Optimism about a possible recovery of oil prices has picked up recently in the offshore energy industry. But 2017 is going to be complicated and this optimism may be premature.
First, there is the Obama administration’s drilling ban in the Arctic and Atlantic. But there is the pledge from the incoming Trump administration to support oil and gas development.
There is also OPEC’s promised production cuts, together with those of several non-OPEC members including Russia, that, as of today, have pushed oil prices into the mid-$50-bbl. range. While long-term compliance may be sketchy, for now it is working, which has created more optimism.
Adding to the conversation is BP’s decision to proceed with its Mad Dog Phase 2 deepwater project in the Gulf of Mexico. This would be the first new deepwater development in quite a while and, some argue, could presage a larger move back into the Gulf. Although Mad Dog 2 will utilize existing infrastructure and relies on relatively simple subsurface geology compared to most other deepwater developments, it has raised optimism.
Overall, there is reason to be optimistic. But don’t get carried away. Shale is still king.
Despite the optimism, the benefits, at least initially, will mostly go to onshore shale oil production, not to offshore development. Production increases will primarily be seen in the Permian Basin and in the Stack and Scoop plays in Oklahoma. Some say activity is set to rise dramatically in the Permian Basin.
“I believe 2017 is the Permian’s year,” Joseph Triepke, founder of Dallas-based oil and gas research company Infill Thinking, told the Odessa American in December. “Companies are going to raise spending levels anyway and OPEC was just the icing on the cake.”
It’s all based on economics. Wells in the Permian Basin, even with extended laterals and complicated frack jobs, can be profitable at $45 bbl. or less. That is why operators in there plan to boost spending by about 40%, according to the companies that Triepke tracks.
The result will be another surge in shale oil production that could drive prices back down into the mid-$40s or lower, barring unforeseen events. At those prices, offshore activity will not come back, and day rates will not increase.