Although debate continues on the extent of the rollover in domestic oil production after a 62% decline in the onshore rig count, there is a different story line developing offshore. Gulf of Mexico production is projected to increase in 2016, a fact that has been overlooked in the headline debate on the direction of crude oil supply.

U.S. offshore oil production is up 15.5% year-over-year to 1.7 million barrels of oil equivalent per day (MMboe/d), roughly equivalent in volume to the Eagle Ford Shale, and up 2% sequentially month-to-month in September 2015, per the last available EIA data at press time.

The rising tide offshore is a function of deepwater production in a basin that has a potential 50 billion barrels of oil equivalent (Bboe). For perspective, compare the Gulf’s resource potential to the estimated 75 Bbbl in the Midland Basin. Furthermore, the physical challenge of accessing deepwater reserves is yielding to technology. The next frontier challenge for deepwater is less about technology and more about reducing breakeven costs to make Gulf deepwater crude competitive in an oversupplied global market.

The story line in today’s Gulf of Mexico revolves around emergence of the Lower Tertiary, where the industry has discovered 4.8 Bbbl of potential resource. Efforts to bring Lower Tertiary production online are underway in the western Gulf at Perdido and its possible extension into Mexican waters, and in the central Gulf, where the industry has drilled 60 wells. While activity focused previously on the outboard section of the Lower Tertiary, with its big structures, thick reservoirs and challenging geologic conditions, the play has expanded over the past two years to include the inboard Lower Tertiary, which features fewer geologic issues.

If the industry solves two problems—engineering-related and financial—the Lower Tertiary in the central Gulf could add as much as 800,000 bbl/d in new production within the next decade and boost the Gulf to Permian Basin-level output. Two nameplate programs include Royal Dutch Shell’s efforts at Perdido, which pushed development below 8,400 feet of water in 2010, and Shell’s Stones project in a record-setting 9,500 feet of water—basically within a couple of football-field lengths of the psychologically astounding depth of 10,000 feet of water. A FPSO is on the way to Stones—only the second for the Gulf, which features an extensive pipeline network. At peak, Stones will process 50,000 boe/d with start-up projected for 2016.

Development is also moving forward at Appomattox, in the emerging Norphlet play. Appomattox represents 175,000 bbl/d of production potential—or more than half of the onshore production rollover estimated by the EIA Drilling Productivity model.

Globally, deepwater has been an expensive arena with breakeven prices ranging from $65 to $85 for projects in the Gulf of Mexico, West Africa and Brazil. Efforts to reduce structural costs are well-advanced during the current downturn. While the decline in service costs is self-evident, those savings represent just 20% of project cost reduction and are nonsustainable, because service costs track commodity prices.

The remaining 80% in theoretical cost savings is sustainable, however, and split between gains related to process and a reduction in the cost of designing equipment and laying out the overall scope of a deepwater project. In nonmanagement speak, it means improvements in design planning by incorporating all parties sooner in the process, getting more efficient in operations, and developing greater sophistication in supply chain management.

Total savings, coupled with advances in well productivity—some attributable to the application of lessons learned in unconventional drilling onshore—can reduce Gulf deepwater breakeven costs to less than $60/bbl. That makes many deepwater Gulf projects competitive with the better unconventional plays onshore.

Technological challenges are still in front of the industry, though within grasp. Moving well control to encompass 20,000 pounds per square inch of pressure will hasten development of the inboard Lower Tertiary. The first 20,000 psi systems have been deployed globally. Artificial lift promises to add as much as 10% to Lower Tertiary recovery, which currently ranges from 8% to 15% of original resource. It has been deployed by Shell in Perdido Field. And standardization has become the focal point of deepwater best practices.

Gulf project timing may move a year or two to the right, but deepwater has the same technological and financial momentum as onshore unconventionals.

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