Push Comes To Shove: Deep-Sea Vs US Shale? US Shale Loses -- December 15, 2014

A must-read article for those following the Bakken closely. Many of these articles are archived and lost unless one has a subscription (just a word to the wise).

Rigzone is reporting:

U.S. shale projects may be vulnerable to short-term investment cuts in relation to deepwater projects, according to a December 9, 2014, report.

Oil and gas companies are facing reduced cash flow in 2015 due to the recent decline in oil prices to a five-year low. That dip has been blamed on reduced demand and global oversupply, with much of the oil production oversupply coming from U.S. unconventional production. As a result, companies will be scaling back or reprioritizing their spending.

However, recent analysis by Gaffney, Cline & Associates indicates shale activity will most likely suffer investment cuts first due to low oil prices, leaving the deepwater Gulf of Mexico and other deepwater plays relatively more protected.

Strong offshore Gulf of Mexico projects can be still viable down the $60/barrel, said paper co-authors Cecilia Jing Cui and Neil Abdalla.

Although pain is likely for areas like the offshore Gulf of Mexico in 2015, it should be much better placed to weather the storm of depressed oil prices in the short-term than the U.S. onshore unconventional industry, said Bob George, executive director and senior strategic advisor at GCA.

“Whilst high cost environments such as the deepwater Gulf of Mexico would appear to be vulnerable, and undeniably cuts should be expected there, economic rationality suggests that the brunt of cuts should be directed at onshore unconventional investments,” said George.

“However, in the short-term there is not always the operational flexibility to make decisions based solely on fundamentals.”

While shale operators can cut back or ramp up shale drilling in more rapid response to fluctuating oil prices, deepwater projects have a longer-term investment cycle, with investments of $1 billion or more and a five-year timeline before returns are seen, said George.

Deepwater projects already underway are less likely to be halted due to low oil prices, but the expected price of oil in 2020 poses a risk for deepwater projects.

There is more at the link.

It's easier to see how this might play out if an operator was involved in both deep-water drilling and unconventional on-shore drilling; it is more difficult when different operators are involved, one a deep-see driller; the other an on-shore conventional driller.

The article ends:

Earlier this year, GCA reported that shale “sweet spots” would still be viable at lower oil prices, but companies operating outside these areas could be pinched if oil prices continued to decline.

Deepwater Gulf of Mexico production is expected to set a new record in 2016 thanks to new developments and the expansion of older oil fields, Wood Mackenzie reported last month.

But production beyond the 2016 peak is expected to decline as legacy fields are depleted and a limited number of new projects are expected to come onstream.