Over the past 115 years, editors and contributing authors of OGJ, known as Oil Investors' Journal during its first 10 years of publication, have made careers of covering industry innovators opening previously unimaginable frontiers.
For the occasion of OGJ's birthday on May 24, I celebrated by perusing our office's dusty archive of past issues, where one can track the evolution of various groundbreaking technologies, read commentary from numerous industry downturns, chuckle at predictions such as those relating to peak oil, and even touch decades-old coffee stains.
I happened to be thumbing through the jaundiced pages of an issue from 1977 when I noticed our now-venerable chief editor, then just a wide-eyed pup of a writer, commemorating the 30th anniversary of what many view as the birth of the Gulf of Mexico offshore industry.
Birth
Hoping to tap into the vast potential of the salt domes off Louisiana's coast, Kerr-McGee Oil Industries Inc. in 1947 contracted offshore engineering and construction pioneer Brown & Root to build Kermac Rig No. 16, which would become the first rig to drill out of sight of land. The $500,000 offshore project was seen as a huge risk for Kerr-McGee given the absence of existing equipment for the new endeavor.
The Kermac No. 16 well was drilled 10 miles offshore in 20 ft of water and flowed 40 bbl/hr through a 1⁄2-in. choke. OGJ at the time reported a "Spectacular Gulf of Mexico Discovery," uncovering a "Possible 100-Million Barrel Field—10 Miles at Sea." The well by 1984 produced 1.4 million bbl of oil and 307 MMcf of gas, a big haul given the initial circumstances.
The US offshore industry grew to average more than 200 rigs working during 1979-85, by far the most active period in data going back to 1973 compiled by the US Energy Information Administration via Baker Hughes Inc. The oil price collapse of 1986 sunk the count below 100 until mid-1987, and it ebbed and flowed until permanently falling below that threshold in 2005.
The number of development and exploratory wells has dropped in each year since 2012, and amid the most recent oil-price collapse, the US offshore count fell from an average 55 in 2014 to 22 in 2016. US gulf oil production reached a yearly record of 1.6 million b/d last year as eight new projects—each sanctioned several years prior—came on stream. Output is expected to rise through 2018 as eight more projects are expected to start up, but what about 2020 and beyond? While industry observers are now forecasting another drilling recovery, a return to even its 2014 activity seems unimaginable at the moment.
Rebirth?
In OGJ's June 5 issue, David Carter Shinn of Oslo-based brokerage, advisory, engineering, and investment services provider Bassoe Offshore AS noted global offshore rig contracting activity and utilization have risen since oil prices have stabilized. Fellow Oslo-based industry consultant Rystad Energy AS believes there will be "increased willingness to invest down the line" in gulf development given cost reductions, standardization, and simplification measures.
"In the short term, outlooks are still dire due to operators wanting to secure positive cash flows before increasing investments," Rystad said. "From 2019, however, as development and exploration activity picks up, a gradual recovery in investments seems inevitable." The firm forecasts "a modest increase in investments over the next 5 years at $60/bbl oil prices."
A report from Wood Mackenzie Ltd. is more optimistic. It asserts "a leaner and more cost-competitive deepwater industry is emerging from the downturn, with the most attractive projects now competing with US tight oil plays." The consulting firm estimates that global deepwater project costs have dropped 20% since 2014, noting that gulf projects "in particular have made significant strides." Assuming a 15% internal rate of return hurdle, 5 billion bbl of presanction global deepwater reserves now break even at $50/boe or lower, it said.
Could the deepwater and offshore industry as a whole, given the promise of large, steadily producing reserves, approach the economic realm of tight oil in the next decade, or at the very least, reassert itself as a portfolio mainstay for large independents? Perhaps, but it will take the same kind of pioneering spirit that brought the offshore industry into sight 70 years ago.
A rebirth sure would provide compelling storylines for the next generation of OGJ scribes and archivists.
