The Sky Is Not Falling (Yet); Number Of Active Rigs Plummeted To 170, Now Back Up To 172 -- December 23, 2014

Active rigs:

	12/23/2014	12/23/2013	12/23/2012	12/23/2011	12/23/2010
Active Rigs	172	189	187	197	162

RBN Energy: Gulf of Mexico projects coming on line, after years of development, adding to the glut; some GOM projects are profitable at $37/bbl.

Crude oil production in the Gulf of Mexico is on the rebound, and headed into record territory as the fifth anniversary of the Macondo blowout approaches.

Several major deepwater projects--including Hess and Chevron’s Tubular Bells—are starting to produce oil after years of development, and others will follow in 2015 and 2016. The gains in GOM crude production are significant; daily output now stands at about 1.5 MMb/d, and it’s seen rising to 2 MMb/d within three years.

In today’s blog, “Tubular Bell—Gulf of Mexico Oil Gains Exorcise Macondo’s Ghosts,” we examine the resurgence in GOM oil production, and the reasons why recent investments in deepwater drilling may well pay off despite the oil price crash.

This may not be the ideal time to start crude oil production from a project that cost hundreds of millions—or even billions—of dollars to develop. After all, crude prices have been nose-diving in recent weeks, and Saudi Arabia appears determined to maintain its production levels no matter how low prices go. There already are signs that US shale oil producers are rethinking their 2015 drilling plans, and that certainly makes financial sense.   

Shale-play development is front-end loaded because production rates from most shale wells peak high and early. That means a well that starts producing in, say, January 2015 will be selling about half of its oil during the 2015 calendar year.

Oil wells in the Gulf of Mexico (GOM) are a different animal. Deepwater drilling may be much more expensive up-front, but production rates at GOM wells remain high and flat over a long period of time. 

For that reason, exploration and production (E&P) companies active in the GOM take a decidedly long-term view. They look at average oil prices over the next 20-30 years when making drill-or-don’t-drill decisions, not the next three to five.

So because deepwater projects in the Gulf are seen as very long-term investments, the oil price of the moment is not such a big factor in an E&P company’s decision on whether a major project is a “go”. Still, no one in the oil business fails to consider the break-even price for developing an oil resource. From what we’ve seen and heard, the break-even price for big GOM oil projects in the early stages of construction is somewhere around $70/Bbl—maybe as low as $65 or as high as $75, but in either case higher than current crude prices (WTI closed at $55.26/Bbl yesterday – December 22, 2014.) What that tells us is that E&Ps with identified and promising discoveries in the Gulf (but, as yet, no commitment to develop them) will be closely tracking oil prices and related events over the next few months.

What’s important to know, though, is that while the break-even oil price for major new GOM projects may be $70/Bbl, the break-even price for smaller “tie-back” projects that link new fields to existing offshore infrastructure (Shell’s Cardamom, with its link to Auger is an example) can be half that: $35 or in some cases even less. That suggests that Gulf oil projects, with their high output and long lives, will continue to attract capital-spending dollars, and that GOM oil production will continue to rebound.

Much more at the link.

For more on Peak Oil Theory, visit The Oil Drum. Oh, that's right. That blog called it quits some time ago.