Despite the crash in oil prices, Gulf of Mexico (GOM) oil production is rising and on track to reach record levels in 2017, according to the Energy Information Administration (EIA). An increase is forecasted even though the deepwater drilling needed in the GOM comes with much higher costs and overall US production has declined in recent months.
The difference between shale oil drilling and deepwater drilling is that the lead times for deepwater are far greater. Where a shale oil operation can shut down, or start-up, within months in reaction to prices, many GOM projects were discovered and planned years before the recent oil crash. “If you’ve already spent $5 billion on a $7 billion project, it’s not like you can say, ‘Never mind, let it sit and wait,'” according to Tom Kloza, global head of energy analysis at the Oil Price Information Service.
While the BP oil spill in 2010 was the worst environmental disaster in the US and caused a moratorium on deepwater drilling for several months, GOM oil production has bounced back. The output is expected to jump by 8% this year and another 10% in 2017 reaching an average of 1.83 million barrels per day. So while oil production might be dropping in other parts of the US this new supply is not only offsetting US production declines but also adding to the global supply glut.
This trend is expected to continue as several deepwater projects are scheduled to come online in the near future. Shell is supposed to launch the 9,500 feet deep ‘Stones’ field which was discovered in 2005 and is expected to yield 50,000 barrels in the first phase. This is on top of three other deepwater GOM fields it opened last year. Noble Energy, Anadarko Petroleum, ExxonMobil and LLOG Exploration have launched similar GOM projects in 2015.
These projects were planned back when oil prices were $100, and profitability is unclear with the current state of oil below $40 a barrel. Substantial investments are needed for this type of drilling and how much the costs of manpower and drilling services will offset this is unclear. “They probably lose money on them, but they’d lose more if they weren’t pumping oil at all,” according to Kloza.