Wait, what? Oil, gas production ramps up in Gulf
Offshore projects take time to develop, produce at steadier, longer rates
The U.S. government will open nearly 45 million acres in the Gulf of Mexico to oil and natural gas development this month, at a time when low prices are forcing producers to cut back sharply on their exploration budgets.
But the industry’s troubles have had little impact so far on oil output in the region. In fact, unlike onshore production, which has been tapering off as oil prices decline, Gulf of Mexico production is on its way to setting a record in 2017.
“Production in the (Gulf of Mexico) is less sensitive than onshore production in the Lower 48 states to short-term price movements,” the U.S. Energy Information Administration wrote in a recent report.
One reason for the difference is the much longer time needed to develop an offshore project, compared with one in a shale field.
“Drilling in the Gulf is no small feat,” said Terry Yen, an EIA analyst who wrote the report. “Platforms take years to build.”
Also, offshore wells typically produce at longer and steadier rates than shale wells.
“If you look at shale wells, they have a very high initial production rate,” Yen said in an interview. “But production begins to decline soon thereafter. So, unless you’re going to drill new wells constantly, your production is going to drop off pretty quickly.
“In the Gulf, production profiles for projects are pretty stable. Once they ramp up, they produce at that rate for a number of years, and then they slowly decline.”
EIA’s outlook for Gulf of Mexico oil is bullish despite expectations that oil prices will remain low for the foreseeable future.
The government agency projects Gulf production will average 1.63 million barrels per day in 2016 and 1.79 million barrels per day in 2017, reaching an all-time high of 1.91 million barrels per day in December 2017.
At those rates, production from the waters in this ocean basin will account for 18% of total U.S. oil output in 2016 and 21% in 2017, according to EIA.
This comes as EIA forecasts a decline in total U.S. oil flow, from an average of 9.4 million barrels per day in 2015 to 8.7 million bar- rels per day in 2016 and 8.5 million barrels per day in 2017.
The pace of development in the Gulf of Mexico is particularly impressive in light of the slump that followed the Deepwater Ho- rizon disaster in 2010, when the U.S. government ordered a moratorium on deep-water drilling while it designed new rules to avoid another well explosion.
Moreover, the recovery relies substantially on new, expensive technology that drills deeper than ever and enables operations even where pipelines and other traditional infrastructure are lacking.
Among the novelties is a floating production, storage and offload vessel that Shell is using for the first time in the Gulf of Mexico. Expected to begin operations this year, the vessel will gather oil from Shell’s Stones project 200 miles southwest of New Orleans for shipment by tanker to refiner- ies along the U.S. Gulf Coast.
That said, declining profit margins and lower expectations for a quick oil rebound are prompting many Gulf of Mexico operators to cut future spending on deep-water exploration and delay drilling contracts.
“These changes added uncertainty to the timelines of many Gulf of Mexico projects, with those in the early stages of development at greatest risk of delay or cancellation,” the EIA report said.
Another sign of those misgivings might come March 23 when the government will offer more tracts for lease in the central and eastern Gulf of Mexico as major and independent companies decide how much they want to wager on an eventual oil recovery.
All told, the Bureau of Ocean Energy Management will make available 44.3 million acres off Alabama, Louisiana and Mississippi and 595,500 acres off Alabama and Florida.
Still, regardless of the outcome of those auctions, the Gulf of Mexico offers another example of the resilience of U.S. oil production even in the face of the worst plunge in oil prices in years.
All told, the Bureau of Ocean Energy Management will make available 44.3 million acres off Alabama, Louisiana and Mississippi and 595,500 acres off Alabama and Florida.