Renewed interest in the Gulf of Mexico
Crude production reached record levels in 2016. And the Trump administration aims to open more federal lands and waters for drilling. Could the U.S. reach its goal of energy independence?
#Analysts, #investors and companies are optimistic that oil and gas #exploration and #production will pick up across the #GulfofMexico

Oil production and exploration in the Gulf of Mexico has suffered a double blow in recent years: The precipitous decline in oil prices made the expensive deep-sea operations even less attractive to petroleum companies, and the fallout of the 2010 BP explosion and spill further dampened interest, if not the potential for profits. But those trends are starting to show signs of changing. U.S. crude oil production in the Gulf of Mexico is increasing and set an all-time annual high of 1.6 million barrels per day in 2016, exceeding the previous record set in 2009 by 44,000 barrels per day (bpd), according to the U.S. Energy Information Administration (EIA), the government agency that tracks energy trends. Gulf operations provide about 15 percent of the U.S. daily oil production. This year, production is continuing to climb, hitting 1.7 million barrels per day. The EIA forecasts that annual production will continue to rise through next year, boosted by eight offshore projects completed last year and seven more scheduled to come online. In other Gulf waters, the combination of reforms and struggling state-run oil operations are opening up Mexican and Venezuelan waters to international exploration and drilling. Venezuela has opened more offshore blocks to global corporations, and Mexico conducted its first offshore auction this past December. Energy analysts say increased activity in the Gulf of Mexico is on the leading edge of renewed interest in a return to deepwater exploration and drilling around the world.

Changes in the oil markets

The shift is due to a confluence of changes in oil markets, oil production and the political landscape in the United States and the other oil-producing nations of the Gulf of Mexico. Oil prices are slowly increasing at the same time that improvements in technology and operational management are making offshore drilling more cost effective. The political fallout from BP’s Deepwater Horizon explosion and spill—the worst maritime oil disaster in history—is receding seven years after the incident. Back-to-back events in March fueled cautious optimism in the industry. First, a lease sale in New Orleans drew almost USD275 million in high bids on 163 U.S. tracts spread over 913,542 acres on the Outer Continental Shelf off Louisiana, Mississippi and Alabama. Exxon, Chevron and Shell were among the 28 companies submitting bids. Those bids represented a 76 percent increase over last year’s USD156 million. However, that was only about half of the USD539.8 million received in 2015.U.S. Interior Secretary Ryan Zinke said the “strong sale reflects continued industry optimism and interest in the Gulf’s Outer Continental Shelf, a keystone of the nation’s offshore oil and gas resources.” Some analysts were more guardedly optimistic in their assessments. G. Allen Brooks, author of the energy newsletter “Musings from the Oil Patch,” wrote: “While the results didn’t set records, the USD275 million in high bids and USD315 million in total bids submitted by 28 oil companies reflected the growing optimism that an offshore sector recovery is coming. This comes after last year’s sale for this area was marked by historically low returns.”Those sales came just days after Interior Secretary Zinke announced that the U.S. government plans to begin offering 73 million acres for offshore oil and gas exploration and development. That will cover all available unleased areas in U.S. territorial waters. In addition, the Trump administration is considering a request from BP to extend the length of time for oil leases.“Opening more federal lands and waters to oil and gas drilling is a pillar of President Trump’s plan to make the United States energy independent,” Secretary Zinke said. “The Gulf is a vital part of that strategy to spur economic opportunities for industry, states, and local communities, to create jobs and home-grown energy and to reduce our dependence on foreign oil.” The administrations plan would allow 10 different sales—two each year for five years. It would cover about 14,000 unleased blocks from three to 230 miles offshore. The U.S. Bureau of Ocean Energy Management estimates the Outer Continental shelf has 90 billion barrels of recoverable oil and 327 trillion cubic feet of gas. The Trump administration is also looking to open new areas in the Arctic and off the Atlantic Coast to exploration and drilling, actions likely to be contested vociferously by conservation groups.

