Low oil prices don't matter: Gulf of Mexico output to hit record in 2017

Oil production in the Gulf of Mexico is expected to increase next year even as new offshore development and exploration have slowed to a crawl, weighed down by a drastic drop in oil prices.

The increased production – the Obama administration expects a record high of nearly 1.8 million barrels per day in 2017 – won’t be driven by new projects. And it has nothing to do with the president’s latest plans to open an additional 45 million acres in the Gulf of Mexico to oil and gas exploration.

Instead 14 Gulf of Mexico drilling projects in various stages of development and expansion will fuel the increased output for this year and next.

That makes perfect sense, said Phil Flynn, senior market analyst at the PRICE Futures Group in Chicago.

He said the long slog from discovery to permitting to construction and, finally, to production can sometimes take more than a decade and require billions of dollars of capital investment. So companies aren’t likely to stop a deepwater project even when oil prices bottom.

“There’s a point where you pass the rubicon,” Flynn said, “and even if prices collapse, you’ve already spent so much money that you’ve got to complete the process. Even though I think a lot of these companies are remorseful that they started them a few years ago.”

Tom Floza, global head of energy analysis at the Oil Price Information Service in Wall, N.J., agreed.

“These (projects) were sanctioned and were funded back when oil was between $80 and $100 per barrel, so I’m sure they would like to have a do over,” Floza said.

As prices remain low, Gulf operators have cut deepwater exploration and the number of active rigs. The turbulence has created labor market uncertainty along the Gulf coast, where new oil-patch jobs for geologists, engineers and general laborers are harder to find.

Seventeen percent of crude oil produced in the United States comes from federal offshore drilling in the Gulf of Mexico. And nearly half of the nation’s oil-refining capacity is based along the Gulf coast, making it a powerful economic force in the region.

But despite the industry depression, the Obama administration expects Gulf oil production to average more than 1.6 million barrels per day in 2016 and reach a record high of nearly 1.8 million per day in 2017.

In fact, daily output in the Gulf could top 1.9 million barrels per day in December 2017, according to the U.S. Energy Information Administration.

The backlog of under-development projects in the Gulf of Mexico is testimony to the once-strong demand for Gulf oil exploration following the moratorium on deepwater drilling that was imposed after the Deepwater Horizon spill in April 2010. The ban lasted nearly six months until October 12, 2010.

After slowly rebounding through 2013, the number of new deepwater drilling projects in the Gulf rose to eight in 2014 and eight more in 2015. But new deepwater projects will fall to four this year, and only two are expected in 2017.

The slowdown reflects the “decreasing profit margins and reduced expectations for a quick oil price recovery,” according to a recent report from the U.S. Energy Information Administration.

But as new Gulf projects are scaled back amid the worldwide oversupply of oil, the Obama administration will hold lease sales on March 23 in New Orleans to open up 45 million acres in the Gulf of Mexico for oil and gas exploration.

About 44.3 million acres will be available off the Louisiana, Mississippi and Alabama shores. Nearly 600,000 more acres will be available south of eastern Alabama and western Florida, with the nearest point of land some 125 miles northwest in Louisiana.

The sales follow a public comment period and extensive environmental analysis. Sales terms will require lease purchasers to protect biologically sensitive resources, reduce potential adverse effects on protected species and avoid possible conflicts related to energy development in the region.

But Glenn Compton, chairman of ManaSota-88, an environmental protection group in the Bradenton, Florida, area, said the federal government should cancel the upcoming lease auction.

In a public comment letter to the federal Bureau of Ocean Energy Management, Compton said the federal government’s environmental analysis supporting the lease sales was not thorough; that an oil spill could cause severe economic and environmental damage to the gulf coast region and that the federal government lacks the staff to ensure drilling is done safely.

Compton also said that low oil prices and the glut of oil worldwide would deflate the selling price for the gulf drilling rights.

“The American taxpayers will lose out on billions of dollars of oil revenues,” Compton wrote. “The glut of oil leases already offered has provided the oil industry an opportunity to lease large blocks of submerged lands at bargain basement prices.”

Energy analyst Floza said he expects oil prices to rebound to more than $50 per barrel in the next few years. But the current slowdown in new Gulf drilling projects will be felt in future years, he said.

“That’s going to mean Gulf of Mexico (oil) production will be quite slow as we start the next decade,” Floza said. “It’s going to be sluggish.”

This story was originally published March 1, 2016 at 1:11 PM with the headline "Low oil prices don't matter: Gulf of Mexico output to hit record in 2017."