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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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Gulf Of Mexico Production Expected To Hit Record High

Offshore

While the U.S. shale production in the Permian has been grabbing most of the market and media attention over the past two years, the Gulf of Mexico has been quietly staging a comeback.  

Big Oil firms, the main operators in the Gulf of Mexico, have been cutting costs and simplifying designs to make offshore projects viable in the lower-for-longer oil price world.

Chevron, Shell, and BP continue with their deepwater developments offshore Louisiana and Texas and have brought down breakeven costs to $40 a barrel or less—comparable with the breakevens at some shale formations onshore. Now operators are vying for new exploration acreage close to existing production platforms that would bring development and production costs down even further.  

While the market and media have focused on the record Permian production, the Gulf of Mexico’s production is also expected to hit a record high this year.  

But there’s one huge difference between onshore and offshore in terms of resource development—for shale wells, production peaks in several months, while vast deepwater resources can pump oil for decades.

Big Oil continues to bet on resources and projects that will last for decades, but companies have drastically changed their approach to development. Gone are the days in which the race was to have ‘the biggest, the most complex and most expensive’ bespoke project the industry has seen. It may have worked at oil prices at $100, but at half that price of oil, the focus is on leaner projects and more collaborative work to bring costs down.

Related: Shale CEO: U.S. To Be The World’s Top Oil Producer By Fall

Top executives at the largest operators in the Gulf of Mexico admit that project costs before 2014 were unsustainable.

“We knew there was incredible waste, but 2014 was the trigger,” Harry Brekelmans, Shell Projects and Technology Director, tells Bloomberg.

“We knew there was no way we could put forward a project in the same way again.”

In April this year, Shell announced the final investment decision for Vito, a deepwater development in the Gulf of Mexico with a forward-looking, breakeven price estimated at less than $35 a barrel. After the oil prices started crashing, Shell began in 2015 to redesign the Vito project, reducing cost estimates by more than 70 percent from the original concept, the oil major said in late April.

Shell “collaborated internally and externally to optimize the supply chain, to drill standardized wells and to build tried-and-tested designs more efficiently,” Brekelmans said at the Offshore Technology Conference in Houston a week later.

Last month, Shell started early production at the Kaikias deepwater subsea development in the Gulf of Mexico a year ahead of schedule and at a forward-looking, break-even price of less than $30 per barrel of oil. Shell’s Brekelmans said earlier this year that the supermajor was targeting its deepwater projects to break even at $40 or preferably below that threshold.

Another oil major, BP, has cut project costs for its Mad Dog 2 project in the Gulf by 60 percent to US$9 billion, working with co-owners and contractors to simplify and standardize the platform’s design.

Chevron says that offshore crude oil extraction, including deepwater, is closing in on shale in terms of cost thanks to new production technologies.

“In the past, a lot of the cost of development has been new technology,” Jeff Shellebarger, president of Chevron’s North American division, told Bloomberg. “With the types of reservoirs we’re drilling today, most of that learning curve is behind us. Now we can keep those costs pretty competitive.”

According to Wood Mackenzie, oil and gas production in deepwater Gulf of Mexico is expected to reach an all-time record high this year at 1.935 million boepd, of which 80 percent is oil—beating the previous record from 2009 by nearly 10 percent and representing 13-percent growth year over year.

U.S. crude oil production in the Federal Gulf of Mexico increased slightly in 2017 to reach 1.65 million bpd, the highest annual level on record, the EIA said in April, adding that production is expected to continue growing this year and next, accounting for 16 percent of total U.S. crude oil production. According to the EIA, a total of 10 deepwater Gulf of Mexico field starts are expected in 2018 and 2019.

Related: U.S. Overtakes Saudi Arabia In Recoverable Oil Reserves

Exploration investment, however, is still flat, and operators are in a ‘wait and see’ mode, Wood Mackenzie said in March in a comment on the latest ‘lackluster’ U.S. lease sale in the Gulf. Bidding was focused on the Mississippi Canyon—an area with established infrastructure and lowest cost developments.

“Operators are keen to keep the utilization up on the infrastructure and every new barrel produced through these facilities, further realizes value from the original investment,” William Turner, senior research analyst at Wood Mackenzie, said.

“Meanwhile some patient but dedicated operators are on the brink of cracking the code on ultra-high-pressure developments. Once the industry sees some proven developments in fields like Anchor, others will follow suit and we will begin to see the return of significant volumes being discovered and developed in the region.”  

By Tsvetana Paraskova for Oilprice.com

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