The disappointing results for shallow-water shelf blocks in the latest Gulf of Mexico (GOM) lease sale aside, performance and prospects for GOM shelf properties in the near-to-medium term, and probably much longer, look depressed, at best. The first shelf well was drilled nearly 70 years ago, meaning over half of the GOM infrastructure is now well-aged, with much of it nearing, or past, the end of its design life.
Today, low prices are impacting the aging shelf, as those prices fail to support development of smaller assets. A number of rigs have left the market. Hardest-hit has been Hercules Offshore, owner of earlier-generation jackup rigs. To reduce expenses, said John Rynd, president and CEO, the company took aggressive action, “including the cold-stacking of five additional domestic rigs.” The decision was “based on market demand, as well as timing of the rigs’ five-year special surveys … “That left the company with six rigs operating in the Gulf of Mexico and three warm-stacked with reduced crews. Rynd’s expectation is “that demand for jackup rigs in the U.S. is unlikely to improve much from the current levels …” through most of 2015.
Deepwater drilling, on the other hand, remains fairly robust, with activity levels sustained by significant investment and stringent performance provisions in leases. Many high-specification deepwater rigs remain on longer-term contracts. That impetus should be enough to carry rig utilization rates in deep water over the short term.
However, over the medium-to-long term, deepwater production is predicted to hit a peak of about 1.9 MMboed, as Jack/St. Malo production ramps up and Heidelberg field comes online, before reaching a plateau in 2016. From there, industry analysts at Wood Mackenzie predict that production will remain stagnant for the rest of the decade, due to the limited number of fields coming onstream and a reduction in exploration driven by budget cuts within oil and gas operating companies.
Given the cost per barrel of deepwater exploration and development compared to shale, there is little incentive to attempt more at today’s prices. Ian Strachan, interim CEO of international driller Transocean, echoed this outlook, saying “We had significant achievements in 2014. However, despite our progress, the offshore drilling market has become increasingly uncertain and, in all likelihood, the next couple of years will remain challenging.”
Energy analysts at Douglas Westwood are in at least partial agreement, in their World Deepwater Market Forecast: 2015–2019. Globally, they predict “deepwater expenditure is expected to increase 69%, compared to the preceding five-year period, totaling $210 billion from 2015 to 2019. However,” they note, “the recent oil price decline has intensified pressure on operators’ budgets. Consequently, numerous operators have deferred sanctioning of capital-intensive developments. Africa, Latin America and North America will continue to dominate deepwater Capex, with $173 billion set to be spent over the next five years. North America is expected to experience the least growth.“
As drilling slows, so slows infrastructure work. Nearly 2,900 platforms reside on the Gulf of Mexico shelf, many of these, as mentioned above, at or beyond their design life, and in need of maintenance and upgrades. Of those, 270 are totally inactive and classed by BOEM/BSEE as “idle iron.” These facilities are subject to mandatory removal under BSEE Notice to Lessee (NTL) 2010-G05, which specifies that any platform that became “idle” or not useful for lease operations, subsequent to the NTL’s publication in 2010, is expected to be decommissioned no later than five years after the platform became “idle.” The mandatory decommissioning and removal program peaked in 2012-2013, with the removal of more than 500 platforms on the shallow shelf, Fig. 1.
In deeper water, 110 fixed, tensioned and moored structures have been installed in the Gulf of Mexico, in water depths greater than 400 ft., and through 2014, 16 structures have been decommissioned and removed, Fig. 2.
Current inventory of idle iron (as of Feb. 9, 2015) includes 1,010 idle wells (261 newly idle since NTL) and 270 idle platforms (82 newly idle since NTL). At today’s oil prices, it may take a while longer to remove these rigs than it has before.
While the continued shrinkage of operations on the shelf may free up some money, continued low oil prices make it unlikely that significant additional investment will be made in GOM deepwater sectors in the next several years.
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