The year 2015 saw a record 101 explo­ration wells spudded in deepwater (including deepwater with depth between 1,000 and 5,000 feet and ultradeep water with depth greater than 5,000 feet) U.S. Gulf of Mexico (GoM). That’s 21 more than in 2014, when the oil price col­lapse started. Deepwater exploration drill­ing dropped after the downturn, starting in 2016. However, operators still managed to spud 78 deepwater exploration wells—on par with 2014. Exploration in shallow water (depth less than 1,000 feet) bears the most impact by the low oil price. Only two and three exploration wells were drilled in shal­low water in 2015 and 2016, respectively, significantly down from the high of 23 in 2014.

On the development drilling side, deep­water wells drilled in 2016 had been cut by half to 26, compared with the 51 wells drilled in 2014, signaling a bigger impact by company spending cuts than explora­tion drilling. Shallow-water development drilling has experienced a similar fate, with operators only drilling 23 develop­ment wells in shallow water in 2016 com­pared to a high of 172 in 2014.

The oil price slowly recovered back to more than $50 per barrel in 2017, a sign of rejuvenated exploration drilling activities in the Gulf—especially in deepwater, based on drilling permit applications. The recovery is expected to be slow, as operators are still very cautious about the recovery. Stratas Advisors expects exploration well counts to jump to about 95 in 2017, from 81 in 2016, and reach 125 by 2021. Most of them will be in deepwater.

On the development drilling side, activities will not start to recover until 2019, with some deepwater projects getting into the construction stage. However, we will not see a full recovery on shallow-water development drilling in the next five years. The shallow well counts will remain about 40, far below the 170 wells drilled in 2014.

In summary, in the next five years as oil price slowly recovers, there will be on average about 177 wells drilled every year, with 62% of them as exploration drilling. Deep and ultradeepwater drilling will continue to be the core activity which counts about 75% of the total wells.

At company level, based on companies working interests on leases and projects, Stratas Advisors forecasted company’s net wells in the next five years. Of the top 20 companies, Royal Dutch Shell Plc and Chevron Corp. are leading all the deepwater players in the Gulf by averaging more than 20 wells drilled per year. Shallow-water player Arena is leading in the shallow-water drilling with 14 wells on average in the next five years.

The total spending in the U.S. GoM reached its lowest point in 2016 to $14 billion, about a 38% drop compared to the spending in 2014 since the downturn began. The cut spread across the board from shallow water to ultradeep water.

The recovery will be slow as benchmark oil prices are expected to stay relatively low for at least the next couple of years. Based on our projections for spending on exploration and development projects over the next five years, Stratas Advisors anticipates that a full recovery of capex reaching more than $25 billion will not be realized until the end of the decade. As oil prices increase, recovery in spending will likely go most heavily to deepwater and ultradeepwater projects, which Stratas expects to control upward of 95% of capital budgets.

Exploration drilling will hover around $7 billion level over the next two years, but will approach $11 billion by 2020. Field development spending will start picking up more forcefully around 2019, rising from around $8 billion in 2016 to more than $16 billion in 2021.

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