The US Gulf of Mexico (GoM) is leaner and nimbler, better prepared to weather the recent oil price crash than the last downturn, according to Wood Mackenzie analysis.
“The region is resilient at low oil prices and nearly 82% of oil production has a short-run marginal cost of $10/bbl Brent. On top of this, over 60% of rig contracts are short-term which gives operators the flexibility to defer capex and maintain positive cashflow,” said Mfon Usoro, part of WoodMac’s Gulf of Mexico upstream research team.
“Although the US GoM remains afloat, budget cuts in the region have been swift, and some fields have been shut in due to the unprecedented low oil prices. Investment, exploration, and project sanctions have all seen major recalibrations.”
Usoro noted key changes in the US GoM after the price crash.
- Low prices have wiped 30% off the remaining value from the US GoM deepwater asset base
Wood Mackenzie changed its long-term Brent oil price assumption to $50/bbl from $60/bbl and updated the 2020-2022 forward curve prices.
“This change alone, not accounting for changes to production or costs profiles on the assets, wiped off roughly 30% of the remaining value (NPV10, Jan 2020) from the US GoM deepwater asset base.”
- Roughly $4 billion in investment has been cut from 2020, a 22% reduction from 2019
Depressed commodity prices have an obvious knock-on effect on corporate investment priorities.
“Taking into account dampened demand as a result of coronavirus and the initial lack of OPEC agreement, we expect capex to fall from its pre-COVID-19 projections by roughly 35% to $7.4 billion. This represents a 22% decline from 2019 investment. Both the under-development and onstream opportunity sets have felt the pinch.”
- Production could decrease for the first time since 2013, but recovery awaits in 2021
The fall in investment leads to lower production outlook, as new projects, drilling campaigns, and brownfield phases have faced delays and potential changes of scope.
“At the start of the year, we predicted production of 2.2 million boe/d – which would have been another production record in the US GoM. But our forecast has fallen by 200,000 boe/d. A recovery in production is expected in 2021. This is because near-term major project start dates have not shifted,” said Usoro.
- Exploration will drop to historic lows in 2020, and a rebound will take time
“We were expecting exploration activity in 2020 to be on par with 2019, which was the first year that exploration saw an uptick in over 3 years. But in response to announced budget cuts, we have reduced our exploration forecast by 55% to 15 wells. This will be an historic low in the region and the recovery will be anything but quick,” said Usoro.
“The downward revision was largely dominated by Independents, while the Majors and small privates have forged ahead with exploration plans, albeit slightly scaled back.”
- No greenfield projects will be sanctioned in 2020; subsea tie-back projects could struggle as well
Momentum had been building in US GoM project sanctions and Wood Mackenzie once expected a new record in 2020 with three greenfield projects requiring total investment of around $10 billion.
But the oil price crash quickly halted FID plans globally due to the heightened risks.
“As a result, we do not expect any US GoM project to be sanctioned in 2020. But, unlike the last downturn, where some projects were cancelled, this time project FIDs have simply been deferred.”
“This is attributed to the relatively competitive economics of the pre-FID projects in the region, which could come down even further with cost deflation.”
