The Crude Genie?--The Future of Oil Production in the Gulf of Mexico

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.

U.S. oil production as a whole has been declining the past few months in response to plummeting prices, but that overall decline in output has come despite gradually rising production in the GOM. As we said in Episode 1, that’s because the incremental gains in output the Gulf has seen over the past few months are the result of investment decisions that E&Ps active in the GOM made a few years ago, when a barrel of crude was selling at a price equivalent to a very nice dinner out instead of the price of a hearty breakfast for two at Denny’s. We also pointed out that while it may take much longer (and cost much more) to develop new production areas in the deepwater and ultra-deepwater Gulf than in tight oil plays on land, the output of the best GOM wells typically remains relatively high for several years, not just for a couple of years as is the case with shale wells on terra firma. In other words, if all drilling in the Gulf were to stop today, the GOM would still be producing a lot of oil five or even ten years from now; the same couldn’t be said, of course, if all shale drilling were to stop on a dime in the Permian Basin or the Bakken, with their wells’ high initial production rates and rapid production fall-offs. In Episode 2, we discussed the major GOM projects that two of the most active E&Ps in the Gulf—Shell and Noble Energy—either brought online in 2015 or plan to start up this year (2016). And last time, in Episode 3, we looked at the rest of the big GOM projects with production starting in 2016, including those operated by LLOG Exploration, Chevron, and Anadarko Petroleum.

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According to the U.S. Energy Information Administration’s (EIA) latest Short Term Energy Outlook (STEO), which was issued February 1, 2016, crude oil production in the U.S. portion of the Gulf of Mexico (which averaged 1.54 MMb/d in 2015) is forecasted to rise 6% this year (2016) to 1.63 MMb/d and to increase another 10% in 2017 to about 1.8 MMb/d. Figure 1 shows actual and forecasted GOM production by quarter in the 2015-17 period. (Recall that production in the Gulf typically dips during the third-quarter hurricane season—EIA builds that into its forecast—and note that 2015 was an outlier in that a dearth of major storms allowed production to continue rising last summer.)

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