Four Years After BP Spill, a Shallow-Water Revival

Big oil has largely lost interest, but independent companies say a resurgence is afoot after years of decline.

Oil or natural gas rig in Galveston Bay, Texas.
National Journal
Ben Geman
Add to Briefcase
See more stories about...
Ben Geman
June 11, 2014, 1 a.m.

For well over a dec­ade, oil and nat­ur­al-gas drilling in the shal­low fed­er­al wa­ters in the Gulf of Mex­ico have been in a seem­ingly un­end­ing de­cline.

Fed­er­al data show that oil pro­duc­tion in wa­ters less than 1,000 feet deep — a rough bench­mark for shal­low wa­ter, or the “shelf” — fell from 830,000 bar­rels per day in 1997 to 381,000 a dec­ade later and has kept fall­ing. Gas pro­duc­tion dropped sig­ni­fic­antly too.

Hur­ricanes such as Kat­rina in 2005 and Ike in 2008 took their toll, but they only ex­acer­bated a de­cline that was already long un­der­way. And then the 2010 BP dis­aster — in vastly deep­er wa­ters farther from shore — brought per­mit­ting to a crash­ing halt for a time as reg­u­lat­ors im­posed new safety re­quire­ments. The pro­duc­tion drops con­tin­ued through 2013, ac­cord­ing to fed­er­al data.

In the af­ter­math of the BP spill and the per­mit­ting freeze that fol­lowed, in­dustry of­fi­cials and Obama ad­min­is­tra­tion crit­ics warned of a mor­tal blow to the Gulf’s oil and gas de­vel­op­ment.

The en­su­ing slow­down in per­mit­ting played a role in the over­all drop in post-spill Gulf pro­duc­tion. But in shal­low wa­ter spe­cific­ally, if the policies are a hurdle, they’ve not been enough to stop a re­cent flurry of de­vel­op­ment.

Four years later, the shal­low-wa­ter re­gion has seen a whirl­wind of deal-mak­ing as ag­gress­ive play­ers snap up as­sets. Ac­cord­ing to the prom­in­ent en­ergy con­sult­ing firm Wood Mack­en­zie, over the past year, mer­ger-and-ac­quis­i­tion activ­ity fo­cused on the shal­low-wa­ter Gulf of Mex­ico has totalled roughly $7 bil­lion.

Late last year the private-equity-backed Field­wood En­ergy closed its $3.75 bil­lion deal for the shal­low wa­ter as­sets of Apache, a big com­pany with world­wide op­er­a­tions. An­oth­er ag­gress­ive play­er, En­ergy XXI, this month com­pleted its $2.3 bil­lion deal for EPL Oil & Gas. It also bought $1 bil­lion worth of Ex­xon Mo­bil’s as­sets in late 2010.

“It is a very sig­ni­fic­ant amount of money for an area that is of­ten for­got­ten about by a lot of people,” said Jeremy Sherby, a re­search ana­lyst with Wood Mack­en­zie.

While oil-and-gas gi­ant Chev­ron re­mains a ma­jor shal­low-wa­ter pro­du­cer, and Ex­xon still has a small pres­ence, a num­ber of the so-called su­per­ma­jors are no longer act­ive in the re­gion, which has been picked over for dec­ades.

The biggest com­pan­ies “sold massive amounts of the shelf prop­er­ties to new, more ag­gress­ive, sin­gu­larly fo­cused [ex­plor­a­tion and pro­duc­tion] com­pan­ies,” said Jim Noe, an ex­ec­ut­ive with the rig com­pany Her­cules Off­shore. His cus­tom­ers now in­clude shal­low-wa­ter play­ers that sev­er­al years ago “didn’t ex­ist or you had nev­er heard of them.”

The activ­ity among in­de­pend­ent play­ers in re­cent years may trans­late in­to an un­ex­pec­ted oil-pro­duc­tion re­viv­al at a time when the in­dustry is fo­cused in­land on the frack­ing-fueled shale en­ergy boom and on the deep­wa­ter fron­ti­ers far from shore.

Shal­low wa­ter-fo­cused com­pan­ies and ana­lysts say a con­ver­gence of factors has led to the re­newed in­terest in oil pro­duc­tion.

“There is a big re­sur­gence of the Gulf as far as the oil plays are con­cerned,” said Greg Smith, vice pres­id­ent for in­vestor re­la­tions with En­ergy XXI, who notes the com­pany has more rigs cur­rently act­ive than ever be­fore.

Oil prices are strong, while nat­ur­al-gas prices — which un­like oil prices are not glob­al — have tumbled over the last dec­ade thanks to the in­land U.S. frack­ing boom.

Ac­cord­ing to a re­cent in­vestor present­a­tion from Her­cules Off­shore, “As oil prices di­verged from nat­ur­al gas, [ex­plor­a­tion and pro­duc­tion] com­pan­ies have shif­ted drilling pro­gram[s] to tar­get oil.”

“The eco­nom­ics are a lot bet­ter on an oil well than a gas well,” Sherby said.

