For several months, we have hinted that a recovery in the Gulf of Mexico was underway and would gradually gather strength. Recently, energy forecasting firms reached similar conclusions, with some much more optimistic.
But will the sudden collapse of oil prices derail the recovery? The timing of the price slide could not be worse. Just how will producers react when the critical decisions about budgets and spending priorities are made?
Stepping back from the current oil market turmoil may offer some guidance about the future of the U.S. Gulf. Late in the second half of 2014, the health of the oil business was dealt a blow by Saudi Arabia’s decision to stop supporting OPEC’s targeted oil price. The havoc this decision brought to the industry was significant. Lower activity resulted, as producers struggled to reduce their finding and development costs. Rig and vessel day rates have been a casualty of the downturn, often forcing owners to drastically restructure their financial houses.
The optimism for next year, as reflected in the media and research reports, is based on the pre-October oil price environment and the expectation that prices would stay high or head even higher. Prospects of sharply lower oil prices in 2019 will force producers to re-examine their budgetary economics, while at the same time trying to embrace corporate strategies that meet both future sustainability needs and the wishes of shareholders for more returns. This cash flow balancing act may find that the large reserves — large flow rate fields found in the deep waters of the Gulf — due to their huge costs and long lead-times, may be sacrificed for the quick payback of onshore shale projects that have been favored for the past few years.
In other words, the expectation for 2018 being the inflection year for a recovering Gulf hasn’t panned out. Now, it could be pushed beyond 2019 if weak oil market fundamentals dominate next year. While a disappointing outlook, it is important to keep several points in mind about the critical drivers for an improved future for the Gulf of Mexico.
First, producers have figured out how to lower field development costs, and some step-out development projects do work at today’s oil prices. Second, the industry is on the edge of significant technological breakthroughs, similar to those that first opened up the deepwater Gulf two decades ago. Keys will be the performance of Shell’s Appomattox field and a decision to move forward with Chevron’s Anchor field. Appomattox will be the first test of a Jurassic reservoir in the Gulf and could open up a new producing frontier. Anchor would be the first ultra-high-pressure field, another frontier opening opportunity.
One needs only to think back to Shell’s Auger field that started producing in 1994 (25 years ago and still going) and opened the deepwater Gulf. That development turned the Gulf of Mexico from the “Dead Sea” as Tidewater’s Chairman and CEO John Laborde called it at the time, into a booming, high-tech offshore market that pushed many industry frontiers, and created substantial profits and created numerous successful companies.
As much as we would like the future to arrive now, we need to see just how conservative producers will be with their spending going into 2019, given the unsettled oil price outlook. A rebound in oil prices could turn 2019 into the inflection year. However, a continuation of weak oil prices could push the recovery out into 2020.
Watch for oil companies to be bold in the face of unsettled oil markets. If not, prepare to hunker down for another muddling year.