As a result of prolonged low crude prices, oil companies have announced significant investment cuts for 2016 and beyond. The U.S. Gulf of Mexico has not escaped the knife. As one of the most-active deepwater regions over the past decade, reduced investment in the area will result in material long-term impacts to U.S. production.

Drilling activity dropped by more than 30% in the GoM in 2015 relative to 2014, when the crude oversupply crisis began. Stratas projects that the trend will continue through 2016 as investment cuts deepen. Spending peaked in 2014 at more than $36 billion, but companies have announced plans to slash capital spending by at least 50%, to about $18 billion annually for both 2016 and 2017.

The recovery in the GoM will be slow, as benchmark oil prices are expected to stay relatively lower for at least the next couple of years. Based on Stratas Advisors’ projections for spending on exploration and development projects over the next five years, we anticipate that a full recovery of capital expenditures to more than $30 billion annually will not be realized until the end of the decade. As oil prices increase, the recovery in spending will most likely be focused on deepwater and ultra-deepwater projects, which we expect to control upward of 90% of capital budgets.

Exploration drilling will hover around $7 billion over the next two years but will approach $10 billion by 2020. Field development spending will start picking up more forcefully around 2019, rising from some $5 billion this year to more than $10 billion to $11 billion in 2020.

At the company level, oil majors Shell, Chevron and BP will continue to be the dominant forces in the GoM over the next five years. Combined investment for the big three will be around $45 billion, accounting for about 40% of total spending.

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