Management issues: Keep offshore energy flowing in 2023 and beyond
Major economic, energy and geopolitical upheaval and uncertainty made 2022 the “Year of the Unexpected.” From the unprovoked invasion of Ukraine to China’s Covid woes to the collapse of FTX, 2022 brought its fair share of difficulties around the world.
However, the U.S. offshore energy sector was able to capture a substantial legislative victory, giving it far more momentum heading into 2023 than one year prior. Congress can capitalize on these critical tailwinds by focusing their legislative priorities on policy that advances American energy.
Achieving a victory. To begin with, a Democrat-controlled Congress granted American offshore oil and gas production (Fig. 1) a reprieve from cancelled lease sales and permitting delays through the Inflation Reduction Act (IRA) during late summer 2022. Especially after a prior piece of the legislation, the Build Back Better act seemingly fell apart on the finish line, very few people had passage of the IRA on their Congressional BINGO card.
The IRA was the result of a compromise between Senate Energy & Natural Resources Chairman Joe Manchin (D-W.V.) and Senate Majority Leader Chuck Schumer (D-N.Y.). It included, perhaps surprisingly, a levy of provisions supporting a diversity of offshore energy segments, including offshore oil and gas leasing, along with provisions in support of offshore wind and carbon sequestration.
The IRA reinstated the previously vacated Gulf of Mexico oil and gas Lease Sale 257. The legislation also requires the Department of the Interior to hold the previously cancelled offshore Lease Sales 258, 259 and 261. A clear timeline of when these lease sales must be held was also established. Cook Inlet (offshore Alaska) Lease Sale 258 was held at the end of 2022. Region-wide Gulf of Mexico Lease Sales 259 and 261 will be held during 2023. The bill also created a tie-in for the issuance of offshore wind leases, under which oil and gas leasing acreage of 60 million acres (roughly an area-wide Gulf sale) must be offered within a year of issuing an offshore wind lease.
The offshore oil and gas provisions were an unexpected win for the offshore energy sector that came at a critical moment; the industry was going through an unprecedent gap in offshore oil and gas lease sales. Without new leasing opportunities, continued domestic energy production is stymied in both the near and long term. The IRA injected a degree of stability in the Gulf of Mexico.
Help for wind and CCS, too. The IRA also provided a boost for offshore wind. Along with extension of tax credits, the bill lifted a 10-year offshore wind leasing moratorium in the Southeastern U.S. and eastern Gulf of Mexico. BOEM may hold the next round of Central Atlantic offshore wind lease sales this year, which could include offerings in areas that were previously under a moratorium.
The IRA also included provisions to jump-start the U.S. offshore carbon sequestration sector. Carbon capture and storage (CCS) offers a way to capture GHG emissions right at the source and then transport and inject the gases in underground formations for long-term storage. The offshore oil and gas industry has unique expertise in developing and managing the engineering and design of subsea projects in the marine environment. The U.S. offshore environment, and the Gulf of Mexico in particular, offers a premier opportunity for sequestering large amounts of carbon dioxide to help achieve climate goals. CCS technology can help flatten GHG emissions, as lower-carbon energy alternatives mature in the market.
While the Department of the Interior is still promulgating the first offshore carbon sequestration regulations, many companies are moving ahead with their plans to lead in this important space. The Inflation Reduction Act increases the federal 45Q tax credit and offers Direct Pay for offshore carbon sequestration projects.
Legislative outlook. The IRA was a massive and historic piece of legislation. It is complex and has elicited strong responses from supporters and detractors. At the end of the day, the U.S. offshore oil and gas outlook went from cancelled and vacated lease sales back to what hopefully will prove to be business as usual, Fig. 2. As the IRA shows, even the most plugged-in prognosticator cannot always predict what Congress is going to do. However, predicting the legislative outlook is even more difficult when heading into a new Congress with significant turnover in both chambers.
Based upon what we have seen with prior legislative proposals, Congress could consider legislation that sets a deadline for the completion of the next federal offshore oil and gas leasing program and mandates at least a minimum number of regionwide Gulf of Mexico lease sales. The IRA does not address the lack of an active federal offshore oil and gas leasing program. Interior is legally required to maintain a leasing program and to schedule and hold lease sales, yet a federal offshore leasing program is currently going through an unprecedented lapse.
With a heightened level of uncertainty in the Gulf of Mexico without long-term lease opportunities, investment dollars may naturally leave the U.S. to be spent in regions with much weaker and more unpredictable regulatory and permitting regimes.
Permitting situation. Congress could also focus on timely permitting for energy projects, Fig. 3. Due to an agency error acknowledged by the National Marine Fisheries Service (NMFS), the permitting backlog at NMFS is delaying seismic surveys and production on current federal leases. There are unreasonable delays impacting current leases that could produce substantial volumes of domestic oil in the near future. NMFS has issued proposed revisions that are a step in the right direction, but the GOP-led House could pursue actions to prevent these needless delays from happening again.
Similarly, while an IRA-adjacent permitting deal between Senators Manchin and Schumer stalled in the lead-up to the mid-term elections, wider permitting reform will continue to be a priority for both Senator Manchin and Republican leadership. There is broad recognition that NEPA reform is essential for timely and thorough environmental reviews. Steps must be taken to make sure red tape does not unnecessarily or arbitrarily impede critical infrastructure projects, especially as the U.S. tries to modernize its infrastructure and scale and deploy additional solutions to address climate change, such as offshore wind and carbon sequestration.
Prosperity through strength. A strong American offshore sector means good-paying jobs, affordable energy supplies, important funding for local infrastructure needs, coastal restoration and resiliency, and parks and recreation programs, and a stable source of lower-carbon energy. These benefits cannot continue without a long-term leasing program. In the global energy marketplace, U.S. energy policy should serve to encourage and attract investment to the U.S. offshore region.
We witnessed disruptive, debilitating and unnecessary energy crises in various regions during 2022. The lesson of 2022 is that energy should be non-partisan. Sweeping offshore energy provisions, including oil and gas, were included in the historic Inflation Reduction Act, because offshore energy benefits every American, regardless of party. Everyone wins through affordable energy, good-paying and accessible jobs, and domestic energy production that advances climate solutions and provides an alternative to energy from higher-emitting geopolitical adversaries such as Russia.
Policymakers should work together to advance a balanced energy strategy, based upon principles of affordability, energy security, national security, and continued environmental and emission progress.
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