Gulf of Mexico Oil Drilling Under Threat From Government Impasse

By Jennifer A. Dlouhy (Bloomberg) —

A fight over Gulf of Mexico oil production is looming in Washington as US regulators race to redo guidance on how to protect endangered species ahead of a deadline that could ultimately threaten about 15% of the nation’s crude output.

The standoff stems from a scientific assessment that underpins oil and gas operations in the Gulf. Under a court ruling, the US government has until Dec. 20 to revise that analysis, when the current one will be tossed out. If regulators don’t finish by the deadline — and courts or Congress don’t intervene to provide more time — existing oil and gas operations that depend on the evaluation could grind to a halt. 

The effects could be sweeping: If the Gulf of Mexico were a country, it would rank among the world’s top 12 oil producers globally.

“The ramifications could be potentially enormous for operations in what we and many others recognize is such a vital, producing region,” said Dustin Meyer, a senior vice president for the American Petroleum Institute. “The level of concern is very high.”

Even with some uncertainty over the impact, the potential for peril has triggered a lobbying frenzy by oil companies and industry groups mulling legal strategies and possible legislation to head off major disruption. One lobbyist likened the situation to an “all-hands-on-deck” moment. Impacts could be felt well before the Dec. 20 deadline, colliding with a presidential election that’s putting the spotlight on economic stability and energy security.

Legal Foundation

At issue is the government’s main Endangered Species Act analysis of oil and gas activity in the Gulf, a so-called biological opinion released in 2020 documenting how drilling, pipeline construction and other operations might jeopardize protected species in the region. 

The broad assessment provides a legal foundation for oil and gas activity under existing Gulf leases. US offshore drilling and leasing regulators generally rely on it instead of doing case-by-case evaluations.

Environmental groups challenged the biological opinion four years ago, arguing it didn’t properly analyze how oil operations affect endangered and threatened species. Last month, a Maryland-based federal district judge sided with them, tossing out the biological opinion — effective Dec. 20 — and sending it back to the National Marine Fisheries Service for a redo. 

The agency had already started work on a new version preemptively, but told the court it might not be done “until late winter or early spring 2025.”

Without a valid biological opinion in place, energy regulators would likely be forced to consult on hundreds — if not thousands — of decisions annually, according to data they provided the court. 

‘Cascading Effects’

The individual reviews would “overwhelm” the agencies and have “cascading effects” not just for oil operations in the Gulf but also renewable permitting on federal waters, Walter Cruickshank, the deputy director of the Bureau of Ocean Energy Management, told the court in April. 

National Oceanic and Atmospheric Administration, which houses the fisheries service, and the Interior Department, which handles offshore oil and gas leases, said they are reviewing last month’s court decision, but declined to comment further. 

The issue is already causing anxiety for some Gulf operators worried not just about delayed government approvals but the viability of existing work authorized under the court-invalidated biological opinion. At stake are operations as varied as traffic from ships supplying offshore platforms to continued production at long-permitted wells, according to industry lawyers who asked not to be named speaking about private legal discussions.

Oil companies and suppliers operating offshore could face additional legal jeopardy if they continue work without new authorizations. 

The government previously authorized “incidental takes” — where oil and gas activities cause harassment, harm or other injury to certain species as long as companies are complying with the 2020 biological opinion. Without that authorization in place, companies “will have to decide whether they continue to operate at their own risk,” or instead “shut down their activities” while waiting for a new biological opinion, Holland & Knight warned in an alert last week. 

With about 2 million barrels of oil produced daily from the Gulf, the potential disruptions “would likely cause considerable economic and national security harm to our country,” said Erik Milito, head of the National Ocean Industries Association, which along with other industry trade groups, including the API, and Chevron USA Inc., has intervened to defend the government in the lawsuit. Talks with the government are ongoing. 

Industry stakeholders are considering legal options, including seeking a stay, if another solution doesn’t materialize soon. They also have been talking with congressional offices about the issue, and are weighing legislation that could address the issue by giving the fisheries service more time. 

“Given the vital importance of the Gulf of Mexico,” Milito said, “we remain optimistic that cooler heads will prevail, and we will see much-needed resolution to this issue.”

© 2024 Bloomberg L.P.

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