GORDON FELLER, Contributing Editor
The Gulf of Mexico (GOM) remains a major hub for oil and gas operations. The past 12 months have seen significant new investments in exploration and production, and in services. The region continues to be a focal point for the energy industry for many decades because of its abundant offshore reserves.
Overall, the past year has seen a mix of new discoveries, production start-ups, and ongoing exploration and development activities in the GOM, indicating sustained industry interest and investment in the region. For instance, one GOM drilling rights auction raised just over $382 million, with significant participation from oil companies, indicating continued interest in the region’s lease opportunities.
OVERVIEW
KPMG’s U.S. Energy Leader, Angie Gildea, thinks that “while the Permian basin has received significant attention over the past year, and for good reason, a storm is brewing again in the GOM. E&P companies are deploying significant amounts of cash back to offshore projects, impacting the whole value chain in this region. With record cash flow, increased appetite from investors, and only so much onshore inventory, I would expect to see this trend of increased investment in the Gulf to continue in the near-term.” Looking at the period from 2015 to 2022, on a global level, an average of about $64 billion was spent per year on exploration. Gildea thinks that the industry is “coming out from this period of underinvestment. Since then, the average spent on exploration has shot up to approximately $87 billion. In December 2023, this played out anecdotally in the Gulf, when the U.S. held its largest oil auction since 2015, and auctioned off approximately 1.7 million acres for over $380 million.” Chevron’s Jack/St. Malo complex (Fig. 1) is a good example of repeated investment by an operator, with Stage 1 completed in 2014, Stage 2 finished in 2018, and Stage 3 completed in 2020. The Stage 4 waterflood project should begin operating sometime this year.
Since hydrocarbons are still the primary energy source, producing oil with lower-carbon intensity matters. The GOM has some of the lowest carbon-intensive hydrocarbons in the world. Accounting for about 15% of U.S. crude production, Gildea thinks “the GOM will continue to be critical to meeting the energy needs of today responsibly, with low-carbon intensity.”
We asked Mfon Usoro, Woodmac's Principal Analyst – U.S. Gulf of Mexico, for some perspective. He notes that, in the last 12 months, the U.S. GOM has “recorded production growth underpinned by large project start-ups, including Vito and Mad Dog Phase II. Investment increased in the region to over $10 billion, as spending on greenfield projects ramped up. The availability of the novel 20,000-psi-rated technology paved the way for the high-profile Sparta field to achieve Final Investment Decision (FID). The project was the most notable project sanction of 2023.”
Usoro notes that “M&A activity remained subdued in 2023, with announced deal consideration (excluding corporate deals) remaining below $1 billion. Despite the muted activity, the basin still welcomed new entrants—Karoon Energy, Westlawn and Alta Mar Energy.”
Operators navigated the legal turmoil and delays surrounding leasing and closed out the 2017-2022 leasing program with the last two sales. Lease Sales 259 and 261 generated a combined $646 million in high bids, the highest amount seen in eight years. But Usoro points to the fact that “the new 2024-2029 leasing plan, which plans only three sales, was finalized. This compared to ten U.S. GOM sales in the 2017-2022 leasing program.”
Based on what she’s seen unfold during the past 12 months, Usoro’s predictions are bullish: “Growth in production and investment will continue in 2024 and remain focused on oil-weighted projects. The Majors dominate the corporate landscape in the U.S. GOM and remain committed to growing their respective positions.” Further, she thinks that the Independents and Privates will also make meaningful contributions.
One key factor that Woodmac has been watching for in 2024 is first oil from the Inboard Paleogene (Paleogene reservoirs with pressures of at least 20,000 psi). “This has required heavy investment in exploration as well as research into and development of 20,000-psi-rated drilling and subsea equipment for nearly two decades. The well-level production results will have long-lasting effects on the region's growth.”
Usoro concludes that the M&A market’s focus on the GOM could see a resurgence. “Foreign investors could have their eyes on the region, due to its economic attractiveness and lower emissions intensity. Recent entrants into the region could also look to widen their footprint.”
