Energy

Big Oil Races Back Into the Gulf of Mexico


The Royal Dutch Shell Plc Olympus tension leg platform sets sail on its way to the Mars B Field in the Gulf of Mexico on July 13

Photograph by Eddie Seal/Bloomberg

The Royal Dutch Shell Plc Olympus tension leg platform sets sail on its way to the Mars B Field in the Gulf of Mexico on July 13

In October 2010, the Obama administration lifted its five-month ban on deepwater drilling in the U.S. Gulf of Mexico following BP (BP)‘s disastrous oil spill. Three years later, global oil companies are flocking back to the deepest waters of the Gulf, snatching up oil leases and drilling permits at a record level.

The number of drilling permits issued in the U.S. Gulf reached a record 807 on Sept. 26, according to a new report by Bloomberg Industries, an increase of more than 14 percent over the same period last year. According to oil-services company Baker Hughes (BHI), there were 62 rigs operating in the Gulf as of Sept. 27, more than at any time in four years. Rig counts fell dramatically following the Deepwater Horizon explosion in April 2010, dwindling to a dozen within three months of the disaster.

“The Gulf of Mexico is definitely back,” says Julius Walker, an energy markets strategist at UBS Securities. “There’s been so much focus on the onshore shale boom, a lot of people have forgotten about the Gulf.”

While fracking in North Dakota, Texas, and Oklahoma has been garnering headlines and helping lift U.S. oil production to a 20-year high, the world’s largest oil companies have been quietly plowing resources back into the Gulf of Mexico. So far this year, Royal Dutch Shell (RDSA) has been the most active, having bid a combined $144 million to lease acreage that the Bureau of Ocean Energy Management auctions off. Shell has won seven permits to drill new wells so far this year, almost entirely in the Central Gulf. Even as it remains caught in endless litigation resulting from the 2010 spill, BP is still the second-most active oil company behind Shell in gaining permits to drill new wells in the Gulf. BP has won seven permits this year, in addition to the 10 it was issued in 2012.

While smaller and midsize oil and gas companies have been the driving force behind the fracking revolution onshore, only the biggest can truly afford to drill in the Gulf of Mexico. “To play in the deepwater Gulf, you have to be big,” says Walker.

In the farthest reaches of the Gulf, where the water is 10,000 feet deep, massive floating oil rigs drill more than 20,000 feet below the sea floor to tap oil and gas deposits buried beneath a giant layer of salt. Technology in the deepwater Gulf has become so precise that engineers are able to pinpoint within a few feet of where to drill miles beneath the ocean floor. That’s like sticking a drill bit in someone’s backyard from a plane cruising at 30,000 feet. That takes enormous amounts of technical know-how and extra-deep pockets. “Individual wells can cost hundreds of millions of dollars,” says Walker. “It’s just a totally different game than the onshore plays.”

Despite the renewed activity, oil production in the Gulf is about 30 percent below the highs reached in 2009, according to data from the Department of Energy. But the Gulf of Mexico is primed to play a key role in helping achieve the Obama administration’s goal of cutting oil imports by 30 percent by 2020. Federal estimates put the amount of undiscovered recoverable oil and gas in the deepwater Gulf at about 78 billion barrels, more than half of which is crude.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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Companies Mentioned

  • BP
    (BP PLC)
    • $37.69 USD
    • 1.93
    • 5.12%
  • BHI
    (Baker Hughes Inc)
    • $56.35 USD
    • 1.20
    • 2.13%
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