Regional Report- Gulf of Mexico

For a region that produces 15% of U.S. crude oil, the Gulf of Mexico is not getting much love. Hurricanes, a pandemic and politics galore have taken a toll on E&P operations over the past few years, and there’s no clear recovery in sight. The Gulf’s future is full of caveats and short-term affection. 

Its prospects are inevitably constrained by the growth of renewable energy, says the Interior’s Bureau of Ocean Energy Management (BOEM). The Bureau’s new 2022-2031 forecast predicts Gulf production will rise briefly, as it picks up slack from several off years, and then begin to fall by 2027. But that depends on a lot of unknowns, like how fast renewable energy can meet demand and how the hurricane season shapes up.  

Oil demand may, nevertheless, grow, despite the allure of solar and wind alternatives. The Gulf has many advantages, including huge resources, extensive infrastructure, advanced technology and expertise, and the generation of significant government revenue. 

The International Energy Agency (IEA) says the global market for crude oil could increase by 2 MMbpd in 2023, to a total 101.9 MMbpd. The latest in a series of increases, the figure is “a clear admission that the world’s appetite for crude continues to grow, despite efforts by mainly Western governments to subsidize a transition away from fossil fuels into existence,” says an article by Forbes/World Oil contributor David Blackmon. 

A key assumption of BOEM’s forecast is the continuation of federal lease sales. It notes that sale frequency becomes more significant as time goes on, due to the development time between when tracts are leased versus when they contribute to federal production. 

However, leasing lately has been an on-again, off-again affair. Disrupted by politics for the last few years, the federal leasing process has currently been restored to some semblance of order. Sales that had been cancelled or revoked are now back in business, thanks to legislative fiat. 

The first of two previously cancelled sales was held by BOEM on March 29. Those sales conclude the last five-year program. The new five-year program is notably late, fraught with ambiguity, and still subject to the drama of public review. It is, at least, a work in progress. 

BOEM FORECAST  

Oil production is expected to grow and plateau until 2027, when a gradual decline will occur, according to BOEM’s 2022-2031 GOM Oil and Gas Production Forecast. While the forecast anticipates a few years of growth and record total oil production, the Bureau is confident that renewable energy sources will ultimately reduce production. Gas production may increase, but it is not expected to reach recent highs, Fig. 1. 

Fig. 1. Growth, plateau and decline in GOM production predicted, as renewable energy advances. Source: BOEM

BOEM’s positive short-term outlook for oil is based on a strong project queue, resulting from Covid-19 related project deferrals, and recovery from off-trend production in 2020 and 2021, due to a “historically abnormal” number of hurricanes. 

Still, Gulf oil remains important, as the U.S. “actively transitions to renewable sources of energy,” says BOEM. In addition to 15% of U.S. oil and 1% of natural gas, the Bureau estimates undiscovered recoverable oil is in the 23.31-to-36.27-Bbbl range, and gas resources between 46.88 Tcfg and 62.56 Tcfg. 

The Gulf had continuous growth in oil production from 2013 to 2019, but an active hurricane season in 2020 resulted in 43 MMbbl of lost production, Fig. 2. In 2021, Hurricane Ida caused 45 MMbbl of lost production and the most damage to the Gulf Coast infrastructure since Hurricanes Gustav and Ike in 2008, says BOEM. 

Fig. 2. Hurricanes and Covid-19 have had a big impact on oil production over the years. Source: BOEM

Fed by the backlog, with no pandemic and better weather, GOM oil production is expected to recover at a size and speed similar to growth from 2013 to 2019, prior to the off-trend years, before beginning to decline in 2027. While gas production may gain a little, it is generally expected to continue its decline started in 2001. 

DEMAND PEAK 

Analysis from McKinsey & Company anticipates a peak in oil demand, occurring between 2024 and 2035, with additional sources of supply needed to meet demand and offset the production decline, Fig. 3. 

Fig. 3. Additional oil sources will be required to offset decline. Source: McKinsey & Company.

Crude supplies are expected to come from the lowest-cost projects, including shale, shallow-water, deepwater, and heavy oil from around the world, including the GOM. 

McKinsey’s Global Energy Perspective 2022 anticipates deepwater basins will contribute 7 MMbopd of the 24 MMbopd of new supply sources needed by 2040; of this, the GOM could supply 1 to 2 MMbopd. 

Prolific production, government revenue and employment are among the key GOM advantages. The Gulf also has lower emissions on a per-barrel basis, releasing less than half the emissions per barrel, compared with other major basins, says the report, Fig. 4. That’s due to minimal flaring, modern designs that minimize methane leakage, wells and production facilities—with high throughput that minimizes energy-intensive processes, like drilling, to bring on new supplies—and decarbonization efforts to meet environmental sustainability goals and regulations. 

Fig. 4. GOM has lower emissions per barrel than other major basins. Source: McKinsey & Company.

However, without continued investment, production from the GOM could start to decline by 2024, creating a gap of 0.8 MMbpd by 2040—a 4-Bbbl cumulative loss for the period, along with significant economic implications, says McKinsey, Fig. 5. Offset by production from other regions, this could increase global emissions by 50 MMmt to 100 MMmt of CO2 through 2040. 