M&A SITUATION
Some of the more notable GOM-related events of the last 12 months hint at big changes that may be underway, especially as these are compared with events of the previous year. Included on any list of such events would have to be the increase in M&A activities.
Karoon Energy. Australian E&P company Karoon Energy entered the GOM by acquiring GOM assets from LLOG Exploration for $720 million. These assets include a 100% working interest in the Who Dat producing field (Fig. 2) and a 60% interest in the nearby, undeveloped Dome Patrol prospect. The acquisition is expected to substantially boost Karoon Energy's GOM presence and increase its production levels. (The deal includes a contingent payment, based on future oil prices).
Talos Energy in January announced the acquisition of Houston-based QuarterNorth Energy a privately held oil and gas company, for $1.29 billion. Talos paid $24 million upfront and agreed to additional contingent payments, based on future oil and gas prices. The acquisition was completed in March. Talos aims to strengthen its position in the GOM and in the Permian basin, and expand its asset base. QuarterNorth has operated in the deepwater GOM, where it owned and operated a diverse set of producing properties alongside a robust prospect inventory strategically located near key deepwater facilities.
Talos is leveraging QuarterNorth's assets to enhance its production levels. Meanwhile, Talos commenced production from two oil and gas deepwater discoveries in the U.S. Gulf, with the wells being brought onstream through a shared riser system at the Ram Powell platform.
Equinor/Beacon. Among the many discovered resource transactions involving private operators, one stands out. In September 2023, Equinor sold its interest in three undeveloped discoveries in the U.S. Gulf of Mexico to private operator Beacon Offshore Energy. This move was prompted by the fact that Equinor executives determined that the Walker Ridge projects did not compete for capital in its portfolio. The field was jointly discovered in 2020 by Equinor, Petronas and Repsol. This was the first U.S. GOM exploration well operated by Equinor since 2015, and it was Petronas' first U.S. GOM discovery. In March 2023, Beacon acquired Equinor's 50% interest and operatorship and farmed-out 20% to Navitas Petroleum later in the year.
Shell/LLOG. In another one of the numerous discovered resource transactions, LLOG Exploration Offshore, LLC (LLOG) bought Blacktip from Shell. LLOG acquired the GOM-based Blacktip project from Shell as part of a strategic move to expand its offshore energy portfolio. The acquisition allows LLOG to increase its production capacity, reserves, and overall GOM presence, aligning with its growth strategy in the region. Shell decided to focus its resources and investment on its core projects and assets, where it sees the most significant growth potential or strategic importance. The key drivers for this deal were portfolio optimization, growth, and value creation. Selling non-core assets like Blacktip frees up Shell’s capital for investment in other areas that are now deemed more strategic or profitable.
LEASE SALES
As of April 2024, there are 2,272 active leases in the GOM, covering 12.2 million acres, Fig. 3. Lease Sales 259 (March 2023) and 261 (Dec 2023) generated $646 million in high bids for 624 blocks. Chevron, Exxon, Shell, BP, and Equinor were the most active participants.
In the case of Lease Sale 259, this transaction was mandated by the Inflation Reduction Act of 2022, and it was the first offshore lease sale under the Biden administration. The sale was controversial, with environmental groups and some coastal communities opposing it, due to concerns about climate change and potential oil spills. The Biden administration defended the sale, arguing that it was necessary to meet U.S. energy needs and that it would be conducted with strong environmental safeguards. Some details about this auction:
Approximately 73.3 million acres covering 13,670 tracts across the Western, Central and Eastern Planning Areas of the U.S. Outer Continental Shelf were offered. In all, 32 companies participated, with high bids totaling $263.8 million. There were 299 leases awarded, covering approximately 1.7 million acres. The highest bid was $15.9 million by Chevron USA, Inc., for Keathley Canyon Block 96.
