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The Gulf of Mexico's misty horizons

While production will rise in 2018, the longer-term prospects are less positive

Not much has changed over the past 12 months to lessen the misery in the US Gulf of Mexico (GoM), where low commodity prices pushed E&P activity to historic lows. As we predicted a year ago, the string of deep-water oil projects coming to completion raised the Gulf's share of US oil production from 17% in 2016 to 19% in 2017. Conversely, the Gulf's contribution to US natural gas output has shrunk from 5% to roughly 4.5%.

Drilling activity hasn't improved, with the Baker Hughes Rotary Rig Count listing an average 20 units working in the Gulf during the first 10 months of 2017, compared with an average 22 rigs during 2016.

A mixed picture can be found in the number of drilling permits approved by the US Bureau of Safety and Environmental Enforcement (BSEE). The combined number of "new well" and "revised new well" permits for all water depths in the GoM during the first 10 months of 2017 (compared to the same period in 2016) fell another 2.5%. But the number of "shallow water" permits (less than 500ft depths) in that period for the two categories totalled 54, up an encouraging 125% on the same period during 2016.

By contrast, the number of similar permits approved by BSEE for water depths greater than 500ft totalled 390 during the first 10 months of 2017, down 9.5% from the same period in 2016. So in the shallower waters of the Gulf, operators are beginning to find ways to make the economics work for them, given the recent minor upswing in oil prices to above $50 a barrel. Conversely, oil prices have still not reached levels sufficient to sustain an increase in deep-water activity.

Despite the mostly negative data over the past two years, the Gulf's oil production has continued to grow. The US Energy Information Administration (EIA) said GoM output peaked at 1.759m b/d in July 2017, before regressing temporarily to 1.693m b/d in August, due to shut-ins caused by hurricanes. For the first eight months of 2017, the EIA said output averaged 1.709m b/d, compared with its earlier forecast of 1.630m b/d for the whole year. This compares to 2016's full-year average of 1.598m b/d, an all-time high, exceeding the 2009 figure by 44,000 b/d.

GoM oil production averaged 1.4m b/d in October, 260,000 b/d lower than September, reflecting the effects of Hurricane Nate. By early November, most oil-production platforms had returned to operation, and the EIA forecasts that production will continue to grow throughout 2018. Be advised that this growth rate should slow down in 2018.

Contributing to the Gulf's production growth in 2016 were four major deep-water field development projects: Stones (Shell), Gunflint (Noble Energy), Heidelberg (Anadarko Petroleum) and Holstein Deep (Freeport McMoRan). This year, start-ups include LLOG Exploration's Son of Bluto 2 and Anadarko's Horn Mountain Deep, where the first well came on stream during the third quarter. Also, Marmalard East in Mississippi Canyon 301 is a field-extension well that was drilled and completed by LLOG during Q217, coming into production at around 12,000 b/d.

Meanwhile, Chevron's Big Foot development in Walker Ridge 29 was delayed by platform damage, and will now go on stream during H2 2018. Chevron also has the expansion at Tahiti field due to go on stream during H1 2018—when Hess's Stampede project is also scheduled to start producing.

During the past three years, various operators hit additional, promising discoveries, yet low oil prices kept them from announcing any further development projects. Thus, we have begun to see a bit of an activity gap during 2017, and 2018 will see a relatively quiet deep-water sector, compared to earlier years. A critical item will be whether the oil-price improvement experienced during October and November 2017 has staying power.

Nonetheless, things may begin to pick up a bit during 2018. One of the more vocal operators talking about plans is LLOG. In late September 2017, the firm announced five small deep-water projects. They include Claiborne (1,500ft of water, first production in mid-2018); LaFemme (5,800ft of water, first output in mid-2018); Blue Wing Olive (5,800ft of water, first production in mid-2018); Red Zinger (6,000ft of water, first oil in H2 2018); and Crown & Anchor (4,200ft of water, first oil in Q2 2018).

Kurt Abraham is Editor at World Oil

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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