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Stuttering outlook for Gulf of Mexico

Despite ever-rising oil and gas production, drilling activity is looking weaker

After a challenging 2018 that saw project momentum in the US Gulf of Mexico (GOM) falter amid weaker oil prices, the outlook for drilling activity in 2019 appears diminished. The November price declines could have a chilling effect on investment, amid rising project costs. It marks a contrast with the situation in early 2018, when oil prices were high and deep layoffs, sustained cost-cutting, new technology, and optimisation had stripped the industry down to lean and mean. Sustained relief on commodity prices, which rose above $60/bbl and even above $70/bbl, was felt and welcomed. Also welcomed were changes in the US tax landscape. The December 2017 tax restructuring reduced corporate income tax rates and revised capital expenditures. Higher spending was expected to result from taking deductions for capex in the year they occur.

Another potential upside was the US' role as a major energy exporter. In late October 2017, US oil exports hit a high of 2.13mn bl/d, a figure surpassed multiple times during 2018, reaching an all-time peak of 3mn bl/d on 22 June. Meanwhile, US natural gas exports, already greater than imports, were expected by the US Energy Information Administration (EIA) to grow with less imported Canadian gas, more gas to Mexico, and increasing LNG exports.

Substantial new LNG capacity will come on stream in 2019. Five new LNG projects are underway—Cameron (Hackberry, La.), Elba Island, Freeport, Corpus Christi and Sabine Pass, Louisiana—that will increase total US liquefaction capacity from 1.4bn cf/d in 2016 to 9.5bn cf/d by 2019. The Federal Energy Regulatory Commission (FERC) has approved another four projects that are not yet under construction.

Production has grown steadily over recent years, as long-term projects have gone online. GOM oil production was expected to have risen from 1.66mn bl/d in 2017 to average 1.77mn bl/d in 2018.

But while GOM oil production has risen, drilling activity is generally weaker and the situation may struggle to improve much in the forecast period. The World Oil short-term GOM outlook is for an 18.2pc decline to just 121 wells drilled in 2018. In this context, gaining back momentum will be tough. In September 2018, IHS Markit estimated that average global demand for mobile offshore drilling units would increase 13pc between 2018 and 2020, assuming the offshore market emerged from its prolonged downturn.

After a challenging 2018 that saw project momentum in the GOM falter amid weakening oil prices, the outlook for drilling activity in 2019 appeared diminished

The 158 shallow-water well permits issued by US Bureau of Safety and Environmental Enforcement (BSEE) in 2017 were about double the 2016 number. In the year to October 2018, shallow-water permits already totaled 155, on track to exceed 2017's figure. Deepwater permits were down 48 in 2017, to 627. However, totals as of October 2018 were at 550 and on pace to beat the 2017 total.

Two US GOM lease sales have been held in 2018 by the Bureau of Ocean Energy Management (BOEM), sales 250 and 251. In March, Sale 250 awarded leases on 148 tracts covering 815,403 acres to high bidders for $124,763,581. Thirty-three companies participated in the sale, submitting $139,122,383 in total bids. Then, in August, Sale 251 attracted winning bids totaling $178,069,406 on 144 tracts covering 801,288 acres. Twenty-nine companies submitted $202,667,923 in total bids.

Results from these two sales dwarfed the Sale 249 numbers from August 2017. During Sale 249, BOEM awarded 81 leases on tracts covering 456,256.16 acres to high bidders for $121,143,055. Twenty-seven companies participated, submitting bids totaling $137,006,181.

Sale 249 was the first under the OCS Leasing Programme for 2017-22, whereby all lease sales combine the three planning areas. The offerings are situated where resource potential and industry interest are high, and infrastructure is well-established, said BOEM. Under this program, 10 region-wide lease sales are scheduled. This includes Sale 249 in 2017, plus two sales, each, in 2018, 2019, 2020 and 2021, plus one sale in 2022.

Large operators have been focusing on deepwater plays. Shell Offshore in January 2018 said that its Whale deepwater well is one of its largest GOM exploration finds in the past decade. The well encountered more than 1,400 net ft of oil-bearing pay. Appraisal drilling was underway this year to further delineate the discovery and define development options. Whale was discovered in Alaminos Canyon Block 772, adjacent to the Shell-operated Silvertip field and 10 miles from the Shell-operated Perdido platform.

Now looking like the GOM's undisputed leader in deepwater production, Shell said in October 2018 that such challenging development is still a viable option with "tremendous opportunity." The company says it is committed to the long-term development of its deepwater portfolio, and that it is in a position to continue capitalising on its GOM operations.

1.77mn bl/d—average estimated GOM oil production in 2018

Shell has three GOM deepwater projects under construction—Appomattox, Kaikias, and Coulomb Phase 2—as well as investment options for additional subsea tie-backs. Appomattox should begin output by the end of 2019. This year, Shell took a final investment decision on its 11th deepwater GOM project, Vito, slated to start production in 2021 and be a potential new hub. Shell expects its global deepwater production to exceed 900,000 boe/d by 2020, from already discovered, established areas.

In early 2017, supermajor BP started up its Thunder Horse South Expansion project in the deepwater GOM, 11 months ahead of schedule and $150mn under budget. The project added a new subsea production system, south of the existing Thunder Horse platform, which can handle 250,000bl/d and 200m cf/d. And in October 2018, the Thunder Horse Northwest Expansion project went online, four months ahead of schedule and 15pc under budget. The project achieved first oil 16 months after sanction, comprising a new subsea manifold and two wells tied back to the platform.

In the deepwater GOM, BP operates four large production platforms-—hunder Horse, Atlantis, Mad Dog and Na Kika, and holds interests in four non-operated hubs. BP's $9bn Mad Dog Phase 2 should start up in late 2021 and produce up to 140,000bl/d from as many as 14 production wells. Recent advances in BP's proprietary seismic imaging technology have identified additional resources around the company's GOM hubs that could yield an additional 1bn bl of oil-in-place.

Anadarko is one of the largest independent leaseholders and producers in the deepwater GOM, with more than 1.9 million gross acres, 10 operated floating facilities and output of 160,000boe/d. In the region, Anadarko achieved a monthly record rate of more than 140,000bl/d during August 2018. The company achieved record output during the third quarter at its Caesar/Tonga development, largely supported by its eighth well coming online. Anadarko also brought new wells on stream during third-quarter 2018 at its Marlin and Holstein platforms, and finished drilling at the first Hadrian North expansion well, which will tie back to the Lucius platform. The second Hadrian North well was due for completion by year-end 2018, with first production anticipated in 2019.

Mike Slaton is Contributing editor and Kurt Abraham is Editor-in-chief, World Oil

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