Gulf deeps on track for ‘new normal’

Burdened by high drilling costs, lower success rates and smaller discoveries relative to other regions, not to mention post-Macondo regulatory changes, the deepwater Gulf of Mexico will nevertheless draw $70 billion in investment over the next two decades, according to analysts at Wood Mackenzie. Russell McCulley finds out why the research firm is so bullish on the region.

Exploration and developmental drilling in the Gulf of Mexico struggled to regain post-moratorium momentum in 2011 and 2012 following the exodus of many deepwater drilling rigs for more promising waters. But by the end of 2012, there will be more than three dozen floating rigs working the gulf, a sign that the region is recovering nicely, says Wood Mackenzie deepwater Gulf of Mexico analyst Lauren Payne.

‘By the end of this year, we expect the number of active floating rigs in the region to be about 37, which is a five-year high,’ says Payne. While 2012 and 2013 will go down as ‘recovery years’, she says, ‘our view is that in the deepwater Gulf of Mexico, we will be reaching a new operational normal in 2013’. With a caveat: ‘That does not mean going back to pre-Macondo business as usual,’ Payne adds. ‘Our view is that in 2013, we will get to the place where the operational environment is stable, predictable and moving in a positive direction.’

‘The above-ground environment here is much more attractive than in many other places around the world.’ Julie Wilson

The rebound in 2013 will be led by development drilling as operators seek to boost production levels at existing assets and bring new projects on stream. In 2014, activity in the deepwater Gulf of Mexico will reach pre-Macondo levels, she says, with about 70% of development drilling devoted to on stream projects such as BP’s Atlantis, BHP Billiton’s Shenzi and Chevron’s Tahiti – ‘big fields that operators really need to get back on their normal drilling schedules’.

LLOG’s foray into deepwater platform operatorship with Who Dat was indicative of the independent sector’s loftier US Gulf ambitions.

Wood Mackenzie analysts, speaking at the company’s Houston office in October, expect investment in the deepwater Gulf of Mexico to total some $27 billion through 2015, with about $20 billion spent on development wells for onstream projects and the balance going to subsea and facility construction as big installations such as ExxonMobil’s Hadrian and Chevron’s Jack-St Malo move forward.

Looking ahead to 2030, the region will reap an investment of more than $70 billion, ‘more than all the other key deepwater basins combined’, believes WoodMac senior exploration analyst Julie Wilson. ‘We expect around 12.5 billion barrels of oil equivalent to be found from that investment, and the value to be created’ – the value of discoveries less the exploration spend, including dry holes – ‘is around $30 billion.’

The investment might seem surprising given the deepwater Gulf of Mexico’s many challenges, including tighter regulations in Macondo’s wake. Wood Mackenzie analysts assume a cost of about $1 million per day to drill in the region, and a 10% increase in the length of time needed to drill, although, as Payne points out, the time increase has more to do with challenging geology than stricter regulations.

‘In the long term, what’s really going to drive the lengthening of average well times in the region is the movement to drilling through salt, the extreme water and reservoir depths that operators are targeting, and of course the complex completions that are required to bring these wells onstream,’ she says.

Nevertheless, deepwater Gulf of Mexico acreage remains tempting to operators for a number of reasons: proximity to refineries, a vast network of pipelines and platforms, some of the world’s most favorable fiscal terms and frequent, predictably scheduled licensing rounds, says Wilson.

Moreover, despite post-Macondo warnings that increased costs and risk mitigation requirements would preclude all but the biggest E&P companies from operating in the deepwater Gulf, 46 operators are active in the region, in contrast to roughly 15 combined in the other offshore components of deepwater’s ‘Golden Triangle’ – Angola and Brazil. ‘The above-ground environment here is much more attractive than in many other places around the world,’ she notes.

Not all deepwater Gulf of Mexico plays are equal, however, and the subsalt Miocene and Paleogene, which could hold yet-to-find volumes of nearly 10 billion boe, will be the territory of the supermajors with deep pockets and a thirst for giant prospects. Although they contain much smaller volumes, the mature mid-to-late Miocene plays offer as much value as the Miocene and Paleogene, Wilson says, because they are less costly to exploit. Jurassic, Mid-Late Miocene and Plio-Pleistocene plays do not offer ‘the materiality that many of the bigger companies are looking for’, she adds. ‘That said, there are a lot of smaller companies that are interested in these plays.

‘This range of plays offers a variety of opportunities to a wide range of operators.’

‘In the deepwater Gulf of Mexico, we will be reaching a new operational normal in 2013.’ Lauren Payne

Peak production

WoodMac analysts expect US Gulf of Mexico production to reach a new peak of 2 million boe/d in 2019.

In the near term, the region will continue to have excess processing capacity, according to deepwater Gulf of Mexico analyst Norm Pokutylowicz. Currently, about 25% of capacity is being used, making conditions ripe for satellite field operators and platform owners alike to create value.

‘Most of the capacity in the Gulf of Mexico is unused. And inherently there’s some value lying dormant there,’ Pokutylowicz says.

Over the next five years, he adds, subsea tiebacks from fields under development, probable developments and fields yet to be discovered will bring an additional 2 billion boe in reserves into production. Nevertheless, about 70% of capacity will remain unused in 2017, mostly in the Mississippi Canyon and Green Canyon areas.

There are technical challenges to be considered, such as whether a platform can handle the weight of third-party subsea tieback equipment. But more to the point are economic issues, Pokutylowicz says: ‘Can you make money from these tiebacks?’ While the supermajors jockey for big plays in deeper waters, mature platforms become candidates for divestment – and opportunities for independents such as Plains E&P, which in 3Q 2012 acquired BP’s operating interest in the Marlin hub, Horn Mountain and Holstein projects, as well as sizable stakes in Ram Powell and Diana Hoover, for $5.55 billion. The move followed Stone Energy’s acquisition of the Pompano installation from BP and Anadarko, and LLOG’s foray into deepwater platform operatorship with the Who Dat project.

‘These independents have come forward with ambitious development plans to capture a lot of the upside potential that’s available in these platforms,’ he says, adding that M&A will likely increase as platforms age.

‘We’re seeing a lot of exciting times in the Gulf of Mexico lying ahead.’

Challenges to WoodMac’s bullish vision remain, including access to capital, global personnel constraints, and technical risks to some very deep plays that have not been fully mitigated. But ‘the deepwater Gulf of Mexico is a long-term game’, notes Payne. ‘The volumes are there. The fiscal terms are attractive. The type of infrastructure that we have, and the extent of that infrastructure, is very good. So those things all continue to support the commitment that we’ve seen from operators, post-Macondo.’ OE