Q&A: Why a Robust Offshore Oil and Natural Gas Leasing Program is Critical for U.S. Energy Security

Mark Green
Posted February 1, 2023

Completing and implementing a robust five-year program for federal offshore oil and natural gas leasing is essential for strong energy production on the U.S. Outer Continental Shelf (OCS). Unfortunately, there are significant problems with the U.S. Interior Department’s proposed new leasing program, which, if left unaddressed, could undermine American offshore production and U.S. energy security. Key questions: How important is the offshore oil and natural gas leasing program for energy security, and how should Interior’s proposal be strengthened?

Those and other points are addressed in the Q&A below with Holly Hopkins, API’s new vice president of Upstream Policy. Hopkins worked in upstream policy for API for more than 12 years before her recent promotion to Upstream vice president. Prior to joining API, she worked for the U.S. Minerals Management Service, predecessor of three federal agencies – the Bureau of Ocean Energy Management (BOEM), the Bureau of Safety and Environmental Enforcement, and the Office of Natural Resources Revenue.

Q: What is the five-year leasing program, and why is it important to U.S. offshore oil and natural gas production?

Hopkins: The five-year offshore leasing program, which also is called the National Program, is the government’s schedule of oil and natural gas lease sales that must be issued at least every five years under the Outer Continental Shelf Lands Act. Basically, it’s a roadmap for the leasing that Interior will conduct over the five-year period – showing the size, timing and location of planned lease sales. The program is intended to reflect Congress' intent that the OCS be a public national resource that should be made available for expeditious and orderly development, subject to environmental safeguards. A lease sale cannot be held unless it is included in the five-year program – or is directed to be held by an act of Congress.

So, the program is vital to offshore energy production. Under previous bipartisan administrations, producers, the states and other stakeholders have relied on the program to make decisions about oil and natural gas projects that cost billions of dollars and can take seven to 10 years to start producing energy. The program should provide certainty and transparency for these decisions, which producers need to commit to the investment levels required for deepwater offshore exploration and development.

Q: Explain the timeline for offshore development and how that underscores the role of the five-year leasing program.

Hopkins: In general, from purchase of the lease to first production can take anywhere from seven to 10 years in deepwater areas. In this context, the timeline for OCS exploration and production can include:

• One year for preliminary geological investigation and selecting areas of interest to explore using safe seismic testing.
• One to two years to acquire and process 3D seismic data, including new wide azimuth data, and to identify good prospects for drilling.
• As much as a year or more to contract and schedule a drilling rig and six to 10 months for drilling and completion of an exploratory well.
• Six months to a year for follow-up evaluation of drilling results, which can include drilling a sidetrack well to test additional geologic features for the presence of oil and natural gas.
• If the exploratory well is successful, another two to three years for additional delineation drilling and forming a plan for reservoir development. During this time, a company also is working on pre-permit studies, permitting, and design and procurement for production facilities, including surface and subsurface equipment and systems.
• One year or more for facilities installation, followed by development drilling, which may take from one to two additional years. During this period, the company is involved in design, permitting, engineering, procurement and installation of a pipeline or offshore mooring system to bring the production to market.

You can see that for all of these plans to be set in motion, for producers to go through the time and expense of this process, they need a clear understanding of the government’s leasing plans years down the road.

Q: Why is offshore oil and natural gas production important to America’s energy security? How much of America’s oil and natural gas, respectively, come from the offshore?

Hopkins: For decades, the U.S. OCS has averaged more than 1 million barrels per day of oil production, with the vast majority coming from the Gulf of Mexico. In 2021 – the final 2022 numbers aren’t available yet – offshore oil made up a little more than 15% of U.S. oil production, and offshore natural gas accounted for about 2% of U.S. natural gas production.

At times the offshore has represented more than 30% of total U.S. production. The percentage has reduced over time as U.S. onshore shale production accelerated, but the OCS remains the backbone of U.S. oil production.

