• Small fields come online in 2017; large ones still ramping
  • Bentek eyes 1.868 million b/d of Gulf oil output at year-end
  • Breakeven oil price lowered to sub-$50/b for some projects

It may be more than a year before US Gulf of Mexico oil exploration begins to ramp up in any noticeable way, but several new deepwater fields are adding to production and there seems to be sparks of interest in developing recent offshore finds.

Platts Analytics Bentek Energy is forecasting a rise in US offshore production to 1.868 million b/d by year-end and to 2.296 million b/d by end-2022 from 1.669 million b/d at end-December 2016.

The reason? Several new fields are slated to come online this year, including Barataria and South Santa Cruz, operated by small privately held Deep Gulf Energy, and Crown and Anchor by LLOG Exploration. Those will bring a combined 15,000 b/d of oil equivalent production.

But the Tornado Field, at around 9,000 boe/d, came onstream in November and other large fields that came on in 2016 such as Anadarko Petroleum’s Heidelberg, Shell’s Stones, ExxonMobil’s Julia and Noble Energy’s Gunflint, are still ramping up, sources said. Also, new wells are expected this year from Anadarko’s Lucius Field (online since early 2015), and Hess’ Tubular Bells (online since late 2014).

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Even though sanctioning of large projects are few in number these days, some are still being advanced. For instance, Chevron’s long-awaited Big Foot development will come online in late 2018. And Shell’s Appomattox field is set to come online in 2020. Shell’s Kaikias Field, to be tied back to its Ursa production hub, comes on in 2019.

“I’ve said for the past few years that things should be more active [in the Gulf] in 2018 and 2019, and I’m still hopeful that’s the case,” Trevor Crone, analyst for Platts unit RigData, said. “We should see a modest but steady increase in drilling in 2019.”

RigData shows just six semisubmersible rigs and 22 drill ships under contract in the US Gulf of Mexico as of the end of March, down from 10 and 29, respectively, year on year.

“It won’t go gangbusters anytime soon. I think there will be gradual improvement from here on out,” Crone said.

GULF SALE ‘EARLY SIGN’ OF COMEBACK

As for new exploration, last month’s Central Gulf of Mexico lease sale, which captured nearly $275 million in total high bids — up from the $156 million seen in last year’s comparable sale — “is an early sign that offshore exploration and production spend is likely to come back,” UBS analyst Amy Wong said in a post-sale investor note.

Mexico also held its first deepwater auction on its side of the Gulf in December 2016, where eight of 10 blocks received bids and Australia’s BHP won a separate bidding to develop the Trion deepwater find jointly with state company Pemex.

But most of these are long-lead exploratory projects that could take up to a decade to produce — and that’s after a discovery is made, which could take several years as seismic is analyzed, drilling locations selected and other prepatory work is done.

Terms for US Gulf deepwater tracts are seven to 10 years, meaning operators have until 2024 (for tracts in 2,600-5,250 foot water depths) or 2027 (for blocks in water depths greater than 5,250 feet) to drill them.

Analysts have said $60/b is roughly the oil price operators likely want to see before embarking on wildcat exploration. With many deepwater wells costing well over $100 million each in remote locations 150-200 miles offshore and at total depths 30,000 feet and greater, operators have shied away from the risk — especially when shale wells onshore yield more immediate benefits.

“Broadly speaking, our view is that we’re not going to see any kind of full-scale return to exploration until oil prices go back up,” Gordon Loy, Gulf of Mexico upstream oil and gas analyst for energy consultants Wood Mackenzie, told S&P Global Platts.

Still, Loy said breakeven oil prices for many Gulf of Mexico deepwater projects are “sub-$50″ per barrel now, down from the $60s/b and $70s/b a few years ago.

In a report last week, Wood Mac said investment decisions on global deepwater oil and gas projects will likely see a recovery this year as drilling costs in the sector have fallen to a level making them more competitive with US shale plays.

DEEPWATER COSTS COULD FALL MORE

Noting that cost inflation in the US tight oil industry was back “with a vengeance,” the report estimated that, in contrast, deepwater costs could fall further, helped by leaner development principles and improved well designs.

“A lot of projects we classify as probable [for development] are undergoing a rescrubbing,” Loy said. “They are being optimized, and operators are right-sizing facilities to be able to produce from a field they have now, not over-designing and not building in extra capacity [for the] future.”

On the other hand, “we’re still seeing appraisal activity at some high-profile discoveries” in the Gulf of Mexico, including Chevron’s 2015 Anchor discovery (not related to a similar-named LLOG field), Anadarko Petroleum’s Shenandoah and Cobalt’s North Platte, he said.

“Those will still move forward. But a majority of Gulf of Mexico exploration will focus on lower-risk subsea tiebacks for the near future,” Loy said.

Subsea tiebacks connect fields relatively near a production hub to the facility. They allow operators to capture value from smaller discoveries that may not be economic enough to warrant stand-alone production hubs.

In addition, top energy officials such as Saudi’s oil minister Khalid Al-Falih and even Chevron CEO John Watson recently said shale alone will not be enough to fill a needed crude supply gap into the 2020s.

Speaking at the Howard Weil conference in New Orleans last week, Paal Kibsgaard, CEO of oil services provider Schlumberger, said production is holding up well despite under-investment despite a global industry downturn now into its third year.

Even so, “the current situation is not sustainable,” Kibsgaard added.

–Starr Spencer, starr.spencer@spglobal.com

–Edited by Richard Rubin, richard.rubin@spglobal.com

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