Thursday, 27 August 2015

Gulf of Mexico - stepping up to the challenges

by Elaine Reynolds

The full note is available here



The Gulf of Mexico benefits from a unique combination of factors that make it a particularly attractive region for major operators, with Shell, BP and Chevron holding substantial acreage. Companies operating in the area have access to potentially large resources together with the ability to hold large positions that gives them running room to grow, while the concentration of companies with interests in the region allows flexibility to farm in and out as necessary. The Gulf is close to a centre of excellence in a range of oilfield applications from seismic to drilling technologies, and also benefits from a well developed infrastructure. Together with the predictable fiscal regime and low tax rate of the US, this makes it a good place to replace reserves and grow production. The region is technically demanding which plays to the majors’ strengths, however US independents are also active in the region, with Cobalt and Anadarko holding key positions in the inboard Lower Tertiary.

Production from the Gulf of Mexico is set to reach a new peak of 1.9mboe/d in 2016.  Activity has returned to the region following the post 2010 Macondo slowdown, and will result in an expected 18% production increase between 2014-2016 as new developments come online. Since late 2014 the Jack/St Malo, Tubular Bells, Lucius and Hadrian South developments have all commenced production, while Lower Tertiary exploration continues to throw up new discoveries, most recently in Chevron’s  Anchor discovery announced in January 2015.


Beyond 2016 however, production is currently expected to remain relatively flat as existing fields decline and the rate of start-ups falls from 15 in 2014-2016 to 8 between 2017 and 2020. Although the overall rig count in the Gulf of Mexico has dropped in the wake of lower oil prices, the deep water rig count has remained resilient, with jack up rigs bearing the brunt of the cuts. Activity does however seem to be prioritising appraisal and development, with only five rigs drilling exploration wells compared to fourteen a year ago.

Given the long lead times required to progress a project from prospect to development in the region, together with long production profiles, we expect activity to continue in the near term as operators focus on maintaining their long term outlook while looking to reduce costs. For example, Shell’s 175,000 boepd Appomatax development was given the go ahead in June 2015 having achieved cost reductions of 20%, and is expected onstream in 2020. BP is aiming for a final investment decision on its Mad Dog 2 project by end 2015/early 2016, and is now working with a reworked project cost of $10bn, significantly lower than its 2011 estimate of $22bn. And it isn’t only the majors that are continuing to invest in the region. US Independent Cobalt recently increased its stake in the Goodfellow prospect from 29.2% to 47% where it is now the operator. The company believes that costs will come down in alignment with the price environment, maintaining the attractiveness of its discoveries in the inboard Lower Tertiary.


Beyond cutting costs, companies will also need to keep innovating if they are to grow production into the next decade.  To achieve this, we see a continuing focus on developing new technologies to improve the recovery factor in the Lower Tertiary and in extending the HP/HT operating limits beyond the 15,000psi and 2500F that is currently feasible. Initiatives to tackle these issues include BP’s Project 20K and Statoil’s ‘Unlocking the Paleogene’, while new ownership structures such as the 2015 alliance between BP, Chevron and ConocoPhillips to develop the Gila and Tiber fields are designed to combine expertise and share costs in order to unlock further resources. Beyond these initiatives, the recent deepwater discoveries in the Mexican waters of the Perdido Fold Belt could point to the opening up of the next area of the Gulf for growing reserves.

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