Nine months later, Lease Sale 261 offered up 13,481 blocks comprising 72.7 million acres across the Western, Central and Eastern Planning Areas of the U.S. Outer Continental Shelf. A total of 26 companies participated, with high bids totaling $382.2 million. There were 311 tracts awarded, covering 1.7 million acres. The highest bid was $25.5 million, submitted by Anadarko U.S. Offshore LLC, for Mississippi Canyon Block 389.
EXPLORATION/DISCOVERIES
In 2023, oil and gas companies operating in the Gulf of Mexico announced at least eight new discoveries in the deepwater section of the region. For instance, subsequent to the first quarter, Murphy Oil drilled a discovery at the Longclaw #1 exploration well. The well reached a total measured depth of 25,106 ft at a net cost of approximately $6 million. The well encountered approximately 62 ft of net oil pay and was undergoing further evaluation.
In July 2023, Hess struck an oil discovery in the Pickerel-1 exploration well (Hess, 100%) in Mississippi Canyon Block 727. The well encountered approximately 90 ft of net pay in a high-quality, oil-bearing, Miocene-age reservoir. Planning was underway to tie-back the well to the Tubular Bells production facility. First oil was anticipated as early as mid-2024.
Meanwhile, in the middle of 2023, operator bp drilled a successful appraisal well, SWX4 (pre-drill estimate of 100 MMboe), in the southwestern part of Mad Dog field. Since then, the partners have been assessing a multi-well tie-back to the Argos semisubmersible production platform that went onstream last year.
And last October, Kosmos Energy announced an oil discovery at the Tiberius exploration well. Kosmos is operator of the well and has a 33.34% working interest alongside Occidental and Equinor (both 33.33%). The Tiberius exploration well tested a four-way structural trap in the outboard Wilcox trend, in Keathley Canyon Block 964. The well encountered approximately 250 ft of net oil pay in the primary Wilcox target. Wireline logging was completed and casing was being run to the target depth, to enable the well to be used as a future oil producer. The Tiberius well sits in approximately 7,500 ft of water and was drilled to a TVD of about 25,800 ft.
PROJECT SANCTIONS
Over the last nine months, three notable projects reached FID status. These include Shell’s Sparta field (formerly known as North Platte), 244 MMboe; Beacon Energy, Winterfell field, 100 MMboe; and BP, Mad Dog field SW, ~100 MMboe.
Jointly owned by Shell Offshore Inc. (51%, operator) and Equinor Gulf of Mexico LLC (49%), Sparta received sanction in December and is expected to reach peak production of approximately 90,000 boed, Fig. 4. It has an estimated, discovered recoverable resource volume of 244 MMboe. Sparta will be Shell’s 15th deepwater host in the Gulf of Mexico and is scheduled to begin production in 2028. In June 2022, Shell acquired its 51% operated interest from Equinor in what was called the North Platte deepwater development project. To reflect Shell’s entry to the project, Shell and Equinor agreed to rename the North Platte opportunity to Sparta.
In January, Beacon Offshore Energy (operator, 35.41%) reached FID on developing the Winterfell discovery in the deepwater GOM. It will be developed as a cost-efficient, low-emissions subsea tie-back. The project sits among Green Canyon Blocks 943, 944, 987 and 988, with a water depth of about 5,200 ft. Winterfell was discovered in 2021 with appraisal drilling conducted in 2022. The field will be developed via a newly installed, 13-mi subsea tieback to the Heidelberg spar in Green Canyon Block 860. First oil was expected to occur early in second-quarter 2024 from three initial wells expected to produce about 22,000 boed.
As mentioned in the Exploration/Discoveries section, bp drilled a successful appraisal well, SWX4 (pre-drill estimate of 100 MMboe), in the southwestern portion of Mad Dog field. After that, the partners assessed a multi-well tie-back to the Argos semisubmersible production platform. Then, in January, TechnipFMC was awarded a significant contract by bp for its Argos Southwest Extension project in Mad Dog field. TechnipFMC will install pipe and an umbilical, tying back three new wells to the Argos platform.
