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New projects, cost-cutting efficiencies driving US Gulf comeback: Fuel for Thought

Summary:
Activity in what has been a mostly sluggish US Gulf of Mexico is expected to increase modestly in 2019, bringing production growth and more exploration aimed at finding the elephant fields of the future. Brent crude has fallen from highs in the mid-s/b months ago, but US Gulf operators, especially in deepwater, aren’t phased by volatile prices, analysts say. Instead, operators are deciding to grow in the gulf because of the industry’s increasing ability to make those fields more economic. Logistical and operational efficiencies, lower oilfield service costs, scaled designs and better engineering have combined to make the region more profitable than it was even before the 2014 industry downturn. “Generally, when industry is at peak efficiency and operating at its best, industry

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Activity in what has been a mostly sluggish US Gulf of Mexico is expected to increase modestly in 2019, bringing production growth and more exploration aimed at finding the elephant fields of the future.

Brent crude has fallen $20 from highs in the mid-$80s/b months ago, but US Gulf operators, especially in deepwater, aren’t phased by volatile prices, analysts say. Instead, operators are deciding to grow in the gulf because of the industry’s increasing ability to make those fields more economic.

Logistical and operational efficiencies, lower oilfield service costs, scaled designs and better engineering have combined to make the region more profitable than it was even before the 2014 industry downturn.

“Generally, when industry is at peak efficiency and operating at its best, industry fundamentals aren’t bad and oilfield costs are relatively low,” said William Turner, a Gulf of Mexico analyst at energy consultancy Wood Mackenzie.

New projects, cost-cutting efficiencies driving US Gulf comeback: Fuel for Thought

2019 will mark the first increase in US Gulf exploration in four years, Turner said. About 21 or 22 exploration and appraisal wells are expected this year in the US Gulf, up from 19 last year, according to Wood Mac. That compares with 40-50 wells drilled three or four years ago.

The increase is “from a low base,” Turner noted. “Certainly, we’re not at 2014 levels of exploration.”

The US Gulf accounts for nearly 16% of the US’ roughly 11.5 million b/d of oil production. Its crude oil production averaged 1.8 million b/d in Q4 2018, according to the US Energy Information Administration, compared with just less than 1.25 million b/d in 2013.

The EIA projects US Gulf production will crack the 2 million b/d mark in about a year. Meanwhile, S&P Global Platts Analytics projects oil output will end 2022 at 1.82 million b/d, up from a recent low of 1.50 million b/d in December 2018.

New projects, cost-cutting efficiencies driving US Gulf comeback: Fuel for Thought

Deepwater US Gulf spending is projected at about $10 billion this year, about the same as in 2017 but down from $16 billion in 2015, according to Wood Mac data. Contributing a swath of this year’s production will be Shell’s Appomattox field, capable of producing 175,000 barrels of oil equivalent per day at peak. Chevron’s Big Foot field, which debuted in November 2018, will ramp up this year; its peak production is 75,000 b/d of oil and 25,000 Mcf/d of natural gas.

Go deeper: S&P Global Platts Rigdata provides timely information on drilling activity in the US, Gulf of Mexico and Western Canada

Several smaller fields are due to come online in 2019, including Buckskin, Stonefly and Nearly Headless Nick from LLOG Exploration, with a combined production of 40,000-50,000 b/d.

Growing small operator Talos Energy, which acquired Stone Energy last year, said wells will come online this year at its Tornado and Boris field. The Tornado #3 well will debut at 10,000-15,000 boe/d, while Boris #3 should contribute 3,000-5,000 boe/d.

Better technology

Despite uncertain oil prices, enthusiastic operators say improved technology makes the area economic. Last month, BP outlined new US Gulf discoveries and nearly 1.5 billion additional barrels of oil it uncovered using improved seismic technology at its giant Thunder Horse and Atlantis fields. And Hess Corp. showcased numerous tieback opportunities at 50% to 100%-plus return rates during a December analyst meeting.

This year’s exploration plate will also see Hess spudding Esox, its first US Gulf exploration well in years, while Chevron already has a rig in place to drill the Yarrow prospect in the Mississippi Canyon area, south of Alabama.

Oil breakevens in the US Gulf average around $55-$60/b, Wood Mackenzie’s Turner said, although some projects are lower. Shell said its Vito development, which is slated for first oil in 2021, has a breakeven price less than $35/b.

Maintaining efficiencies

While tiebacks to existing fields will comprise a major part of US Gulf work this year, the big challenge is to “squeeze the efficiencies they’ve achieved and maintain them,” S&P Global Platts Analytics analyst Sami Yahya said. “What’s really important is the confidence of the market to maintain oil prices,” Yahya said. “They can’t sanction projects without fully knowing they can survive in a low-price environment.”

In addition, 2019 may see a significant project sanction: Chevron-operated Anchor in the Green Canyon area offshore Louisiana. Anchor is an early 2015 oil discovery the company at the time described as “significant.”

Anchor is not only important reserve-wise, but success and invocations there could open development opportunities across the industry, analysts said.

The field is ultra-high-pressure—20,000 pounds per square inch—compared to a current produceable limit around 15,000 psi. Technology is advancing to produce 20K fields, but few operators are large or able enough to take on the gamble.

If Chevron green-lights Anchor, which could happen by mid-year, it could open the frontier play to industry. That might result in a “gold rush” of new leasing and investment in remote, deep and technologically complex fields, Wood Mackenzie’s Turner said.

Another potential hot spot is the Appomattox field, which represents the first output from the Norphlet play offshore Alabama and Mississippi. Depending on how it performs, Appomattox could spur more Norphlet activity, analysts said.

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