The biggest question is whether the price is right

Deepwater exploration and drilling has been particularly hard-hit by plunging oil prices in recent years. It is expensive, requires long lead-times from exploration to production and was dealt a devastating setback to its public image by the blowout on BP’s Deepwater Horizon seven years ago. It didn’t help that a Hollywood movie by the same name—“Deepwater Horizon”—released last year focused on the dangers and financially driven decisions of offshore drilling. Deepwater wells can cost more than USD100 million, require depths of about 30,000 feet and are usually at least 150-200 miles offshore. As a result, companies are reluctant to consider operations unless oil is selling for at least USD60 a barrel. With the surge in cheaper, faster- turn-around tight oil technology, companies and investors have had even less incentive for offshore operations. But the industry has been changing with the times and market conditions. Companies have been developing more compact offshore facilities and leaning on improved technology and better management, factors which have combined to reign in some of massive costs of deep-water exploration and drilling. Energy consultants Wood Mackenzie issued a recent report projecting a moderate recovery in global deep-water oil and gas projects, saying lower drilling costs are making them more attractive to investors and companies. A new study by the Norwegian analyst firm Rystad Energy found that for every dollar invested in the North American shale market this year, a dollar is also earmarked for the development of new offshore resources,” Eric Smith, associate director of the Tulane Energy Institute in New Orleans wrote in The Advocate newspaper. “Both will receive approximately USD70 billion in capital expenditures in 2017, an equivalence not seen since 2013.”

Energy analysts say increased activity in the Gulf of Mexico is on the leading edge of renewed interest in a return to deepwater exploration and drilling around the world

Eyes focused on the Gulf producing countries

Political changes in the oil-producing countries that ring the Gulf of Mexico are also creating new opportunities for international operations. The election of a more fossil fuel-friendly administration in the United States follows closely on the heels of major reforms in Mexico’s oil operations and Venezuela’s courting of international companies to boost its financially troubled oil sector. Mexico is one of the largest producers of petroleum and other liquids in the world and is the fourth-largest producer in the Americas after the United States, Canada and Brazil and an important partner in U.S. energy trade. According to the most recent EIA data, Mexico accounted for about 9 percent of U.S. crude oil imports, though that has been decreasing. Mexico ended the state-owned Pemex’s monopoly on production in 2013 and allowed private operators for the first time since the 1930s. That has not stopped a slide in production that has hit its lowest levels in thirty seven years. However, Mexico is hoping deepwater crude development in the Gulf by private producers could help boost its production in coming years. Eni SpA, which won rights to develop a Gulf field in 2015, earlier this year announced Mexico’s largest offshore find by a foreign company in more than seven decades. Mexico conducted its first Gulf deepwater auction this past December. Companies submitted bids on eight of 10 blocks offered. Winning bidders included China’s Offshore Oil Corporation, Australia’s BHP Billiton, France’s Total teaming with ExxonMobil, Norway’s Statoil in partnership with BP, Malaysia’s PETRONAS, Chevron and Japan’s INPEX. Most of these projects will likely take more than a decade to begin production. Mexico is expected to conduct three more auctions over the next two years for shallow and deep waters. Venezuela, the globe’s 12th largest oil producer, also has been struggling under the sharp decline in oil prices. Financial analysts fear its troubled PDVSA oil company could default in the next year. It currently doesn’t have sufficient funds to adequately maintain its refineries, production operations or ships. PDVSA has been awarding exploration blocks to international oil companies in its offshore waters including Total, Statoil, Chevron, and Gazprom. Venezuela’s offshore gas went untapped until Eni and Spain’s Repsol began production in the offshore Perla field in 2015 in the Gulf of Venezuela. Eni made one of the largest natural gas discoveries in the history of the country. Elsewhere in the Gulf, numerous international oil and gas companies have been attracted to the prospect of oil in the deep waters off Cuba’s northern coast. The EIA reports, however, “as a result of the geological and technological challenges, offshore deepwater exploration activity has so far yielded no results.” Analysts, investors and petroleum companies are cautiously optimistic that oil and gas exploration and production will pick up across the Gulf of Mexico in the coming months and years. The oil and gas is there. The biggest question is whether the price is right.