Playing the long game in the Gulf

Author Manash Goswami, Senior Reporter

Recent production announcements from massive US Gulf of Mexico projects may seem like poor judgment given the current low crude price environment. But large projects like Anadarko’s Lucius, Chevron’s Jack/St. Malo and Hess’ Tubular Bells aren’t done based on short-term economics.

Recent production announcements from massive US Gulf of Mexico projects may seem like poor judgment given the current low crude price environment. But large projects like Anadarko’s Lucius, Chevron’s Jack/St. Malo and Hess’ Tubular Bells aren’t done based on short-term economics.

Companies committed to these multibillion dollar projects years ago, well before the current price trough, with a knowledge they would likely start production in a very different pricing environment. That’s different from onshore production, where the decision-making process for smaller and less costly wells has a much shorter horizon. 

These offshore projects also have longer lifespans. For example, Chevron’s Jack/St. Malo has a production life of more than 30 years, while onshore shale wells can decline by as much 80pc annually.

But even then, many of these offshore projects started up in the past six months have relatively low breakeven costs because of their scale, in the $10-$50/bl range at first production, according to consultancy Wood Mackenzie.

In contrast, only three US shale oil areas – the Springer formation, the Karnes Trough in the Eagle Ford and Nesson Anticline in the Bakken – generate at least 10pc returns at $50/bl Nymex WTI, Wood Mackenzie says in a separate study. The remaining 35 top oil-weighted shale areas need an average drilling and completion cost reduction of 30pc to be economic at that price.

That may explain why ConocoPhillips, the world’s largest independent oil and gas producers, is still keeping the GoM as one of its focus areas for 2015 despite lowering its total capex guidance.

Chevron said this week it deployed its sixth drillship in the GoM, aiming to maintain a steady pace of drilling in the region. The Transocean Deepwater Asgard, capable of drilling to a depth of 35,000ft, will commence operations in the Mississippi Canyon area.

Similarly, Anadarko plans to continue work in the GoM – even though it plans to cut capital spending by 33pc to $5.4-$5.8bn this year.

Overall, US GoM output may increase by 23pc, Wood Mackenzie says. Six new projects are expected to come online this year that would bring an additional 177,000 b/d of oil equivalent (boe/d) to the markets, increasing total output to 1.6mn boe/d. Capex in the GoM is expected to increases for a fifth year in a row to a record $14.9bn.

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