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Budget Deal Includes U.S.-Mexico Deepwater Drilling Accord

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December 11, 2013

Image (c) Bruce Rolff/Shutterstock

By Caitlin Webber

Dec. 11 (Bloomberg) — Deepwater oil and gas exploration would be allowed to proceed in parts of the western Gulf of Mexico as part of a budget compromise announced yesterday.

Language in the legislation would implement a 2012 U.S.- Mexico Agreement concerning hydrocarbon reservoirs in parts of the gulf that cross the international maritime boundary.

U.S. domestic crude production rose to a 25-year high as the combination of horizontal drilling and hydraulic fracturing, or fracking, unlocked supplies trapped in shale formations from Texas to North Dakota. Output from federal waters in the Gulf of Mexico will account for 17 percent of total U.S. production this year, down from 20 percent in 2012, government data showed.

“It’s a step in the right direction and it will add to oil supply,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “It’s another reason that oil will be relatively cheap. The Gulf of Mexico is not as critical as it used to be, so the price impact will be limited.”

West Texas Intermediate, the U.S. crude benchmark, dropped $1.07, or 1.1 percent, to $97.44 a barrel on the New York Mercantile Exchange, down 12 percent from this year’s settlement high of $110.53 on Sept. 6. Prices have moved between $90 and $100 since Oct. 22 and are up 6.1 percent this year. WTI was at its biggest discount to Brent, the European benchmark, in eight months on Nov. 27, having predominantly been at a premium until 2009.

Domestic Production

Royal Dutch Shell Plc, Chevron Corp., BP Plc and Anadarko Petroleum Corp. may be among the biggest beneficiaries of the end of the standoff as producing crude in the Gulf of Mexico has become one of the most profitable prospects in the world, Fadel Gheit, an analyst at Oppenheimer & Co. in New York, said in a telephone interview today.

“It’s good news for everybody,” he said. “The industry is looking for access to additional resources and there’s nothing better than getting access right in the Gulf of Mexico. This is basically our home court. We have the technology, people, the knowledge, the infrastructure, everything. It’s right in our backyard.”

Domestic crude production climbed to 8.08 million barrels a day in the week ended Dec. 6, the highest since 1988, the Energy Information Administration reported today. Output will average 7.5 million this year, with 1.27 million coming from the Gulf, according to the EIA. Gulf production was 1.56 million as recently as 2009.

Surpassing Imports

U.S. production surpassed imports in October for the first time since 1995, the EIA said in November in a monthly report. The country met 86 percent of its energy needs in the first eight months of 2013, on pace for the highest annual rate since 1986, according to the EIA.

The measure in the budget deal would also lay out a process for submitting future transboundary hydrocarbon agreements to Congress. It has taken more than a year to finalize the U.S.- Mexico deal because it got caught up in a dispute over the Dodd- Frank financial oversight law.

The budget agreement negotiators struck yesterday would do that, along with easing automatic U.S. spending cuts for two years, removing the risk of a government shutdown and cutting the deficit by $23 billion.

The House, with the backing of the American Petroleum Institute, moved legislation that would have both implemented the U.S.-Mexico agreement and given oil, gas and mining companies a waiver from a Dodd-Frank requirement that they file reports on payments made to a U.S. or foreign government related to “resource extraction.”

Removing Moratorium

Erik Milito, director of upstream operations at the American Petroleum Institute, said in October that the group was dropping its opposition to the Dodd-Frank reporting requirements as a way to expedite the U.S.-Mexico agreement.

The bilateral agreement would remove a moratorium on 1.5 million acres of the western Gulf that has attracted interest from major oil companies such as Shell, Chevron and BP, Bloomberg BNA reported.

The Interior Department’s Bureau of Ocean Energy Management estimates the border area contains as much as 172 million barrels of oil and 304 billion cubic feet of natural gas.

The agreement was negotiated by then-Secretary of State Hillary Clinton and signed in February 2012.

The House passed its version, H.R. 1613 on June 27 on a largely party-line vote. The White House preferred S. 812, a Senate-passed version with no Dodd-Frank waivers.

By Copyright 2013 Bloomberg.

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