All Washed Up? Shale Oil and Gas Drowns Out US Gulf of Mexico Shallows

All Washed Up? Shale Oil and Gas Drowns Out US Gulf of Mexico Shallows
More than 10,000 jobs in the US Gulf of Mexico may be lost, never to return, as shallow water drilling lands in the doldrums where experts say it will remain.

Short-term contracts, dismantled infrastructure and lagging dayrates have long challenged shallow water drilling on the U.S. side of the Gulf of Mexico – but it’s the natural gas-belching shale plays that may finally turn the tide away from the shelf.

In January 2007, there were 82 jackup rigs drilling in the shallow water of the U.S. Gulf (GOM). By January this year, that figure had dwindled down to 12. At the end of March, 11 jackups remained on the shelf, according to Rigzone Data Services.

McDermott International Inc. began its exit from the U.S. shallows six years ago, said Scott Munro, McDermott’s vice president for the Americas, Europe and Africa.

“There’s not much of the (U.S. GOM) shallow water that hasn’t been explored or attempted. Most of the low-hanging fruit has been taken; most of the big oil opportunities have been taken,” he said. “What was left really was gas opportunities … But then what happens? Mr. Shale shows up and the onshore shale plays just spit out gas as a by-product of oil production and so no one is spending a lot of money to develop offshore gas. It’s only if you can get out a nice oil find that people are really spending.”

A jackup requires up to 150 personnel on board (POB), according to Rigzone Data Services and Platts RigData. At a drop from 82 jackups to 11, that’s up to 10,659 jobs that won’t be coming back.

“I’m no economist, I’m no soothsayer, but I would say the chances of shallow water coming back in the USA coming back in any meaningful way is slim,” Munro said.

Shelf Life         

Houston Energy Inc., and its partners waded into the Gulf of Mexico in the early 1990s, said Ronald Neal, co-founder and co-owner of the private exploration and production (E&P) company. The plan was to follow the majors to drill in shallow water as a consortium of four member companies: with Houston Energy, LLOG Exploration Co. is the operating partner; Ridgewood Energy Corp. raises capital and invests in the partnership; and Red Willow Production Co., a sub-unit of the Southern Ute Indian tribe of southwest Colorado. Houston Energy’s role is primarily to generate prospects. It’s the only such partnership in the Gulf of Mexico. 

The majors were the first to drill in the Gulf of Mexico, and they established fields and produced a lot of oil and gas, Neal said. But as the 2000s ticked by, those large, publicly traded players were abandoning the shelf for the promise of deepwater.

“The size of the prize – how big the fields that were typically being found in shallow water – were much smaller and did not have any impact on (majors) needs. When they began to decrease their activity, the independents, the smaller public companies or the private companies began to move into the shelf,” Neal said. “We thought that same would occur in the deepwater. Potentially the majors took the initial risk, made the initial discoveries, proved the deepwater was viable as an oil province and put in a lot of the initial infrastructure. We felt there could be a niche to repeat our model on the shelf.”

Deepwater has transitioned through the downturn, Neal said, but the economics didn’t get as bad there as they did on the shelf.

“I don’t know if the shelf will ever recover,” he said. “The ‘size of the prize’ – it’s generally smaller and it’s generally gas, so that makes the economics much more difficult. Also, as the shelf has been producing out, the fields, the platforms have to be removed and the pipelines have to be abandoned. The infrastructure that you had in place to be able to tie into with your production is being removed.”


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Scott Southerland  |  May 16, 2017
Very good and honest article. One day it may come back in an emergency or if majors decide to do their own drilling again one day, as cheap as a jackup is today to buy and a two man crew to maintain it, it would make sense for majors to invest in the potential future.