to the industry that the government is on its side.

We use PetroView to show all the active leases where royalty suspension volumes are still available from the pre-2001 leasing terms era.