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Feature: US Gulf of Mexico still seen as attractive, but players are changing


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Houston — Even as onshore shale has become the gleam in the US oil industry's eye, the Gulf of Mexico remains a solid, if less glamorous, member of the domestic production profile than in years past.

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The Gulf has begun to stir recently after three years of low prices, attracting private equity money alongside a new set of players.

As shale recently helped push US crude oil production over the 10 million b/d mark for the first time since 1970, the US Gulf -- which had been expected to fade silently into the background -- continues to grind forward and will reach a peak this year, analysts say.

"We will see an all-time record production from the deepwater Gulf of Mexico in 2018 [and] again in 2019," William Turner, senior research analyst for Wood Mackenzie, said.

"Long term, the Gulf is important for American production, and deepwater in general is important for the long-term simply because of the volumes it offers," Turner said.

One offshore well can produce as much as 30,000 b/d of oil equivalent and 12,000 boe/d is not unusual. That compares to onshore, where a typical well might yield 1,500 boe/d of initial production and where 2,000 boe/d or 2,500 boe/d are exceptional, although becoming more common.

But while shale decline rates are high, up to 70% in the first year; offshore well decline rates are slower.

Currently, total US Gulf production is projected at 1.725 million b/d of crude in July, according to S&P Global Platts Analytics, nearly 18% of current domestic production. The figure is projected to rise to a peak of 1.874 million b/d in January 2019 before declining slightly and ending that year at 1.825 million b/d.

As oil prices have risen this year from the mid-$50s/b level to the mid-$70s/b currently, more rigs are also working in that arena -- 19 last Friday compared to 12 earlier this year, although that compares to 55 at the start of 2015.


That has caused private equity money to flow into the US Gulf, which has been called the "Dead Sea" at numerous times during its 70-plus years of producing oil and gas.

This time, a bevy of ambitious new players in both shallow- and deep waters and expansions of offshore projects and new strategies forged by older players are beginning to dot the landscape.

At one time, most US large independents had a US Gulf operation. But currently, the Gulf appears to have three types of players.

One is the larger veteran players such as Shell, Chevron and BP with money to pursue ultradeep, highly complex fields.

Another type are large independents such as Hess and Anadarko Petroleum, which remain in the basin because it is profitable, but appear to view it mainly as a cash engine for growing their projects elsewhere.

The newest group is smaller private operators, formed to focus on traditional areas of the offshore basin -- shallower Miocene targets, such as the area around the Mars-Ursa and other legacy fields nearby. In those areas, target sizes for well tie-backs to existing infrastructure have been a modest 20 million-50 million barrels of oil equivalent, Turner said.

Those thresholds were "meaningful" for small, ambitious operators such as privately held longtime Gulf player LLOG Exploration and remain so for companies like Fieldwood Energy and Talos Energy, he said.

Moreover, as those operators have gained experience in the Gulf, all three have all taken steps recently to beef up their deepwater presence, especially LLOG, which is taking on more difficult reservoirs.

Fieldwood, also a privately held operator, and Talos are were formed in the last half-dozen years initially to operate on the shallow-water Gulf Continental Shelf. But both are now wading into modestly deep waters up to 4,000 foot depths. Talos went public in May when it acquired US Gulf veteran operator Stone Energy.

The Talos deal was one of several recent examples of deepwater assets changing hands which has brought renewed attention to the US Gulf as an arena where profits could still be made. For example, Fieldwood in April bought the deepwater Gulf assets of large independent Noble Energy, while LLOG last year took over as operator of Buckskin, a remote discovery by Chevron in 2009.


LLOG also assumed operatorship in April of Anadarko Petroleum's 2011 Shenandoah discovery also in remote waters of the Gulf's Walker Ridge area in 2011 -- a find LLOG CEO Scott Gutterman called "large" at an estimated 100 million-400 million boe.

Rotation of larger players out of the Gulf or to ultra-deepwater from lesser water depths is part of the natural growth process as they grow in size and seek bigger scale operations, leaving room for "more guys like ourselves," Fieldwood CEO Matt McCarroll said.

Moreover, the US Gulf offers a "huge advantage" right now to operators at current oil prices, McCarroll said, compared to the transportation bottlenecks seen in the Permian Basin, where crude oil prices are heavily discounted to those offered on the US Gulf Coast.

"The smaller players ... are probably betting on synergies from consolidations and also breakevens that are below current oil prices," S&P Global Platts analyst Rene Santos said. "The difference in breakevens between US shale and the Gulf of Mexico is narrowing ($40/b WTI for shale and $48/b WTI for the deepwater Gulf), and the gap is expected to narrow in the next couple of years."

In the shallower waters, activity is also starting to pick up.

In the most recent federal Gulf lease sale in March, bidders won 43 tracts in waters of 200 meters depth or less, compared to 10 in the August 2017 sale and 22 in the March 2017 sale.

The March 2018 auction also attracted more bidders (33) than the two previous sales, which pulled in 27 and 28 bidders respectively. Shallow-water bidders were mostly small and privately held.

Private equity has funded a variety of tiny startups in recent years -- Talos and Fieldwood, for example, and is also being poured into new projects for existing players. In March, W&T funded 14 new US Gulf projects costing more than $400 million -- many of them drilling new targets in mature fields - largely with private equity money.

Talos, which also made a giant offshore find in its first well on the Mexican side of the Gulf of Mexico a year ago, said the US Gulf is still that country's second-largest basin and has adequate infrastructure and "good commodity pricing," company CEO Tim Duncan said in May at a conference.

"There's stuff to do here, and there's not a lot of operators to do that stuff," Duncan said.

--Starr Spencer,

--Edited by Gary Gentile,