Fig. 5. GOM production could start to decline by 2024 without continued investment. Source: McKinsey & Company.

LEASING PLAN DRAFT 

The BOEM’s proposed 2023-2028 leasing program for the Outer Continental Shelf (OCS) and its accompanying environmental impact statement were released for public comments in July 2022. The 2017-2022 program expired on June 30, 2022.  

With the next program still a work in progress, the country is without a leasing plan for the first time since 1980, when the Department of the Interior (DOI) began administering the five-year programs. The draft is at step three of a four-step process that typically takes place over two or three years, with successive drafts published for review and comment.  

The proposed program provides for no more than ten potential lease sales in the GOM and one in Alaska’s Cook Inlet, Table 1. The prior plan also listed 10 GOM sales, two of which were cancelled and a third revoked. Sale 257 has since been reinstated and the other two sales rescheduled.  

Table 1. Ten GOM lease sales are proposed but not guaranteed. Source: BOEM.

In addition to a scenario in which all eligible areas are offered, the draft program presents two other options. These include a targeted approach that would narrow available areas and a no sale option that has prompted industry concern. 

While BOEM estimates there would be “incremental net benefits” from the sale versus no sale, those benefits and Gulf leasing could change significantly, depending on energy markets and movement toward a “net-zero future,” notes a review by the Congressional Research Service (CRS). 

The no-sales option would be a departure from past practice and would appear to prohibit offshore wind leasing under the IRA during the program period, says CRS. 

The industry has expressed concern about the plan’s delay and prospect of no lease sales. The American Petroleum Institute (API) said it has serious concerns with the proposed leasing program. It is particularly troubled by the delay in the draft’s issuance and intimations that BOEM ultimately may not adopt a schedule of lease sales. 

Offshore operators rely on certainty for the multi-year development process, said the Independent Petroleum Association of America (IPAA). “A five-year gap would have devastating long-term impacts to not only producers but also the service and supply companies, who would no longer have contracts for work as a result.”  

The Gulf Energy Alliance, representing independent offshore producers, called it “alarming” that BOEM would even consider the possibility of no lease sales. Among the dangers it cites are capital investment flight, resulting from pauses and erratically timed lease sales, and a shift of production to other global regions with lower environmental standards. 

LEASE SALES 

After much litigation and drama, leasing in federal waters under the previous plan was freed up in August 2022, with the passage of the Inflation Reduction Act (IRA). It includes the stipulation that previously announced offshore lease sales in the GOM and Alaska be held during the next two years and, in particular, it required DOI to award long-delayed leases from Sale 257. 

BOEM had first halted Sale 257 in February 2021, pending review of oil and gas leasing “deficiencies.” That set off a chain of litigation that eventually saw the sale conducted on Nov. 17, 2021, further disputed and ultimately reinstated on Sept. 14, 2022, in compliance with the IRA. 

Passage of the IRA also restored two previously cancelled sales. Lease Sale 259, slated to be held by March 31, was actually conducted on March 29, and Lease Sale 261 is to be held by Sept. 30, 2023. 

For Lease Sale 257, compliance with the IRA resulted in BOEM’s acceptance of 307 bids, totaling $189,888,271. Thirty-three companies participated in the sale, which offered approximately 15,148 unleased blocks in the Western, Central and Eastern Planning Areas, Fig. 6. 

Fig. 6. Sale 257 leases in the three GOM areas were finally awarded after legislative order. Source: BOEM.

High bids came from Anadarko (now part of Oxy) for Alaminos Canyon Block 259 ($10,001,252) and Green Canyon 551 ($6,001,252). Chevron was next, with bids for Mississippi Canyon Block 40 ($4,409,990) and Walker Ridge Block 842 ($4,341,006), Table 2. 

Table 2. Top high bids came from Anadarko, Chevron and Shell. Block abbreviations: AC-Alaminos Canyon, GC-Green Canyon, MC-Mississippi Canyon, WR-Walker Ridge, VK-Viosca Knoll, SE-Sigsbee Escarpment, EI-Eugene Island. Source: BOEM

The most active companies were Exxon Mobil (94 bids), BP E&P (47 bids), and Chevron (31 bids). High bid totals went to Chevron ($47.1 million), Anadarko ($39 million) and BP ($29 million), reports BOEM. 

GOM NUMBERS 

Production. Oil output in 2022 fell to 584,805,706 bbl—the lowest it’s been since 2015, according to BSEE figures. That’s down from 622,962,492 bbl in 2021, 610,123,961 bbl in 2020, and way off a high of 692,814,368 bbl in 2019. 

Gas production continued its decline with a 2022 total of 728,278,017 Mcf, down from 791,945,848 Mcf in 2021. It was 3,155,658,994 Mcfg as recently as 2005.  

Top producers. Ranked by total oil production volume in 2022, BSEE says the top five operators of 51 listed companies are Shell Offshore Inc. (157,224,436 bbl), BP Exploration & Production Inc. (92,428,070 bbl), Anadarko Petroleum Corporation within Oxy (61,466,231 bbl), Chevron U.S.A. Inc. (57,109,196 bbl) and Murphy Exploration & Production Co (32,638,917 bbl). The ranking in 2021 was the same, except Murphy moved into the top five, replacing Hess Corp. 

