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Soldiering on in the Gulf of Mexico

The oil-price slump has crimped activity in the Gulf of Mexico, but output will still rise in 2017

These are tough times for the Gulf of Mexico (GoM), arguably one of the most important provinces in America's - and maybe the world's - exploration and production sector. While GoM federal output accounts for 17% of US oil production and 5% of US dry-gas production, weaker oil prices over the past two years have taken a major bite out of upstream work. Still, the region will add more output in 2017.

Drilling activity remains depressed. In early October, just 22 rigs were working in the Gulf, according to services firm Baker Hughes, down a whopping 61% from the 56 rigs that were working in the GoM just two years ago. Exploration and development work has come to a virtual standstill in the shallow water plays.

The number of drilling permits approved by the US Bureau of Safety and Environmental Enforcement (BSEE) helps to amplify the trend. The combined number of shallow-water "new well" and "revised new well" permits granted by BSEE in the GoM during 2014 was 182. That number fell by 75% during 2015 to 45, and by another 47% during the first nine and a half months of 2016. By contrast, the number of similar permits BSEE approved for water depths greater than 500ft totaled 474 in 2014, and it rose by 8.4% during 2015, to 514. And while that number has fallen by about 22% so far in 2016, to 399 permits, deep-water activity certainly compares favourably with the free-fall in shallow-water activity.

Yet, despite the many indicators of decline over the past two years, oil production in the Gulf continues to rise. GoM oil output averaged 1.54m barrels a day in 2015 and 1.66m b/d in 2016, an 8% year-on-year rise. Production is expected to rise by a further 14.5% in 2017, reaching 1.9m b/d in the fourth quarter, says the Energy Information Administration. By late 2017, the GoM will account for about 22% of US oil production.

The term "mega-projects" explains the apparent contradiction between falling exploration activity and rising output. Eight deep-water fields discovered between 2004 and 2013 went on stream during 2015, alone, including Silvertip (Shell), West Boreas (Shell), Hadrian South (ExxonMobil), Lucius (Anadarko), Deimos South (Shell), Big Bend (Noble Energy), Marmalard (LLOG Exploration) and Dantzler (Noble Energy). With the exception of the Lucius field, each has been developed with subsea wells tied back to nearby production facilities. The use of tiebacks has allowed operators to reduce project costs and start-up times. Lucius uses a floating production platform type known as a truss spar - the largest spar of Anadarko's GoM assets.

The parade of new deep-water fields going on stream continued in 2016, with five achieving first production. In January, Anadarko's Heidelberg field began producing from a spar platform similar to that at Lucius, reducing development costs. In April, Exxon's Julia field started producing at 34,000 b/d, with six wells tied back to a floating production platform at Chevron's Jack and St Malo fields, 24km away. Three months later, Noble's Gunflint field put two subsea wells on stream, tied back to the Gulfstar One facility, owned by Williams Partners and Marubeni. And, in September, Shell's Stones field started up, producing into a floating, production, storage and offloading vessel from a water depth of 9,556ft, the Gulf's deepest project to date. When fully ramped up next year, Stones will produce 50,000 barrels of oil equivalent a day. Freeport McMoRan's Holstein Deep satellite field went on stream in the second quarter of 2016 too, with three subsea wells tied back to existing facilities.

After 2016, the backlog of existing deep-water development projects begins to thin out, with just one field preparing to go on stream. Sometime during the first half of 2017, Freeport McMoRan's Horn Mountain Deep field should enter production, with subsea wells tied to existing facilities. But in mid-September, the firm announced the sale of its deep-water assets to Anadarko, so it's not yet clear how this will affect progress at Horn Mountain Deep.

Although operators have made more discoveries in the past couple of years, the weaker oil price has kept them from announcing any further development plans. An activity gap is likely to open in 2017 and 2018 could be very quiet for deep-water activity. Much depends on how far and fast prices recover in 2017. It's all played havoc with Louisiana's economy. An outlook by two professors from the state's university, notes that Lafayette, alone, has lost 16,500 oil-and-gas-related jobs during 2015 and 2016 - 8,900 of them in 2016. The authors predict that, before things start to get better, another 5,000 jobs will be shed in that area in 2017.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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