<article><p class="lead">Oil majors are resuming projects in the deepwater US Gulf of Mexico that were delayed by last year's Covid-induced oil price collapse. But their energy transition strategies, alongside US president Joe Biden's climate policies, are creating longer-term uncertainty around the US Gulf as an investment destination.</p><p>Output in the region is due to rise in the short term as fields with start-ups delayed by 2020's record-breaking hurricane season ramp up, with some projects expected to produce first oil this year (<i>see table</i>). The Energy Information Administration (EIA) forecasts US Gulf output at 1.75mn b/d next year, up from 1.71mn b/d this year and 1.66mn b/d in 2020. In the longer term, OECD energy watchdog the IEA sees US deepwater production rising to 2.1mn b/d by 2026, just above the 2019 peak of around 2mn b/d. </p><p>The Biden administration has formally called off all federal oil and gas lease sales scheduled before the end of June, as it continues to work on a sweeping review of its fossil fuel programme. Federal ownership of the offshore leaves deepwater operators with no way around a moratorium. The Interior Department plans to release by early summer an interim report outlining its next steps, including possible changes to offshore leasing. "If conditions in the US become so onerous that it really disincentivizes investment, we have got other places where we can take those dollars," Chevron chief executive Michael Wirth says.</p><p>For some majors, future investment in the US Gulf depends more on how the region fits into their exploration strategy and low-cost, low-carbon strategies than on Biden's policies. They face the uphill struggle of replacing depleting oil reserves required to pay for the energy transition while juggling a value-over-volume focus.</p><p>Chevron is progressing US Gulf projects that it says fit into its "higher returns, lower carbon" strategy, maintaining that the area holds some of the world's lowest carbon-intensity assets. It expects development costs at the approved St Malo, Mad Dog 2 and Anchor projects of $14-17/bl, excluding a $2/bl technology development cost for Anchor. And BP has focused its US Gulf strategy on tie-backs to existing infrastructure, which are cheaper and quicker than most stand-alone projects. Its Puma West prospect find this month could tie back to the Mad Dog 2 platform, depending on commercial viability, but if it spurs a major new investment it could complicate a transition strategy that assumes a 40pc cut in BP's oil output by 2030.</p><p>The US Gulf makes up 55pc of Shell's US oil and gas production, but reservoir challenges at its 175,000 b/d of oil equivalent deepwater Appomattox development contributed to post-tax impairments in the fourth quarter. The project started in May 2019 with a breakeven price of $55/bl. "We need to make judgments on the value of that asset over the next 10-20 years," chief financial officer Jessica Uhl says. "We have had some disappointments in the last 12 months."</p><h3>Gulf widow</h3><p class="lead">For other firms, increasing competition from different regions has reduced the US Gulf's long-term appeal. Total is unlikely to have an aggressive exploration strategy in the area beyond Ballymore and North Platte, for which it expects a final investment decision (FID) this year or beyond, chief executive Patrick Pouyanne says. The smaller size of the US Gulf's reserves and discoveries compared with Brazil or Suriname requires Total to work harder on technical costs to break even, he says.</p><p>This has been behind ExxonMobil's shift towards higher-return investment offshore Guyana and Suriname and away from the US Gulf, where its net acreage fell to 300,000 acres (1,215km²) at the end of 2020 from 1.2mn acres five years earlier. Short-term start-ups and FIDs in the region look likely to go ahead. But its long-term appeal depends on Biden's policies, and how competition with deepwater assets elsewhere plays into firms' energy transition investment strategies.