The leading gas producer by far is Shell (175,768,227 Mcf), a position it’s held since 2014. BP is number two (at 64,062,346 Mcf), followed by Anadarko (54,938,137 Mcf), Murphy (51,421,180 Mcf) and Hess (46,507,662 Mcf). 

Well permits. Well permitting is a subject of debate. While the Biden Administration claims it is approving permits at a faster pace, a November 2022 API editorial by Megan Bloomgren differs. She notes that despite benefiting from Trump-era permitting efficiency standards, new offshore well permits for the Gulf of Mexico declined 20%, compared to Trump’s first year (2017); new offshore wells spudded declined 32%. 

BSEE figures show approved well permits remained somewhat stable in 2022, gaining 19 over 2021, for a total of 800. While up, total permits remain off from a recent high of 1,098 issued in 2018, Table 3.  

Table 3. Total well permit approval varies in shallow and deep categories since 2013. Source: BSEE.

Permits are categorized as shallow or deepwater, and they are issued for a range of activity, including new wells, sidetracks and bypasses. There were 53 new well permits in 2022, versus 52 in 2021 and 64 in 2020. 

APPROVED WELL PERMITS BY WATER DEPTH 

Rigs. Petrodata counted 32 marketed rigs in the Gulf in early February, compared to 35 in February 2022. Of them, 27 were contracted (84% utilization) versus 29 last year (82.9% utilization). The contracted rigs could be moving or undergoing maintenance, etc. and not actively working. 

Active rigs, as counted by Baker Hughes, totaled 12 units in early February, down from 18 in February 2022. That generally describes the range of active rigs for the past few years. Counts in 2019 were reaching the mid-20s. 

FIELD NOTES 

Shenandoah and Anchor fields. The first of Transocean’s two advanced drillships built by Sembcorp Marine is in the Gulf, and the second is due in the second quarter. Arrival of the unique eighth-generation vessels equipped for 20,000-psi BOP technology and three-million-pound hookloads opens the door to new high-pressure Gulf prospects. 

The Deepwater Atlas is at work in Walker Ridge Block 51 for Beacon Offshore Energy’s Shenandoah project. Sister ship Deepwater Titan is due to start work for  

Chevron Corporation’s Anchor Project in Green Canyon, Fig. 7. 

Fig. 7. Deepwater Titan will work for Chevron’s Anchor Project. Source: Transocean.

Vito. The Shell-operated Vito floating production facility began output in February. The four-column semisubmersible in Mississippi Canyon has an estimated peak production of 100,000 bopd. 

Its simplified design and efficiency have reduced estimates of lifetime CO2 emissions by approximately 80% and have cut costs about 70% over a prior design, says Shell. Vito also serves as the design standard for the Whale production host, which has a very similar hull and topsides. 

Whale. In Alaminos Canyon, Shell’s Whale project is expected to begin producing in 2024. The semi will host 15 production wells, with peak production estimated at 100,000 bopd. 

Argos/Mad Dog 2. Startup of BP-operated Mad Dog 2 was expected this year, but it may be delayed after the merger of shareholder BHP Billiton’s (23.9%) petroleum business with Woodside Petroleum. The Argos floating production unit was towed from Ingleside, Texas, and moored on location in Green Canyon during January 2022. Mad Dog 2 is the southwest extension of Mad Dog field and may have recoverable oil-equivalent resources exceeding 500 MMbbl. 

Herschel. BP announced the Hershel project start-up in February 2022. Phase 1 of the Green Canyon project involves a new subsea production system and the first of up to three wells tied to the Na Kika platform. At its peak, this first well is expected to increase platform annual gross production by an estimated 10,600 boed.  

Ballymore. First oil is expected in 2025 from the Ballymore project. Chevron’s first in the Norphlet trend, the Mississippi Canyon project has a design capacity of 75,000 bopd and will be developed as a 3-mi subsea tie-back to the existing Chevron-operated Blind Faith platform. 

King’s Quay FPS. First oil from the Khaleesi, Mormont and Samurai field development projects in the deepwater GOM started flowing through the Murphy Oil-operated King’s Quay floating production system (FPS) in April 2022. The project is comprised of Khaleesi / Mormont fields in Green Canyon Blocks 389 and 478, respectively, and Samurai field, located in Green Canyon Block 432. Completions were ongoing for the remaining five wells in the seven-well project. King’s Quay FPS is designed to process 85,000 bbl of oil and 100 MMcfgd. 

Ram Powell. Two discoveries in Talos Energy’s Lime Rock and Venice prospects will be tied back to its Ram Powell platform in the Viosca Knoll area, with first production from both wells by the first quarter of 2024. The two discoveries are the first in a rig program running from Q4 2022 through the first half of this year that also includes the Rigolets and Lisbon prospects. 

Lead image: Transocean’s Deepwater Atlas, the world’s first 8th-generation drillship, is at work for Beacon Offshore Energy’s Shenandoah project. Source: Sembcorp Marine