Four-Year Gulf Slowdown Puzzling

Conditions have been right for increased GOM activity, but it's not happening. The question is: What gives?

It's safe to say people are uneasy about what's happening--or what's not happening--in the Gulf of Mexico (GOM).

"Gosh," one might comment, "both crude oil and natural gas wellhead prices are pretty high, some say even sky-high. Offshore goods and services costs are said to be reasonable. Operators have big inventories of undeveloped leases. So why isn't GOM drilling activity going all-out?"

Many are asking the same question. The fact is, the major oil companies--and that includes those with headquarters overseas--don't seem to be stepping up their exploration efforts in the GOM, which they usually do when wellhead prices climb and remain elevated.

And while mostly independent companies have kept busy drilling for gas on the outer continental shelf (OCS), including deep gas with its royalty break incentive for newer leases, their exploration/production drilling volume, while welcomed by the service industry, hasn't contributed much to keeping mobile rigs occupied in the GOM, either.

Using rig statistics provided by, overall mobile offshore rig utilization for the past three years has been lackluster, at best, and the low utilization trend has continued so far this year.

For mobile drilling rigs of all types--jackups, semisubmersibles, drillships, and a few drill barges and submersibles--the average number of rigs under contract in 2000 was 164 units out of a total GOM fleet of 189 rigs, for an average utilization factor (UF) of 80.3%. Not bad, but nothing to warrant any hoopla. In 2001, the average number of contracted rigs was 163 units out of a total fleet of 212 for a 77% UF. That's okay; too, particularly since the overall GOM fleet had grown by 23 units. By 2002, overall numbers had fallen to an average of 126 rigs under contract out of a fleet of 198 rigs for a very poor UF of 58%. That downturn was influenced by a spate of lower oil and gas wellhead prices. Finally, with data for the first 11 months of 2003, an average of 121 rigs were under contract out of a total fleet of only 179 units, yielding a 68% UF, once again dispiriting, particularly since the GOM fleet has fallen by 19 units so far during the year.

But on the surface, at least, the GOM currently has a lot going for it in terms of attractive conditions. For instance:

  • Oil prices are staying within a $29-$32/barrel range, from which oil companies claim they can earn a decent return.
  • Natural gas prices have averaged around $4.85/thousand cubic feet (mcf) this year--with weather-driven futures hikes climbing to nearly $7/mcf, at least for January 2004. And according to the DOE's Energy Information Administration's most recent forecast, next year's price should average about $3.99/mcf, down significantly from this year, but still above the historic price range of $2 to $3. That, too, appears to suit the industry's financial vision.
  • Everyone involved in natural gas supply says the U.S. market will be strained until LNG plants start going on line in four or five years. Until then, GOM gas, say most experts, will have to serve as the swing source for domestic supply.
  • A number of forecasters predict that drilling/production activity in the GOM's deepwater and shallower OCS areas will rise during the next several years as part of an overall trend up around the world.

  • While such bullish indicators normally would produce higher rig utilization, it hasn't. The question is: "When will it start?" Nobody seems to have the answer. In fact, there's some talk once again about the GOM being a "dead sea" in terms of E&P.

    Even with sustained strong commodity prices, which started climbing months ago, not much has happened so far. And the gas supply shortage--be it actual or merely "perceived"--doesn't appear to have influenced things much, either.

    A partial answer, say some, is the major companies' bias towards overseas activity, though that had been hoisted up before GOM activity slowed. The majors continue to book revenues from their GOM properties, where deepwater and ultra-deepwater E&P is their almost exclusive bailiwick. And they're holding on to larger U.S. onshore projects, as well. But they appear to be spending the lion's share of their E&P capital overseas in places like West Africa, and plan to increase future action off Brazil, as well as in the former Soviet Union. They're also waiting to see if they'll get new opportunities in Iraq and other Middle East countries, both on land and offshore.

    Apparently, only sizeable overseas projects are big enough to produce a blip on most major companies' radar screens. West African discoveries usually are big, with potential reserves in the hundreds of millions of barrels class. Activity off Brazil should increase significantly in the near future, since its state oil company, Petrobras, has its hands full with offshore projects it already operates. Future discoveries in Russia and other FSU republics probably will be similarly large. As for Iraq, it's anyone's guess under current circumstances, but redeveloping the huge, neglected oil fields that already exist there will take big bucks. There's also a renewed interest in Iran.

    In any case, to maximize their return on investment, the majors need the big reserve additions that, at least currently, seem to be available only abroad. Wall Street also favors the overseas aspect.

    So, in the GOM, that leaves the independents. Back up on the OCS, they're concentrating on finding gas below, say, 10,000 feet or so, and they're apparently succeeding, though reserve additions tend to be smaller. Nevertheless, the news is filled with OCS deep drilling success stories (though unnumbered unsuccessful attempts usually don't make headlines).

    But independents are generally cash-challenged, so they're conducting most of their deep shelf E&P via partnerships and joint ventures, which narrows the size of everyone's slice of each pie. Even so, a number of them have done well enough to venture into deepwater E&P, where the potential reserves are more likely to be of the "deep dish" type.

    Overall activity, however, still doesn't appear to be improving. Needless to say, the area's energy services industry is distressed by it, and a number of companies who depend on offshore E&P activity are taking difficult measures to stay in the game, including laying off personnel and rearranging debt obligations.

    Jackup rigs, which are limited to working on the OCS, are staying fairly busy, reflecting somewhat the deeper drilling the independents are doing. From 2000 through November 2003, an average of 105 units were under contract out of an average GOM fleet of 143 rigs for an average UF of 75%. In recent months, a number of jackups have either been newly built or upgraded to drill wells to depths of 30,000 feet, reflecting a novel thrust toward looking into what lies below existing OCS fields. The industry is watching that activity closely.

    Meanwhile, forecasters are predicting GOM improvement, particularly in the deepwater and ultra-deepwater areas, where technology advances and satellite fields clustering around production hubs are helping both to increase overall recovery and to chop away at high deepwater development costs.

    In a recent outlook on world deepwater E&P trends, John Westwood of the UK-based energy analysis firm Douglas-Westwood said that during the next decade, deepwater would be the most significant source of domestic U.S. oil production. Westwood said Brazil currently leads the world in deepwater production, but its outflow likely will be exceeded greatly during the next 10 years by that from West Africa and the U.S. GOM. Brazil and the U.S., he said, combined to produce about 1 million b/d of deepwater oil in 2002. But while Brazil is expected to increase to some 1.5 million b/d during the next decade, the GOM should provide up to 2.8 million b/d alone. Both, of course, will be overshadowed by West Africa, which will contribute some 4 million b/d.

    Westwood also predicts continued high deepwater drilling activity around the world, accompanied by increased deployment of floating production facilities.

    According to Rigzone data, GOM deepwater drilling, as represented by the use of semisubmersibles and drillships, has been mixed during the past four years. For drillships, which are used almost exclusively to drill deepwater wells, the average UF from 2000 through November of this year has been 92%, with 7 drillships working. For semis, some of which cannot work in true deepwater, the four-year average is much lower at 68%, with an average of 26 units at work out of a total GOM fleet of 39.

    The Douglas-Westwood report also forecasts spending levels for world deepwater development, which are expected to exceed $56 billion during the next five years alone, most of it focused on Brazil, West Africa, and, you guessed it, the U.S. GOM.

    So, with the preponderance of positive factors favoring GOM E&P, including high spending forecasts, all one can say is, "Let's get on with it!"