Sherby said com­pan­ies that have been snap­ping up shal­low-wa­ter as­sets are likely fo­cused spe­cific­ally on that re­gion, com­pared to much lar­ger firms that can make strong re­turns in in­land shale plays like the Eagle Ford in Texas, or have the massive cap­it­al needed for deep­wa­ter pro­jects.

“It is be­com­ing a re­gion dom­in­ated by spe­cialty play­ers,” he said. “The buy­ers in these trans­ac­tions are more likely to drill more and drill more ag­gress­ively.”

Noe said that ad­vances in seis­mic ex­plor­a­tion tech­no­logy have yiel­ded in­form­a­tion that shows oil pro­duc­tion could make a big comeback in shal­low wa­ters.

“The in­dustry by and large ad­vances very meth­od­ic­ally from a tech­no­logy stand­point and some would say slowly,” says Noe, the com­pany’s seni­or vice pres­id­ent, but adds: “One area that has ad­vanced at break­neck speed is seis­mic.”

“We are find­ing oil that was long since be­lieved to have been pro­duced,” said Noe, whose com­pany has been able to sub­stan­tially in­crease its per-day rates for rigs as de­mand re­bounds. New­er tech­no­lo­gies have giv­en com­pan­ies the abil­ity to see oil through salt form­a­tions.

Smith, of En­ergy XXI, said use of ho­ri­zont­al drilling in areas with ex­ist­ing de­vel­op­ment is en­abling the in­dustry to “sta­bil­ize” the re­gion’s oil pro­duc­tion de­cline. “At $100 per bar­rel, we can drill these ho­ri­zont­als all day long,” he said.

To send it back up­ward, Smith said, de­pends on the suc­cess of new pro­jects en­abled by tech­no­lo­gic­al ad­vances such as bet­ter seis­mic tech­no­logy, which he said can “re­define the shal­low-wa­ter Gulf.”

Not every­one is so bullish.

“The costs are so great in shal­low wa­ter now and there’s really no big ele­phants. The eco­nom­ics don’t work, so we don’t have as much play in the shal­low wa­ter,” said Don Briggs, the pres­id­ent of the Louisi­ana Oil and Gas As­so­ci­ation, who says post-BP spill reg­u­la­tions and oth­er factors have made shal­low wa­ter less at­tract­ive.

In­teri­or De­part­ment drilling per­mit data shows an up­ward tra­ject­ory since the ma­jor slow­down that fol­lowed the BP dis­aster.

Still, des­pite all the activ­ity, Sherby says he doesn’t ex­pect total shal­low-wa­ter oil and gas pro­duc­tion to out­right re­verse the long de­cline.

“If any­thing it will just make the de­cline less pro­nounced,” he said. Un­less …

“The big wild card … is the ul­tradeep trend,” Sherby adds. He’s re­fer­ring to gas re­sources far, far be­low the sea­floor at high pres­sures in a re­gion called the In­board Lower Ter­tiary/Creta­ceous that com­pan­ies such as Free­port-Mc­Mor­an hope to de­vel­op.

“If that ever be­comes com­mer­cial and gas prices make it eco­nom­ic­ally vi­able, that could po­ten­tially re­verse the de­cline,” he said. “But that is still pretty un­proven from a com­mer­cial stand­point.”

Jason Plautz contributed to this article.
What We're Following See More »
McMullin Leads in New Utah Poll
23 minutes ago

Evan McMul­lin came out on top in a Emer­son Col­lege poll of Utah with 31% of the vote. Donald Trump came in second with 27%, while Hillary Clin­ton took third with 24%. Gary John­son re­ceived 5% of the vote in the sur­vey.

Quinnipiac Has Clinton Up by 7
24 minutes ago

A new Quin­nipi­ac Uni­versity poll finds Hillary Clin­ton lead­ing Donald Trump by seven percentage points, 47%-40%. Trump’s “lead among men and white voters all but” van­ished from the uni­versity’s early Oc­to­ber poll. A new PPRI/Brook­ings sur­vey shows a much bigger lead, with Clinton up 51%-36%. And an IBD/TIPP poll leans the other way, showing a vir­tu­al dead heat, with Trump tak­ing 41% of the vote to Clin­ton’s 40% in a four-way match­up.

Trump: I’ll Accept the Results “If I Win”
1 hours ago
Duterte Throws His Lot in with China
4 hours ago

During a state visit to China, Philippine President Rodrigo Duterte "declared an end to his country’s strategic alignment with the United States and pledged cooperation with Beijing." Duterte told Chinese President Xi Jinping that he's "realigned myself in your ideological flow and maybe I will also go to Russia to talk to Putin and tell him that there are three of us against the world—China, Philippines, and Russia. It’s the only way.”

Hatch Considering 2018 Re-election Run
5 hours ago

Reports say that Orrin Hatch, who in 2012 declared that he would retire at the end of his term, is considering going back on that pledge to run for an eighth term. Hatch, who is the longest serving Republican in the Senate, is unlikely to make any official declaration until after this election cycle is completed.


Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.