Hope on the Gulf of Mexico Horizon

The Gulf of Mexico’s offshore oil industry appears to be climbing out of the latest downturn.

Based on rig counts, well numbers, permitting data and information about sanctioned and expected projects, IHS Markit’s Bob Fryklund, vice president for upstream energy, said the firm expects to see a slow ramp-up in the region.

“The offshore is starting its slow recovery,” he said. Analysis of data suggests “2019 will be slow, and every year for the next three years, we will be crawling out of this” downturn.

The rig count is starting to rise, albeit “very slowly,” he added, as are financial investment decisions (FIDs). There are not a lot of exploration wells being drilled in the U.S. Gulf, he said, but there are a lot of development wells being drilled.

Expectations are that 150,000 b/d of oil growth in 2019 from the Gulf of Mexico will come from tiebacks. In all, oil production in the Gulf of Mexico is expected to increase by 500,000 b/d between 2017 and 2023.

Projects like Shell’s Appomattox, which is expected to begin production in 2019, and BP’s Mad Dog 2, slated to go online in 2021, would contribute to that, although smaller companies like LLOG have a host of smaller projects that will also drive up the production volume.

While deepwater has been historically cost-prohibitive to enter, restricting play to much larger companies, smaller companies are finding ways to participate in the deepwater arena.

Bob Fryklund (Photo: IHS Markit)

“A whole herd of these smaller independents have moved out into the deepwater and are proving to be masters of the hub and spoke game as well as exploring in these basins,” Fryklund said.

In addition, some new companies have gotten their feet wet in the Gulf of Mexico, including Kosmos Energy, which agreed in August 2018 to buy Deep Gulf Energy for $1.2 billion. At the time of the announcement, Andrew G. Inglis, Kosmos chairman and CEO, said, “With many competitors leaving the Gulf of Mexico to chase onshore shale plays, a huge opportunity has opened in the basin. The best deepwater assets can compete with the best of shale, and now is a good time to enter the Gulf of Mexico.”

Fryklund said he expects continued emphasis from operators to bring projects online faster. “That’s been the Achilles heel for the Gulf and all global deepwater projects. They’re not cycle-proof.”

For quite some time, the average time to first oil has been about seven years in the Gulf of Mexico, he said. “That’s not capex flexible” because of the cyclic downturns in the industry. Recently there has been a push to compress the average time to first oil to about three years, such as through satellite projects and tiebacks.

“The Gulf of Mexico is still a place where we’re making discoveries,” he said. Some of those include Shell’s Whale deepwater discovery, announced early this year, and the Anadarko discovery at Samurai, announced in June.

While there are projects on the horizon, service companies and equipment manufactures will compete fiercely for the awards.

“Things are going to be tougher for the service side,” Fryklund said. “As they ramp up the number of sanctioned projects, that will start to make the pie bigger for those service companies.”

Gulf of Mexico drilling permits are up from 189 last year to 197 this year, and wells drilled to date is up five from 136 in 2017 to 141 in 2018. IHS Markit anticipates the numbers at the end of the year will be close to 2017’s count of 163. (Table courtesy of IHS Markit Petrodata)