Gulf of Mexico shows waves of change in energy sector
The Gulf of Mexico once teemed with oil companies off all sizes seeking opportunity and spending lavishly on increasingly sophisticated platforms, pipelines and other technologies to exploit reservoirs in ever deeper waters.
Today, as the Offshore Technology Conference returns to Houston, the Gulf in many ways symbolizes the changes that both the offshore sector and broader energy industry have gone through after enduring a global pandemic, two wrenching oil busts in five years and increasing pressure to wean the global economy from fossil fuels.
In the Gulf, as in shale plays, conventional oil fields, and deepwater around the world, the industry is smaller and dominated by bigger players. It has become more cautious and more frugal, turning to automation and technology to produce more oil at lower costs. It has scrambled to win back investors after years of high expenses and low profits. And it is trying to find a place in the energy transition as the world tries to avoid catastrophic climate change and the Biden administration reconsiders leasing programs in federal waters.
The Gulf of Mexico produces about 1.7 million barrels a day of crude, accounting for about 15 percent of U.S. oil production, according to the Energy Department. Output is expected to grow by about 200,000 barrels day by the end of the year, returning production to its 2019 peak of 1.9 million barrels a day.
The increased production is expected even though major exploration projects for new oil and gas fields have largely stalled, according to Colin White, analyst with the Norwegian consultancy Rystad Energy. Most new drilling is occurring near operating projects, where companies can tie into existing pipelines and other infrastructure and dramatically reduce development costs.
This shift away from riskier exploration in uncharted areas of the Gulf floor reflects the uncertainty around the oil and gas industry’s future, despite the surge in crude prices above $100 a barrel. Memories of recent oil busts are still raw, including the 2020 crash when prices briefly fell below zero, while the drive to shift from fossil fuels has undercut investment decisions. With analysts forecasting that oil demand could peak before the end of this decade, committing to offshore projects that take an average of seven years — and often longer — has become more difficult for investors and companies, said White.
“What we’re seeing from operators is they’re so scarred from the past that they’re just not eager enough — even despite right now $100 plus oil — to undertake these projects,” White said.
Big Three
That has left the field open to the three oil majors that dominate the Gulf: BP, Shell and Chevron. BP produces about 300,000 barrels of oil per day in the Gulf and plans to grow to 400,000 over the next few years. Shell’s output reached 337,000 barrels per day in 2021, and Chevron clocked in at an average of 180,000 barrels of crude a day.
Even the oil majors are stepping away from large exploration projects in favor of expanding near existing operations. BP, for example, is in the process of bringing its first new platform since 2008 online, but it will essentially be an extension of the company’s Mad Dog development, tapping 14 new wells drilled in the oil field discovered in 1998. The new platform, called Argos,
will tie back into existing pipelines.
“Our business in the Gulf of Mexico is really centered around four large, operated hubs,” said Starlee Sykes, BP’s senior vice president for the Gulf of Mexico and Canada. “These are the best reservoirs, or the biggest reservoir potential, so we’re always doing tie back projects to the four big hubs.”
Shell is bringing its new Vito platform online with the capacity to produce up to 100,000 barrels of oil a day. The plan is for Vito to take advantage of the extensive pipeline network already running through the Gulf.
The platform encompasses a new generation of designs meant to cost less. Vito will lack onboard drilling — that will still be done by drill ships — and instead will pull up oil and gas through pipelines, and separate the two before sending them to shore. Shell said it slashed Vito’s cost by 70 percent from the initial design and can produce oil profitably even if oil drops to $35 per barrel, although now oil is trading above $100 a barrel.
Beyond drilling
Looking ahead, experts say activity in the Gulf will go beyond drilling. Oil and gas operations in the Gulf produce lower greenhouse gas emission than in other areas, and companies like BP and Shell say they use money earned in the Gulf to help finance clean energy initiatives.
Analysts also expect more carbon capture and storage projects along the Gulf, especially as investors and the public demand that energy companies do more to address climate change. Exxon Mobil, partnering with other companies, has launched an initiative to capture carbon emissions from refiners, chemical makers and other industries along the Houston Ship Channel and store them under seabeds along the Gulf Coast. Exxon estimates the geological formations could hold around 500 billion metric tons of carbon.
In a recent lease sale, the Houston oil company Talos Energy signed an agreement for more than 40,000 acres in the Gulf to develop a major carbon storage site. The project also includes capturing carbon from facilities along the ship channel, piping it over to the Gulf, and injecting it into reservoirs.
Carbon capture and storage will be a topic at OTC. The oil field services company Schlumberger, for example, will present on emerging carbon capture technology and how to expand carbon capture and storage projects.
The oil and gas industry, however, still faces increasing criticism for climate plans that aren’t aggressive enough. Even though some oil and gas analysts note lower carbon emissions in the Gulf, environmental advocates say that claim is slightly misleading. In general, the bulk of harmful emissions from the industry come from customers using its products.
Meanwhile, climate change poses another risk to operators in the Gulf: intensifying hurricanes. Ahead of Hurricane Ida in 2021 oil and gas companies shut down nearly all operations in the Gulf, and in some cases, took more than a month to restart activity.
Scientists say storms will only become stronger and more damaging as the planet warms.
“While we are immensely proud of our hurricane preparedness, we are always looking for ways to improve,” said Cynthia Babski, a Shell spokesperson. “Both the 2020 and 2021 seasons were unquestionably challenging, to say the least, but they allowed us to strengthen our processes more than ever. We have better coordination between offshore needs and shoreside support.”
The frequency and intensity of hurricanes is one reason why offshore wind energy projects have yet to take off in the area. Floating offshore wind platforms have yet to prove they can survive a category five hurricane, making the Gulf of Mexico less attractive.
Clean-energy advocates still hope offshore wind energy will be an important component of the Biden administration’s next five-year plan for leasing federal waters, which traditionally has been focused on leasing for oil and gas development. The current lease plan is set to expire in June.
Path forward
Industry advocates say uncertainties in the federal leasing program are hindering exploration and drilling projects.
Oil and gas industry trade and lobbying groups like American Petroleum Institute (API) have warned that delays issuing a new-five year plan will halt lease sales and hurt domestic production.
But Jim Krane, energy fellow at Rice University’s Baker Institute, said delays in leasing won’t immediately affect the industry or production. The world, however, needs a reasonable path forward to reach net-zero carbon emission, he said, and the oil and gas industry needs to play a role.
“Just because you’re emphasizing climate action doesn’t necessarily mean that you wish everyone in the oil and gas industry harm,” Krane said. “It’s pretty clear — and it’s becoming clearer every day — that climate action has to coexist with the oil and gas industry.”