Gulf of Mexico looking good for comeback

The Ben Loyal oil rig on operations in the Gulf of Mexico
The Ben Loyal oil rig on operations in the Gulf of Mexico

The US Gulf of Mexico is making a comeback this year.

Wood Mackenzie predicted the first increase in drilling activity since the collapse in 2014, first-ever production from a Jurassic play and key new project sanctions.

In its outlook, Woodmac said that after four years of decline, exploration activity is back on the up with an increase of 30% predicted for 2019.

According to World Oil’s 2019 forecast, GoM drilling should lift 7.7% to 140 wells overall.

The anticipated uptick will be a welcome relief to drillers especially, who have endured years of decline including the 17% drop in drilling activity recorded last year.

However, even with efficiencies that have reduced break-even costs to $40 per barrel, it has been noted elsewhere that the outlook doesn’t foresee a meaningful resurgence in deepwater drilling during 2019 and, perhaps, early 2020.

On the development drilling front, Westwood Global Energy Group predicts 136 subsea wells will be drilled in the US GoM across 2019-23, and that 215 surface wells will be drilled over the same period.

Shell and Chevron are expected to lead the way, but the actual growth in exploration will come from new entrants – Kosmos Energy, Equinor, Total, Murphy, and Fieldwood.

Shell has already announced an exploration success in the current year, as has BP.

This year is also crucial on the development front, notably Chevron-operated Anchor on Green Canyon block 807 for which the FEED bid was opened in January with an award predicted to be imminent.

Anchor, which has an operating pressure of 20-ksi, will when it reaches final investment decision be the first ultra-high-pressure project in the world.

FID would mark the culmination of more than a decade of multiple joint industry research and development projects to design kit that can safely produce at 20-ksi. The current limit is 15-ksi.

Success at Anchor will lead to the next wave of mega-investment in the Gulf of Mexico, as several 20-ksi projects are waiting to follow its lead; all of which will require the drilling of physically challenging development wells and, in some instances, further appraisal wells.

Woodmac believes that if Anchor moves forward, more than $10 billion of investment could flow into the region.

“Proof of concept at Anchor, and more certainty around facilities to serve as hosts, will surely increase interest in discovered fields,” said Woodmac analyst William Turner.

“We expect it will also invite more exploration for ultra-high-pressure targets over the next couple of years. Even so, with higher technical risk and higher breakevens, market conditions would have to align for it to become a reality.”

Another project being closely watched is Shell’s Appomattox development, in Mississippi Canyon Block 392. It is due on stream this year and will mark the first production from a Jurassic reservoir in the region.

“If the Jurassic roars to life in 2019, it could give operators greater confidence in the play’s potential,” Mr Turner said. “However, if Appomattox disappoints, the Jurassic could continue to lie dormant. The wider region would also be missing an expected strong production growth contributor.”

Meanwhile, it looks as if Shell has struck pay-dirt with its ongoing Blacktip exploration probe being drilled some 250 miles south of Houston in the deepwater Alaminos Canyon.

The well is about 30 miles from the Shell-operated Perdido platform and the recent Whale discovery, also in Alaminos Canyon.

Hopeful: Lease sales could increase interest in the Gulf of Mexico

Blacktip is operated by Shell (52.375%) and co-owned by Chevron (20%), Equinor (19.125%), and Repsol (8.5%).
Through exploration, Shell has added more than a billion barrels oil equivalent to its portfolio over the past decade in the Gulf of Mexico.

Moreover, the super-major’s global deep-water production is on track to exceed 900,000 boe per day by 2020.

While drilling activity and investment are returning to the region, a key factor to ensure a strong future will be holding on to the industry-wide efficiency gains made since 2014.

“In the last four years, deepwater operators have focused heavily on lean operations, standardisation and industry collaboration to achieve fiscal discipline,” said Mr Turner. “Reverting to inefficient ways of doing things is a real threat.

“The challenge will be to hold onto lessons learned, mitigate efficiency risks where possible and properly plan for higher costs and longer schedules where unavoidable.”
Exploration and development drilling in deep water has increased considerably. Indeed, oil output on the shelf area, where production began 70 years ago, has declined 77% over the past 20 years, while deepwater oil output has risen by 198% in the same period.

Gas production on the shelf is down 92% while deepwater gas production has remained flat.

About 50,000 wells have been drilled on the shelf compared to about 5,000 wells in deepwater, where production began about 45 years ago.

On the development side, fewer, larger, deeper and more-complex platforms are replacing shallow-water facilities. The average water depth for new GoM production platforms is more than 1,000ft versus 225ft just 10 years ago.

Another important bellwether stimulus to activity is the ritual of lease sales of which there were two last year, with two planned for the current year, one of which has already been held.

Lease sale 250 – staged in March last year and the largest in the history of the US GoM – pulled a weak response from industry bidders, as a small percentage of available blocks received winning bids well below past price averages.

The auction included 14,474 unleased blocks and, of these, just 148 received bids, with the high bids worth a combined $124.7 million.

Most of the blocks that attracted bids were either deepwater or very shallow water: 59 blocks with bids were in depths of 1,600m or more, and 43 blocks of 200m or less received bids.

The bulk of these blocks received one bid. Mississippi Canyon 509 was the only one to receive three bids. Total won it, offering just over $7m, the highest individual bid placed on a block in this lease sale.

Mississippi Canyon was one of the few active areas in the sale. Chevron paid about $7m for the rights to three deepwater blocks in the area: MC 740, MC, 786, and MC 241.

LLOG won the rights to MC 509 for $4.1m, and BP paid $2.9m for the rights to MC 564.

Other high bids came in the Alaminos Canyon near south Texas and the Green Canyon.

Lease sale 251 last August attracted 171 bids for 144 shallow and deepwater tracts from 29 companies, with high bids totalling $178.1m.

Notably, Exxon acquired 25 deepwater blocks in the Desoto and Lloyd Ridge areas. BP acquired equity in 19 deepwater blocks.

Lease sale 252 in March this year pulled 257 bids from 30 participating companies, with high bids totalling $244.3m. Shell was the leading bidder, with 87 high bids for $84.8m. Anadarko had 27 high bids for $24.1m.

At least 97% of the leases offered in the three sales are located in the US GoM
Lease sale 252, live-streamed from New Orleans, was the fourth offshore sale held under the 2017-2022 National Outer Continental Shelf Oil & Gas Leasing Program.

Under this programme, a total of 10 region-wide lease sales are scheduled for the GoM, where resource potential and industry interest are high, and oil and gas infrastructure is well established.

Two Gulf lease sales will be held each year and include all available blocks in the combined Western, Central, and Eastern Gulf of Mexico Planning Areas.

They are expected to stimulate considerable further activity over the coming decade.
Many drilling industry fingers will be crossed.

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