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Gulf of Mexico oil sector faces pandemic-related risks and hurricanes

Highlights

Producers could cite COVID-19 health risks for offshore drilling delays

Royal Dutch Shell evacuating Gulf workers with coronavirus

Global crude oversupply about 15 million b/d in Q2

Houston — Weak crude oil will make it harder for some Gulf of Mexico operators to fulfill their drilling requirements on leases just as the industry is battling outbreaks of coronavirus offshore and the beginning of hurricane season on June 1.

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The escalating offshore challenges come just as Royal Dutch Shell airlifted coronavirus-infected workers and others showing symptoms from one of its offshore platforms, showing that the confines of offshore rigs remain potentially ripe environments for viral spread.

It is likely that more offshore oil producers will cite coronavirus concerns if they seek suspension requests or extensions on their lease requirements with the US Interior Department's Bureau of Safety and Environmental Enforcement, said Jonathan Hunter, a partner at the Jones Walker law firm, while speaking Wednesday at the online Louisiana Energy Conference.

"We may see appeals and litigation related to that," Hunter said, depending on how BSEE opts to respond to these potentially unprecedented requests.

"It's been a wild, wild ride and it's certainly not over," Hunter said of the oil sector in 2020.

With crude oil priced near $30/b, there's not much incentive to push forward with new drilling offshore except for fulfilling the demands of federal leases, he said, and the pandemic risks to offshore workers could help companies seek legal remedies for temporarily suspending lease deadlines.

Coronavirus outbreaks offshore have plagued the industry this spring from the Gulf of Mexico to Brazil and other parts of the world.

As for Shell, spokeswoman Cynthia Babski said Wednesday that seven workers were airlifted from an undisclosed Shell platform in the Gulf. Five of them tested positive for COVID-19 and two others were symptomatic. Two more workers showing symptoms were being isolated on the platform before being evacuated late Wednesday, she said.

Shell is reducing its personnel to minimum staffing levels on the platform, Babski said. "We have been and will continue to take steps to protect all employees following guidance from the CDC and local public health officials while maintaining data privacy and individual health confidentiality," she said in a statement.

But now the additional annual worry of hurricane season is approaching. The National Oceanic and Atmospheric Administration is predicting a busier-than-usual hurricane season with 13 to 19 named storms through November. An average hurricane season is 12 named storms.

A TOUGH YEAR

The offshore energy woes come as the global energy sector is dealing with a crude oil oversupply of about 15 million b/d through the end of the second quarter, said Jesse Mercer, Enverus senior director for crude market analytics.

"This is an astonishing amount of liquids that have no place to go except into storage," Mercer said. "It has been a year to remember, and we're not even halfway through it yet."

And global oil demand still won't return to at least 100 million b/d until 2022, he said, so the pain will be dragged out.

The more expensive, slower-moving offshore sector is particularly challenged, Mercer said, while the onshore shale sector has been able to pull back and shut in more production from stripper wells and the most expensive wells. Permian Basin crude production has fallen by almost 1 million b/d, he said, while the Williston Basin has removed more than 500,000 b/d.

Falling crude oil, natural gas and natural gas liquids production also comes after a wave of midstream growth to build more pipelines and NGL fractionators, especially serving the Permian.

"It's a pretty ugly picture," Mercer said. "It coincides with a historic expansion of midstream capacity."

Next will come a bigger spree of bankruptcies and eventual mergers and acquisitions.

"The outlook for consolidation is pretty high," he said. "Those that remain will be able to pick up some pretty good assets."