CAPEX Spending Cuts to Delay New Gulf of Mexico Production

The negative impact of low oil prices on exploration and production company balance sheets – and low stock value of these companies – has prompted the Bureau of Ocean Energy Management to require companies to post bonds proving they can afford to plug and abandon mature wells. These bonds have boosted the cost of doing business in the U.S. Gulf, according to officials with Ernst & Young.

Herb Listen, assurance oil and gas leader for Ernst & Young LLP in the U.S., said he expects the cutbacks in exploration spending in 2015 and 2016 to result in a significant decline in U.S. Gulf of Mexico activity. Many projects that were expected to reach the final investment decision stage have been pushed back, ultimately delaying the start of deepwater Gulf production. This will have a trickle-down effect from the E&P companies to the oilfield service companies that operate in the U.S. Gulf, Listen told reporters during a press briefing Tuesday in Houston.

According to E&Y’s 2015 U.S. Oil and Gas Reserves Study, the oil and gas industry’s spending cutbacks was really evident in the number of wells drilled in 2015, with exploration drilling activity down 41 percent from 1,613 wells in 2014 to 957 wells in 2015. The number of development wells also decreased from 15,486 wells in 2014 to 10,677 wells in 2015.

Despite the downturn’s impact on exploration and production, the companies studied still recorded significant discoveries and extensions in 2015, Listen noted. Most of that oil production growth came from independents and large independents. During 2015, the 50 companies surveyed by E&Y made added extensions and discoveries of 3.05 billion barrels of oil and 18.7 trillion cubic feet of gas. However, these companies were forced to make downward revisions to their oil and gas reserves due to low oil prices.