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Feature: Gulf of Mexico seen springing back to life

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Production of 2 million b/d should level off, then pick up

But US Gulf still seen in recovery from downturn

High-pressure developments starting to take off

Houston — After stirring for 18 months, the US Gulf of Mexico now appears to be springing back to life after years in virtual hibernation, as the region's production rises and oil companies prepare for future growth even amid uncertain oil prices.

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Crude output in the US Gulf is at an all-time high, currently around 2 million b/d, and it should roughly level out before rising again in 2021 from new deepwater fields coming online then, analysts say. Mergers and acquisitions have been brisk, operators are drilling more and have sanctioned a number of stand-alone facilities for the first time in some years.

As a further signal of the US Gulf's promise, Chevron – in a much-awaited December move – gave the green light to development of its Anchor discovery, potentially opening up a new play in the region.

But despite the region's promise and quickening pace of activity, analysts caution that it is unlikely to see comparable activity levels to those of early in the last decade – at least not yet.

"We are still in a period of recovery" from an industry downturn that began in early 2015, Sami Yahya, analyst for S&P Global Platts Analytics, said. "Operators are not putting their feet on the gas pedal all the way."

One big uncertainty is cost, which blew through the roof during the last regional activity peak six or seven years ago, but were tamped down by low demand when oil prices fell about 50% from over $100/b between the middle of 2014 and the year's end.

But costs may not rise that much this year, William Turner, vice president-Gulf of Mexico for consultants Welligence Energy Analytics, said.

2019 LIKELY BOTTOM FOR OILFIELD COSTS

"The year 2019 will probably mark the bottom of costs for third-party contractors, rig rates and oilfield services," Turner said. "So those moving forward are betting that now is the best time to be lining up the work because prices will only go up from here."

The relatively low oilfield costs seen at the present stem from concessions made to exploration and production companies to help them stay afloat during the 2015-2017 industry downturn. Turner and others believe costs will rise some this year as demand picks up from more US Gulf activity.

In part as a result of lower oilfield prices and also from efficiencies, US Gulf oil breakevens average around $45/b, with a lower average for tiebacks. These are quick field hookups to existing infrastructure and do not require massive and long lead-time construction.

Gulf crudes currently priced around $60/b leave a comfortable margin for operators that survived the downturn and are now beefing up their Gulf operations.

Talos Energy, for example, in December made what it called a "transformative" purchase of US Gulf prospects, finds and production from several small operators. Also in December, W&T Offshore, a US Gulf-focused producer, bought ConocoPhillips' last operated producing asset in the region after the latter exited US Gulf exploration in 2015.

Hess recently drilled its first US Gulf exploratory well in years at Esox, unveiling a discovery in October. It will be online later in the first quarter of 2020. And Murphy Oil in April acquired more than two dozen blocks with production in the US Gulf from LLOG Exploration.

Murphy is also developing its Samurai and Khaleesi/Montmort fields, to be produced by the King's Quay floating production system.

While Occidental Petroleum was not a Gulf of Mexico producer at the time of its $57 billion acquisition of Anadarko Petroleum last August, the purchase marked its return to the US Gulf after a dozen years' absence.

The company plans to spend $100 million on "near-field exploration" in 2020 that includes tiebacks and development wells drilled from platforms, Ken Dillon, Oxy senior vice president, said during a November earnings call.

GULF MAY BE COMPETITIVE WITH PERMIAN

During that call, Oxy CEO Vicki Hollub said she believed the US Gulf could "compete for capital ... [and] can beat the Permian" Basin, which analysts say has a breakeven cost of around $40/b.

Chevron's Anchor field, sited about 140 miles off the coast of Louisiana in 5,183 feet of water, is the first ultra high-pressured 20,000 psi find to be sanctioned.

Currently, 15,000 psi wells are producing in very deep, remote US Gulf areas. But 20,000 psi development requires subsea equipment rated to withstand more punishing pressures. Until recently the technology was not available.

Once Anchor is online in 2024, it could spur not only further exploration of those extreme wells, but development of discoveries made years ago but kept on ice for lack of production technology. These include BP's Tiber and Kaskida discoveries, which were announced in 2009 and 2006, respectively.

LLOG recently ordered subsea trees for Shenandoah, also a 20,000 psi project 200 miles south of New Orleans, containing 100-400 million barrels of oil, while Total is in the early stages of advancing another 20,000 psi project, North Platte.

In addition, the cost of newbuild facilities has dropped drastically. Better supply chain logistics, re-using hub designs in lieu of designing uniquely for each field, and sizing hubs for nearer-term output rather than the long-term, are greatly slashing construction costs in an era of corporate austerity.

The payoff has been that in the last couple of years, new production facilities have been given the green light by Shell and BP in the form of Vito, which has a breakeven cost under $35/b, and Mad Dog Phase 2, respectively.

"The industry will be watching the performance of the upcoming standalone projects and that could have an impact on how other projects tread forward," Yahya said.