Analysts Hopeful for US GoM Production Recovery

The streak of record annual production growth in the U.S. Gulf of Mexico (GoM) could come to a halt this year after offshore players delayed projects and cut spending; however, momentum will return, analysts say.

“We do have several projects that are coming online toward the end of this year and into 2021” plus more in 2022, Justin Rostant, principal analyst for U.S. Gulf of Mexico upstream at Wood Mackenzie, said Aug. 19 during a Houston Energy Finance Group webcast. “We think that we’re going to have peak production in 2022 and then taper off from there and level out.”

Data from the U.S. Energy Information Administration show production from GoM federal waters dropped from about 1.98 MMbbl/d in January to about 1.61 MMbbl/d in May as the oil and gas industry waded through unchartered territory. Like their onshore counterparts, offshore operators are navigating continued oil market volatility amid a global pandemic, less demand and resource oversupply.

Wood Mackenzie had forecast the GoM region, which accounts for about a quarter of the world’s deepwater production, would see about $10 billion in annual capital investments between 2016 and 2020, Rostant said.

Then, March happened and oil prices fell.

GoM players responded quickly by cutting about $4 billion of 2020 capex plus “significant” opex cuts, according to Rostant, who noted cuts ranged by company from about 20% to 50%. The cuts, he added, came from projects in various phases. Uneconomic wells were shut in and maintenance programs accelerated.

“The focus of companies here wasn’t to cancel projects—just to delay that spend and delay those projects as much as possible, trying to conserve cash in that low-price environment in 2020,” Rostant said.

Wood Mackenzie doesn’t anticipate any greenfield projects will be sanctioned this year.

Earlier this year, the energy research and consultancy forecast GoM production was on course toward another production record of 2.2 MMboe/d. Rough market conditions prompted analysts to lower its forecast by 200,000 boe/d. However, with major projects still in the works, production recovery is anticipated next year.

“We’re not seeing any cancelations, just delays,” Rostant said.

Exploration programs also saw cuts. Some companies opted not to pursue options for rigs to drill additional wells. The number of wells spud in 2020 is expected to be the lowest seen in the last 10 years, according to Wood Mackenzie.

However, some companies are still pushing forward with exploration programs and running rigs. Others pushed planned 2020 exploration wells to 2021, giving analysts hope for a future uptick in GoM exploration alongside continued focus on low-risk infrastructure-led exploration.

Attraction Remains

The GoM remains an attractive region with favorable economics.

Operational efficiencies gained in recent years have improved the GoM’s competitiveness with tight oil. The analyst pointed out how some subsea tiebacks and standalone GoM developments have lower WTI breakevens at 10% IRR than some tight oil plays in the U.S.

Plus, Rostant said the GoM has about 1.7 MMbbl/d of production with a post-tax short-run marginal cost of less than $15/bbl, “so companies could weather a short-term price drop.”

Those costs are basic expenses required to operate the facility, royalties to the government, and transportation, processing or handling costs. “When we take all those costs into consideration, you’re running at $15 if forward prices are $20. You’re doing okay,” he said. “Obviously, prices are back up into the $40 range.”

Economics have kept some companies—a mix of independents, privates and majors—in the successful hydrocarbon province, which still has untapped volumes of oil and gas. Though others have left as company strategies shifted.

M&A activity ramped up in 2018 and 2019, Rostant said. Deals included Kosmos Energy Ltd.’s acquisition of Deep Gulf Energy and Talos Energy Inc.’s acquisitions of ILX Holdings, Castex Energy and Venari Resources.

Rostant pointed out in his presentation that “asset sales have gone for steep discounts” but “future private exits could be difficult but also provide opportunistic acquisitions” as the implied long-term oil price has ranged from the low $20s/bbl to $50/bbl.

Still, don’t expect fire sales given oil price uncertainty, he warned.

Potential Buyers, Sellers

Wood Mackenzie’s list of potential sellers includes Fieldwood Energy LLC, which earlier this month filed for Chapter 11 bankruptcy—its second time to do so in the past two years. Potential sellers also include Occidental Petroleum Corp., which bought Anadarko Petroleum Corp. along with its massive deepwater portfolio, he said.

“Now they are in a bit of trouble from needing to raise cash,” having had a couple of transactions in Algeria and Ghana fall through, Rostant said. “We anticipate Oxy may need to raise some cash immediately. They may look at their portfolio in the Gulf of Mexico to try and do some divestitures there.”

Potential buyers, according to Wood Mackenzie, include Total SA and Petronas.

Rostant described Total as a big player worldwide with aspirations to return to the GoM. He noted the company has expressed interest in purchasing Occidental assets elsewhere but deals fell through. “If Oxy is a potential seller here in the Gulf of Mexico, then Total could be a natural partner there to pick up some of their assets,” he said.

Malaysia’s Petronas has also been looking to diversify. The company’s subsidiary, Progress Resouces USA Ltd., partnered with Equinor ASA and Repsol SA at the Monument prospect in GoM and announced earlier this year they struck oil.

“We do not anticipate Petronas is going to be a one-shot player in the Gulf of Mexico,” Rostant said. “They’re going to want to grow their portfolio.”

Assessing Risks

The GoM, however, is not without risks. Political risks have surfaced as Democratic presidential nominee Joe Biden’s climate initiative could impact activity in the GoM. Wood Mackenzie evaluated the impact potential bans could have on oil and gas permitting in four scenarios.

“Each scenario gets more and more prohibitive. We see the impacts are becoming more and more drastic,” he said, later adding “If the Democratic Party wins, things will be more difficult.”