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Is the U.S. Gulf of Mexico Slowly Getting Back in the Game?

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It's usually the U.S. shale plays that are in news given the stupendous production growth in these regions. However, there is a quiet revolution taking place elsewhere – in the Gulf of Mexico (GoM) – where operators are eyeing resurgence, with record high output.

The oil crash that began late in 2014 forced upstream companies to reduce their exploration capital expenditure to a bare minimum. The shrinking spending meant that investments in the GoM region started falling as well. Meanwhile, low cost shale plays attracted a huge amount of investment as companies started looking away from expensive offshore production. But it seems that things are looking up.

Last year, crude production from the Federal GoM reached a record level of 1.65 million barrels per day (BPD), in spite of the hurricane related outages. Per U.S. Energy Information Administration (EIA), production is expected to surge in 2018 further, accounting for 16% of the country’s total output.

Here are the reasons that are likely to contribute to the surge.

Project Ramp-ups

Production in the region is expected to increase to 1.7 million BPD in 2018 and 1.8 million BPD in 2019, with support from existing as well as new fields. Seven new projects became operational in 2016, which boosted output in 2017. These projects contributed around 126,000 BPD of crude on average last year. Moreover, addition of two new projects in 2017 with 10,000 BPD of production contributed to the pile. Surging production from these nine projects (that came online in 2016 and 2017) are expected to get four new projects this year and another six in 2019, which will push the total output in the region to new heights.

Some of the major projects, which are slated to come online and might ramp up in the 2018-2019 period include Tomcat of Talos Energy Inc. (TALO - Free Report) , Stampede-Knotty Head and Stampede-Pony of Hess Corporation (HES - Free Report) , Rydberg of Royal Dutch Shell plc (RDS.A - Free Report) and others.

Cost Efficiency

As has been mentioned above, the top energy companies cut spending (particularly on costly drilling projects) due to lower profit margins. At the same time, the tough environment forced operators to make cost control their primary focus. And they did just that by reducing operational costs through simplifying designs and cutting unnecessary costs.

In keeping with the lessons learnt in the low oil price environment, Shell declared a final investment decision for the deepwater project Vito in April, which showed breakeven at a price level less than $35 per barrel. In 2015, the Hague-based energy company started redesigning the project, which slashed costs by more than 70% from its original strategy. Moreover, in June, Shell brought Kaikias deepwater development online in the GoM, which has a breakeven price level less than $30 a barrel. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

British energy giant, BP p.l.c. (BP - Free Report) reduced project cost for its Mad Dog Phase 2 project – on which it is partnered by BHP Billiton Limited (BHP - Free Report) and Chevron Corporation (CVX - Free Report) – to $9 billion from $20 billion. The partners in the project approved the updated plan toward the end of 2016.

Offshore Drilling is Competitive Again

Lower operating costs and recovering oil prices have made offshore operations viable again. There is also a fundamental difference between offshore and onshore operations. In terms of development of resources, onshore production reaches peak levels faster than its offshore counterpart. However, once online, offshore developers can produce from the vast resources for decades and that too at a higher rate.

Moreover, the pipeline bottlenecks in most of the shale plays have reduced producers’ margins in recent times. Improving the infrastructure will take time and investments, which makes investing in offshore production an attractive option at the moment.

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