Give Me One Reason – Why Gulf of Mexico Crude Production Isn't Always Steady As She Goes

The offshore Gulf of Mexico is often viewed as the rock-steady player in U.S. crude oil production. Unlike price-trigger-happy shale producers that quickly ratchet their activity up or down, depending on what WTI is selling for that month or quarter, producers in the Gulf base their big, upfront investments in new platforms or subsea tiebacks on very long-term oil-price expectations. Also, unlike shale wells, whose production peaks early then trails off, wells in the GOM typically maintain high levels of production for years and years. But don’t think for a minute that production in the Gulf can’t spike down, if there’s a good reason. GOM output dropped by 300 Mb/d, or 16%, from March to April as producers shut down wells in response to sharply lower oil prices, and a couple of weeks ago more than 80% of GOM wells were taken offline in anticipation of Hurricane Laura. Today, we look at offshore oil production ups and downs in a wild and woolly year and what’s ahead for the GOM.

As we said in Take a Look at Me Now, crude oil production in the offshore Gulf of Mexico is a topic that generally flies below the radar, unless there’s a major hurricane that causes a big, downward spike in output or a man-made disaster like the Macondo/Deepwater Horizon blowout in April 2010, which effectively halted drilling in the Gulf for more than a year. In The Crude Genie?, we noted that crude production in the GOM dropped by 510 Mb/d (to 1.09 MMb/d) between March 2010 (the month before the blowout) and September 2011, and it took almost four years (until August 2015) for Gulf production to return to pre-Macondo levels. And it took another year and a half — until February 2017 — for GOM output to top the all-time record of 1.75 MMb/d hit in September 2009 (see Don’t You Forget About Me). GOM production averaged 1.68 MMb/d in 2017, 1.76 MMb/d in 2018, and 1.90 MMb/d in 2019, reflecting the fact that production from new wells has been outpacing the gradual slowdown in output from existing wells. But there’s been some volatility: production the past three-plus years has spiked as high as 2.04 MMb/d (in August 2019) and dropped as low as 1.48 MMb/d (in 2017). And, as we’ll get to in a moment, production in the Gulf took another dive this spring in response to sharply lower refinery demand and oil prices, and took its deepest dive in years a few days ago, when Hurricane Laura tore through an area off the Louisiana/Texas coast that is dotted with production platforms and subsea tiebacks.

A common theme throughout our blogs has been that the offshore Gulf of Mexico is a different animal than U.S. shale production areas. For one thing, the crude oil produced offshore fits nicely into the crude slates of Gulf Coast refiners. As we said in I’ll Be Alright Without You, nearly two-thirds of GOM production has an API gravity of between 30.1 and 40.0 degrees, and most of the other third is 30-degree API or heavier –– squarely within the wheelhouse of the complex refineries near the coast. In contrast, shale plays primarily produce lighter crude, most of it with API values north of 40 degrees and some with APIs topping 45 and even 50. The GOM is also different from shale plays in the longer time it takes to develop new production wells in the Gulf and the slower natural decline in production there. It can take three or four years to build and install a new offshore platform and at least a year or two to develop a new subsea tieback; with new shale production, the time lag between the decision to develop a new well and first oil is relatively compressed. As for production, output from GOM wells, once initiated, is generally close to flat, with only a very slow decline over a period of many years — decades even — while production from shale wells starts out sky-high, then falls quickly after the first few months of operation. These differences mean that offshore producers take a decidedly long-term view on crude oil prices and demand when considering whether to invest in new platforms or subsea tiebacks.

To access the remainder of Give Me One Reason – Why Gulf of Mexico Crude Production Isn't Always Steady As She Goes you must be logged as a RBN Backstage Pass™ subscriber.

Full access to the RBN Energy blog archive which includes any posting more than 5 days old is available only to RBN Backstage Pass™ subscribers. In addition to blog archive access, RBN Backstage Pass™ resources include Drill-Down Reports, Spotlight Reports, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. If you have already purchased a subscription, be sure you are logged in For additional help or information, contact us at info@rbnenergy.com or 888-613-8874.