The Crude Genie? - Gulf of Mexico Production Buoyant Despite Crashing Oil Prices

Work continues on several major deep- and shallow-water crude oil production projects in the U.S. Gulf of Mexico (GOM), despite the fact that oil prices are far lower than they were when the commitments to develop these projects were made. U.S. benchmark West Texas Intermediate (WTI) crude for prompt delivery closed yesterday on the CME/NYMEX futures market at $26.55/Bbl – its lowest level since May 2003 – threatening to strangle resilient domestic onshore shale production. Yet GOM production levels will rise again this year--and likely for at least another couple of years—offsetting some of the expected decline in onshore U.S. crude output.  Today, we continue our examination of steadily rising crude output in the GOM with a look at projects coming online in 2016 and beyond.

Because of the complex challenges and big bucks involved, it typically takes several years to advance an offshore oil project from discovery to exploration, appraisal, final investment decision (FID), construction and—finally--production. And, as you might guess, a lot can change in those intervening years, not the least of which being the market price of the crude you eventually produce. In July 2015, a full year after oil prices started their long and precipitous decline, Royal Dutch Shell’s Offshore unit made the FID to develop the Appomattox deep-water project, which will involve the installation of Shell’s eighth—and largest—floating platform in the GOM, 80 miles off the Louisiana coast, and which (with the adjoining Vicksburg field) is expected to produce 175 Mb/d once it ramps up. Shell, which holds a 79% working interest in the Appomattox/Vicksburg project and will operate it (Nexen Petroleum Offshore USA owns the other 21%), knew when it made its FID six months ago that oil prices had fallen significantly over the previous year, but it put its nose to the grindstone and reduced total project costs by one-fifth (through supply chain savings, design improvements, and reducing the number of wells required for the development). Even with these cost savings though, Shell estimated the “go-forward project breakeven price” at about $55/Bbl—more than $25/Bbl higher than where oil prices stand today (January 2016). Still, as we said in the opening episode of this blog series, exploration and production companies (E&Ps) active in the GOM take a decidedly long-term view when considering whether to proceed with a major project. After all, production levels at the best offshore wells typically remain high and flat for a number of years, in sharp contrast to onshore, shale-play wells, where production levels peak high and early, followed by a quick decline. That dichotomy has resulted in what we see now: namely, declining output in most shale plays (reflecting oil-price-based decisions producers have made the past few months) and gradually rising production in the GOM (reflecting FIDs producers made in 2012-14, when oil prices were nearly three times what they are today).

Been struggling to understand why crude oil, natural gas and NGLs are doing what they are doing? What if there was a coherent, straightforward explanation of what the shale revolution has done, and what will be happening next? Well there is…

The Domino Effect by Rusty Braziel

Hot off the presses. You can go to thedominoeffect.com to get a preview, or go straight to Amazon.

www.thedominoeffect.com

The depressed oil prices of the past few months have prompted at least some retrenching among E&P’s active in the Gulf (more on that later), but the GOM developments they committed to two, three or four years ago have been coming online, and bringing GOM output back to levels the Gulf hasn’t seen since just before the Macondo/Deepwater Horizon blowout in April 2010 (which effectively halted new drilling in the GOM, and caused production to sag by one-third before starting to rebound in late 2011). In our Tubular Bells blog just over a year ago, we described how GOM oil production took off again during 2014. This time we continue with a four-blog deep dive into the major GOM projects that either came online in 2015 or will be starting production in 2016. Together, these projects (and the ones like Appomattox/Vicksburg that will follow in 2017-18) will propel the GOM to production to levels well beyond the 1.75 MMb/d pinnacle it reached (pre-Macondo) in September 2009. (GOM production stood at 1.6 MMb/d as of October 2015, the last month for which statistics are available). The incremental production is expected to offset most (but probably not all) of the forecast declines in onshore oil production.

We’ll begin with Shell because it’s the GOM’s biggest producer (about 225 Mb/d in 2014, and more last year), and because Shell’s got a lot going on. In 2015, Shell started production at subsea wells in the South Deimos and West Boreas fields, both of which are part of the huge Mars B development (Shell owns 71.5% of Mars B and is the operator; BP owns 28.5%) in the Gulf’s Mississippi Canyon, 130 miles south of New Orleans (see large cluster to the center-right of Figure 1).

To access the remainder of The Crude Genie? - Gulf of Mexico Production Buoyant Despite Crashing Oil Prices 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.