Potential FIDs this year. Looking back at what unfolded over the course of the past 12 months, some changes may be underway in the patterns of investment. As a result, some analysts predict that the GOM will see increased rig and well activity throughout 2024. The Kaskida (bp) and Monument (Beacon) projects could be sanctioned this year.
Lower Tertiary oil supply is likely to grow significantly, Fig. 5. Most of the larger projects—including Anchor, Shenandoah, Whale, Leon Castile, Monument, Sparta and Kaskida—target resources within this geological trend. Some experts are estimating a production CAGR of 22% between 2023 and 2028 for the Lower Tertiary interval. Since the Lower Tertiary play generally has high pressure and low permeability, ultra-deepwater fracing will be the key technology to watch.
GOM PRODUCTION
Companies active in the GOM are making significant efforts to increase the production rates of both oil and gas. Despite a slight decrease in output over the past year, these companies are intensifying their production activities to meet growing demand for energy resources. This includes streamlining logistics, implementing innovative reservoir management techniques, and leveraging data analytics to make informed E&P decisions.
According to the U.S. Energy Information Administration, federal offshore GOM field production of crude oil during 2022 reached 1.731 MMbpd, Fig. 6. During 2021, the average was 1.707 MMbpd.
OFS/TECHNOLOGY SECTOR
Oilfield service companies operating in the GOM have seen an increase in contracts, particularly in well-cementing operations. For instance, in November 2023, oilfield service provider Expro completed a well cement placement project for an operator in the GOM. The project involved the delivery of inner-string cementing on a subsea well’s 22-in. surface casing in the Mississippi Canyon area, at a water depth of approximately 2,000 m ( 6,560 ft).
One major area of focus has been on innovative ways to extract resources from deep GOM waters. In recent years, there has been a notable increase in orders for FPUs in the GOM. For instance, October 2023 saw the delivery of the Whale FPU to Shell for deployment at the Whale deepwater field development.
Looking ahead, more deepwater exploration and project sanctions in the GOM are expected to continue building on the momentum of the past 12 months, with several fields patiently waiting out years of price volatility. In fact, figures gathered by Mordor Intelligence show that the GOM oil and gas market size is expected to grow from $22.56 billion by the end of this year to $25.74 billion after five years (2029), Fig. 7.
REGULATORY FRONT
The regulatory environment for GOM oil and gas activity is becoming tighter. The whole regime is governed by stringent federal oversight and multiple permits.
Here are some key points regarding current regulations:
CCS OUTLOOK
Finally, a word about the prospects for carbon capture and sequestration (CCS) in the GOM. According to Greg Matlock, EY’s Global Energy & Resources Tax Leader, “the global CCS market is experiencing a significant ramp-up in interest and focus, with the United States leading the way (due, in part, to the increased incentives provided by Section 45Q of the Internal Revenue Code, as enhanced by the Inflation Reduction Act of 2022). Although a significant number of U.S.-based CCS projects were initially focused on onshore capture and sequestration sites, offshore CCS could be a material market participant, providing an alternative monetization and business model for GoM investments.”
“Considering the depth and breadth of talent, capabilities and expertise, combined with ancillary and additive assets and infrastructure,” continued Matlock, “the oil and gas industry is perfectly positioned to capitalize on the emerging market and develop, at scale, world-class GOM CCS projects. Given the vast geological potential for storage of carbon dioxide, coupled with established infrastructure along the U.S. Gulf Coast (and significant industrial centers in the same geographic area), sequestering carbon oxides in the GOM shows initial promise—especially for shallow-water sites that are close in proximity to industrial and manufacturing centers that emit carbon oxides. As with any large-scale project, permitting, coordinating various pieces of the value and operational chain, and properly evaluating the commercial propositions of offshore CCS projects, are crucial.” WO
Lead Photo: Diamond Offshore’s Ocean BlackHawk is a 7th-generation drillship operating in the U.S. Gulf of Mexico. Image: Diamond Offshore.