Energy Pulse: in brief (29 September)

The Biden administration announces plans for the “fewest offshore oil and gas lease sales in history”

The Biden administration has published its Proposed Final Program for offshore oil and gas lease sales over 2024-29, including a maximum of just three in the Gulf of Mexico. The plan compares to the Trump administration’s proposal of 47 lease sales off all coastal areas in the US over a five-year period.

The three possible sales in the Gulf of Mexico, scheduled for 2025, 2027 and 2029, were described by the Department of the Interior as the minimum needed for it to continue with its leasing programme for offshore wind. Under the Inflation Reduction Act, passed last year, the Bureau of Ocean Energy Management (BOEM) is not allowed to issue a lease for offshore wind development unless it has offered at least 60 million acres for offshore oil and gas leasing in the previous year.

The department said in a statement that limiting lease sales to no more than three would “bring the Federal offshore oil and gas program in line with the Biden-Harris administration’s goal of net-zero emissions by 2050.”

Deb Haaland, the secretary of the interior, said: “The Proposed Final Program, which represents the smallest number of oil and gas lease sales in history, sets a course for the Department to support the growing offshore wind industry and protect against the potential for environmental damage and adverse impacts to coastal communities.” 

US Gulf of Mexico Lease Sale 261 postponed due to legal action

A few days before the administration announced its proposed leasing programme, the US Court of Appeals Fifth Circuit ordered that Gulf of Mexico Lease Sale 261, scheduled to take place on Wednesday, should be delayed to 8 November. The cause was a lawsuit filed by the State of Louisiana, the American Petroleum Institute (API), Chevron, and Shell, contesting the withdrawal of certain offshore blocks from the sale area.

A court ruling last week ordered the BOEM to return the withdrawn areas to the sale. In response, BOEM and environmental advocacy groups appealed the decision. While the appeals court did not fully side with BOEM in its appeal, they did order a delay to the sale, so the administrative actions required to return the withdrawn blocks to the sale area could be completed.

Besides the withdrawal of acreage, BOEM had imposed restrictions on vessel movement in the gulf from 100 to 400 meters water depth, intending to protect the habitat of the Rice’s whale. Previously, the area restricted due to the Rice’s whale was mainly limited to the Eastern gulf. With Sale 261, BOEM sought to expand this area to the entire gulf through the 100 to 400-meter depth band.

The 100 to 400-meter depth band is where the Gulf of Mexico transitions from shallow water shelf to deepwater. While it is not an especially significant area for exploration and development, the restrictions on vessel transit would impact deepwater operators. In their court filings, Shell and Chevron suggested that the restrictions could cost a million dollars or more per vessel, as drilling rigs and support ships would require more time to transit through the restricted area.

While the Inflation Reduction Act passage appeared to reduce the uncertainty around US offshore leasing, this new lawsuit suggests that some uncertainty and political risk will remain. We expect any newly imposed restrictions will be vigorously contested by industry and coastal states.

Equinor commits to deepwater oil development in the UK

Equinor this week announced a Final Investment Decision (FID) for the first phase of the Rosebank deepwater oil field in the UK. Rosebank Phase 1 will recover 245 million barrels of oil, making it the UK's biggest development by reserves since Buzzard in 2003. Equinor (80%) and partner Ithaca Energy (20%) will invest US$3.8 billion in Rosebank Phase 1. First production is expected in 2026-27.

Equinor’s 80% stake in Rosebank means it becomes one of the Norwegian NOC’s largest global capital investments. On field start-up, we estimate the UK will account for about 5% to Equinor’s global oil and gas output, helping the company achieve its aim of growing oil and gas output to the middle of this decade. Rosebank is aligned with Equinor’s strategy to become a diversified energy supplier in selected key markets, joining Equinor’s large-scale investment in UK offshore wind, CCUS and hydrogen.

Rosebank is also set to generate a healthy investment return for Equinor. In our base case model, we calculate that the field will deliver an IRR of 25% to the company after including the effects of the company’s wider tax position in the UK.

But there are big risks. Rosebank’s deepwater location West of Shetland is one of harshest environments in the UK and will make development challenging. Fiscal changes are also a key threat. Rosebank economics would become marginal if the UK’s Investment Tax Allowance (ITA) is removed and Energy Profits Levy (EPL) is continued indefinitely following the UK’s next general election in 2024. As a greenfield oil development, Rosebank has attracted much environmental opposition in the UK.

TotalEnergies sets out its 2023 strategy and outlook

More energy, less emissions and growing cash flow were the main messages in TotalEnergies’ 2023 Strategy & Outlook presentation. The company is sticking with a balanced growth strategy underpinned by two pillars: the energy of today (oil and gas) and the low-carbon energy of tomorrow (integrated power).

The focus on Integrated Power stood out. TotalEnergies is building a portfolio of renewable power, flexible generation (CCGT), storage, trading and customers to extract value by selling firm, clean power. Deregulated markets will account for more than 70% of the capacity the company plans to bring online, providing opportunities to capture value through managing volatility.

The big news was a new profitability target. TotalEnergies is now targeting a 12% ROACE from Integrated Power, compared to the previous 10% return on equity target. The new target is also equivalent to the Upstream ROACE at US$60/bbl.

TotalEnergies also provided an update on its oil and gas cash engine, outlining how a rich portfolio of projects is driving growth. The company expects volumes to grow at 2% to 3% per annum between 2023 and 2028, which looks achievable on our projections.

Balance sheet strength and cash flow growth provided the backdrop for an upgrade to the distribution strategy. Management outlined plans to deliver US$6 billion of operating cash flow growth between 2023 and 2028 under constant prices. The company raised its planned distribution payout to 44% of operating cash flow in 2023 and more than 40% from 2024.

Iran begins the development of a new gas field in the Northeast

The National Iranian Oil Company (NIOC) has started the development of the Tous gas field, which holds an estimated 2.1 trillion cubic feet of gas initially in place.

Despite being the world’s third-largest gas producer, Iran has been importing gas from Turkmenistan for decades to supply its Northern provinces. The Iranian gas fields are all located in the South, especially in the Gulf, far from the sparsely populated areas in the North. Gas from the Gulf is not flowing to these remote regions due to the high transportation costs associated with the construction of long pipelines.

Iran's reliance on imports from Turkmenistan to meet the gas demand of its Northern provinces comes with challenges. When gas prices spiked in 2016, Iran built up a substantial US$1.8 billion debt, resulting in Türkmengaz cutting off supplies. Iran resumed a test delivery of 350 million cubic feet per day from Turkmenistan earlier this month, after a six-year hiatus.

The gas conflict with Turkmenistan has prompted Tehran to focus on the development of its Northern gas reserves. The Tous field is expected to reduce Iran's dependence on gas imports from Ashkhabad and establish energy security in this remote region.

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Peter Findlay — Seven key questions on the CCUS outlook

Murray Douglas — Our top takeaways from Wood Mackenzie’s Hydrogen Conference 2023

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Mauro Chavez — Three key takeaways from our Europe Gas and Power Markets Short-Term Outlook Q3 2023

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Thanks for this week’s Energy Pulse in brief to Scott Nance, Norman Valentine, Gail Anderson, Tom Ellacott and Serveh Naderi