Because of the offshore’s long timeline, it’s very much a strategic energy asset. You don’t make a decision today to set up an offshore platform a few weeks or months in the future. Unlike shale production, which can be ramped up or shut down rather quickly, once the investment decision is made for an offshore project, with all of its steps and moving parts, it’s hard to turn back. The value of the offshore is that it affords America a level of energy security measured in large amounts of energy for long periods of production. But this production must be sustained with continued leasing and access to new areas for exploration.

Q: With all of the approximately 1.7 billion acres of the U.S. OCS under federal control, how much is off limits to development?

Hopkins: It’s pretty simple: Without a five-year leasing program in place, all of the U.S. OCS is off limits to energy development. That’s basically where we are now. Interior’s proposal for a new program last summer came right as the previous program expired.

In our view, Interior’s proposed program, which includes an option for zero leasing over the next five years is flawed and insufficient for ensuring America’s future energy needs. If no leasing is done over that interval, there could be significant damage to U.S. energy security.

Delay and uncertainty over the next offshore oil and natural gas leasing program has put the United States in the risky and unprecedented position of having a substantial gap between leasing programs for the first time since the process started in the early 1980s. Because a finalized leasing program is not yet in place, American producers are at a significant disadvantage on the global stage, which could threaten our country’s economic and national security.

Q: What should a strong leasing program look like?

Hopkins: A robust offshore oil and natural gas leasing program is one that provides ample opportunity to explore and develop existing producing areas, mainly the Gulf of Mexico, while also opening new areas for exploration, such as the Eastern Gulf or Atlantic OCS.  Unfortunately, most new areas of interest to our member companies have been excluded from future leasing.

Some areas are permanently off limits to future leasing, such as the Chukchi Sea and most of the Beaufort Seas offshore from Alaska, which President Obama withdrew from consideration. Other areas, such as the Eastern Gulf and the Mid- and South Atlantic, and acreages under presidential moratoria, cannot be leased until 2032 at the earliest.

A key element of a strong program is an unmistakable signal from the government that there will be steady leasing in the foreseeable future. Of course, this is undermined by the zero-lease option in the current program proposal.

Q: What happens if the leasing program is missing these elements? Will companies go elsewhere, and what does that mean if they do?

Hopkins: If companies believe that the risk of unfavorable or even hostile government policies toward offshore oil and natural gas exploration and development is too high, they’re likely to consider investing in projects elsewhere, in onshore U.S. basins or in other offshore areas of the world that are more receptive to continued exploration and development. It’s possible we could see American OCS production decline, and that’s a problem because energy demand is rising. That demand will have to be met somewhere.

Without continued leasing in the Gulf of Mexico, investments in the area could begin to fall off.  Production from previous discoveries should offset existing field declines and maintain relatively stable production volumes over the next two to three years. But already the Gulf is seeing less exploratory drilling and new discoveries, and with no leasing, the long-term trend is not promising. (Seen in the graphs below, based on BOEM data.)

Q. What is your expectation for offshore leasing in 2023? When will the Interior Department finalize the leasing program and hold more sales?

If not for the upcoming Inflation Reduction Act (IRA) mandated offshore lease sales, 2023 would shape up as another year without lease sales because of the unprecedented lapse in the five-year program. 

The pre-leasing activities for the Gulf of Mexico sales scheduled for March and September are on track, and we expect the sales to be held as directed by the IRA. Given that there are already two sales scheduled for 2023 and the need for the government to finish work on the environmental analysis and address hundreds of thousands of public comments received on the proposed new leasing program, the Final Program isn’t likely until 2024, with the first sale in the new program also held in 2024. . But it’s still possible for the administration to issue a five-year program with no lease sales.

As I said earlier, the offshore is critically important to American energy security and electing to hold zero new lease sales over the next five years could significantly impact U.S. production and weaken American energy security. We hope the administration recognizes this and comes forward with a robust leasing program that properly plans for America’s energy future.