Oil explorers retreat from shallow U.S. Gulf in shift to shale

CHICAGO (Bloomberg) -- Energy producers are abandoning the search for oil and natural gas close to shore in the U.S. Gulf of Mexico as drilling budgets shrink and exploration migrates to land-based shale fields.

The number of permits for new wells in seas less than 500 ft (152 m) deep plunged 74% to nine during the first six months of this year from a year earlier, according to the U.S. Bureau of Safety and Environmental Enforcement (BSEE).

Shallow-water drilling has largely targeted gas in recent decades, because most of the crude in fields close to shore had already been discovered and harvested. The glut of gas from shale fields in Texas, Louisiana, Oklahoma and Pennsylvania that crushed prices for the fuel made offshore gas production less attractive.

“A lot of the players operating on the continental shelf are financially distressed or significantly cutting back on capital spending,” J.B. Lowe, an analyst at Cowen and Company in New York, said in an interview on Monday. “There’s not the same amount of cash flow coming in to justify drilling some of these prospects when there’s better stuff to be had elsewhere.”

In the years following the April 2010 blowout at the Macondo well that sank the Deepwater Horizon rig, shallow-water permitting for the first half of the year peaked in 2013, when regulators were greenlighting new exploration projects at a rate of one every five days.

Deep Waters

It’s a different story in the deep waters of the Gulf, where exploration is proceeding apace with 2014, undaunted by the rout in crude prices. During the first six months of this year, 31 permits were approved for new wells, unchanged from a year earlier, according to the BSEE.

Brent crude averaged $59.35 during the period, down 45% from a year earlier, according to data compiled by Bloomberg. Deepwater exploratory permitting for the first half of the year, since the Deepwater Horizon disaster, topped out at 67 in 2012.

The BSEE defines anything beyond 500 ft as deepwater. That differs from much of the industry, which regards 1,000 ft as the cutoff point.