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Crude Not Going Off the Deep End

The U.S. shale boom has rightfully received a lot of media attention over the past decade, building from relative obscurity to eventually account for just over half of U.S. oil production. At the same time, output from the Gulf of Mexico suffered a number of setbacks, including Hurricane Gustav in 2008 and the devastating Deepwater Horizon oil spill in 2010.

Nevertheless, production in the Gulf of Mexico has actually increased during the oil price decline that began in 2014. The U.S. Energy Information Administration (EIA) expects Gulf output to reach a record next year.

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Gulf production has gotten out of sync with shale because it involves more expensive, longer-term projects that are less likely to be canceled because of fluctuations in oil prices. The offshore fields coming online today and over the next few years began to be developed prior to the price crash.

But over the longer term low prices will start to affect the exploration and drilling in the Gulf. As the EIA notes, eight Gulf projects started producing in 2015, but that dropped to four this year and only two new projects are expected to start producing in 2017.

So who are the Gulf’s top oil producers today?

In 2010 — the year of the Deepwater Horizon spill BP (NYSE: BP) was the Gulf of Mexico’s top oil producer, having surpassed Shell (NYSE: RDS-A) in 2008. BP remained the Gulf’s top oil producer in 2011. But liabilities from the Deepwater Horizon spill forced the company to sell off assets, including some in the Gulf. So in 2012 BP ceded first place back to Shell, which has retained it ever since.

The Bureau of Ocean Energy Management (BOEM) keeps detailed statistics for all of the oil and gas producers in the Gulf. Here are the top oil producers in 2015, with 2009 production noted for comparison. The numbers are in millions of barrels and exclude condensate from natural gas production.

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Source: Bureau of Ocean Energy Management

As the table shows, the top producers in the Gulf are supermajors like Shell, BP and Chevron (NYSE: CVX). BP’s oil production in 2015 was 91.6 million barrels, which is only about half of what it was in 2009, the year before the Deepwater Horizon spill. Chevron’s production has also declined.

Shell, on the other hand, increased its annual production over the same span from 86.2 million to 100.7 million barrels. Some producers, including Anadarko Petroleum (NYSE: APC) and Hess (NYSE: HES), ramped up their Gulf output even faster.

In 2009 it was hard to imagine that BP would lose its dominant position among Gulf producers, but that was before the Gulf spill. The company is likely to fall even further behind over the next few years, because it has not developed any of the new projects coming online now.

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Source: EIA

Conventional wisdom is that incremental offshore oil production isn’t competitive with that from shale. To the extent that this is true, it has investment implications for crude producers. Recent history has certainly favored the shale drillers. Their leader, EOG Resources (NYSE: EOG), doubled its share price over the past five years, while Anadarko with its offshore exposure lost 20% over the same span.

It isn’t coincidental that the model portfolios we maintain at The Energy Strategist have stayed away from Anadarko, while EOG has been one of our best long-term performers. But, given the rapid changes in technology and capital spending plans, the advantage could easily flip in the not-too-distant future. Consider subscribing to The Energy Strategist to benefit from in-depth research on the ever-evolving energy sector.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 


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