</p><p class="bylines"><i>By Rowena Edwards</i></p><p><table class='tbl-excel'><tr><td class='tbl-header' colspan='3'>Highest bidders in Gulf of Mexico Nov 2020 lease sale*</td></tr><tr><td class='tbl-columnheader tbl-bold tbl-left'>Company</td><td class='tbl-columnheader tbl-bold tbl-right'>Total high bids</td><td class='tbl-columnheader tbl-bold tbl-right'>Sum of high bids $mn</td></tr><tr><td class='tbl-rowspace'></td><td class='tbl-rowspace'></td><td class='tbl-rowspace'></td></tr><tr><td class='tbl-left'>Shell Offshore†</td><td class='tbl-right'>21</td><td class='tbl-right'>27.9</td></tr><tr><td class='tbl-left'>EnVen Energy Ventures</td><td class='tbl-right'>13</td><td class='tbl-right'>7.7</td></tr><tr><td class='tbl-left'>BP Exploration &amp; Production†</td><td class='tbl-right'>10</td><td class='tbl-right'>17.1</td></tr><tr><td class='tbl-left'>Chevron USA†</td><td class='tbl-right'>10</td><td class='tbl-right'>17.1</td></tr><tr><td class='tbl-left'>Repsol E&amp;P USA </td><td class='tbl-right'>9</td><td class='tbl-right'>6.4</td></tr><tr><td class='tbl-left'>Murphy Exploration &amp; Production Company</td><td class='tbl-right'>8</td><td class='tbl-right'>5.3</td></tr><tr><td class='tbl-left'>Equinor Gulf of Mexico</td><td class='tbl-right'>7</td><td class='tbl-right'>22.2</td></tr><tr><td class='tbl-left'>Anadarko US Offshore </td><td class='tbl-right'>4</td><td class='tbl-right'>6.5</td></tr><tr><td class='tbl-left'>LLOG Exploration Offshore</td><td class='tbl-right'>4</td><td class='tbl-right'>1.4</td></tr><tr><td class='tbl-left'>Renaissance Offshore </td><td class='tbl-right'>4</td><td class='tbl-right'>0.5</td></tr><tr><td class='tbl-notes tbl-left tbl-italic' colspan='3'>*Based on total number of high bids †Shell, BP, and Chevron bids secured 19, 10 and 8 blocks, respectively</td></tr><tr><td class='tbl-footer tbl-right tbl-italic' colspan='3'>— US Bureau of Ocean Energy Management</td></tr></table><table class='tbl-excel'><tr><td class='tbl-header' colspan='4'>Upcoming projects in US Gulf of Mexico</td></tr><tr><td class='tbl-columnheader tbl-bold tbl-left'>Project</td><td class='tbl-columnheader tbl-bold tbl-left'>Partners</td><td class='tbl-columnheader tbl-bold tbl-left'>Detail</td><td class='tbl-columnheader tbl-bold tbl-right'>Plateau &#39;000 boe/d</td></tr><tr><td class='tbl-rowspace'></td><td class='tbl-rowspace'></td><td class='tbl-rowspace'></td><td class='tbl-rowspace'></td></tr><tr><td class='tbl-left'>Thunder Horse South expansion phase 2</td><td class='tbl-left'>BP (75pc), ExxonMobil (25pc)</td><td class='tbl-left'>First oil 2021</td><td class='tbl-right'>50</td></tr><tr><td class='tbl-left'>Manuel</td><td class='tbl-left'>BP (50pc), Shell (50pc)</td><td class='tbl-left'>First oil 2021</td><td class='tbl-right'>15</td></tr><tr><td class='tbl-left'>St Malo Waterflood development</td><td class='tbl-left'>Chevron* (51pc), MP Gulf of Mexico (25pc), Equinor (21.5pc), ExxonMobil (1.25pc), Eni (1.25pc)</td><td class='tbl-left'>First oil 2021</td><td class='tbl-right'>na</td></tr><tr><td class='tbl-left'>Powernap</td><td class='tbl-left'>Shell (100pc)</td><td class='tbl-left'>First oil 2021-22</td><td class='tbl-right'>35</td></tr><tr><td class='tbl-left'>Mad Dog 2</td><td class='tbl-left'>BP (60.5pc), BHP Billiton (23.9pc), Chevron (15.6pc)</td><td class='tbl-left'>First oil 2022</td><td class='tbl-right'>120</td></tr><tr><td class='tbl-left'>Vito</td><td class='tbl-left'>Shell (63pc), Equinor (36.9pc)</td><td class='tbl-left'>First oil 2022</td><td class='tbl-right'>100</td></tr><tr><td class='tbl-left'>Herschel</td><td class='tbl-left'>Phase 1 BP (100pc), phase 2 BP (50pc), Shell (50pc)</td><td class='tbl-left'>First oil 2022</td><td class='tbl-right'>25</td></tr><tr><td class='tbl-left'>Anchor</td><td class='tbl-left'>Chevron (62.86pc), Total (37.14pc)</td><td class='tbl-left'>First oil 2024</td><td class='tbl-right'>na</td></tr><tr><td class='tbl-left'>Whale</td><td class='tbl-left'>Shell (60pc), Chevron (40pc)</td><td class='tbl-left'>FID 2H 2021</td><td class='tbl-right'>100</td></tr><tr><td class='tbl-left'>Ballymore</td><td class='tbl-left'>Chevron (60pc), Total (40pc)</td><td class='tbl-left'>FID 2022</td><td class='tbl-right'>na</td></tr><tr><td class='tbl-left'>North Platte</td><td class='tbl-left'>Total (60pc), Equinor (40pc)</td><td class='tbl-left'>FID 2021 or later</td><td class='tbl-right'>75†</td></tr><tr><td class='tbl-notes tbl-left tbl-italic' colspan='4'>*in St Malo field †&#39;000 b/d</td></tr></table></article>