Increased Production

Crude oil production in the Gulf of Mexico (GOM) has been riding high in recent months, still surfing the wave of deepwater and ultra-deepwater projects whose development started in the “good ole days” of $100/Bbl oil. Some incremental output is still being added, keeping GOM production levels high even as onshore oil output is declining in response to low crude prices and drilling cutbacks. But exploration and production companies (E&Ps) are cutting their spending on offshore projects, and unless oil prices start to rebound soon the Gulf too will see a leveling off—and after that, a gradual fall--in production. Today, we conclude our series on resilient production levels in the GOM with a look at recent cutbacks and what they may mean for Gulf oil output in 2016 and beyond.

Crude oil production is off in most U.S. shale plays and at today’s prices will continue falling, but offshore Gulf of Mexico (GOM) output is resurging like a genie and it looks like 2016 will be another solid year. That means, with existing GOM wells producing at full throttle and new offshore production due online, U.S. production as a whole is down by less than you might expect, given that oil prices are stuck well under $35/Bbl. Today we begin a review of the resilience of GOM oil production, efforts to reduce costs, and new projects coming online.

With crude oil prices just over $40/bbl you might think producers would be reducing capex and cutting their 2015 production estimates.  But not so.  RBN’s analysis of second quarter guidance in 2015 indicates that 31 E&Ps as a group kept their capex outlook at about the same level as they indicated in Q1.  And as a group they still expect oil and gas production in 2015 to increase versus last year. But there were significant differences between the peer groups we examined. The Small/Mid-Size Oil-Weighted E&Ps upped 2015 investment by $730 million versus Q1 and now expect 2015 production to be up 16% over last year versus the 13% increase expected last quarter.  The Large Oil-Weighted E&Ps slashed capex by another $630 million, yet production is still expected to rise, in this case by 4% versus a 3% growth expectation last quarter.  In contrast, capital spending and production guidance were little changed among the gas-weighted peer groups. Today we provide an update to our Q1 analysis of capital spending and production trends.

CME NYMEX crude oil prices were down again yesterday – with the West Texas Intermediate (WTI) contract closing at $46.39 down $2.30 over the holiday weekend and over 55% lower than its high 7 months ago in June 2014. Some are billing the free fall in crude prices as a showdown between U.S. shale producers and OPEC. That is because OPEC has apparently decided not to cut production to prop up prices in an over supplied market in hopes that lower prices would squeeze out U.S. shale producers. If that was the strategy then it isn’t working so far. Today we review crude producer plans for 2015 and find lower capital expenditure budgets and cuts in rig deployment contrast with expanded production.