Four Years After BP Spill, a Shallow-Water Revival

Big oil has largely lost interest, but independent companies say a resurgence is afoot after years of decline.

Oil or natural gas rig in Galveston Bay, Texas. (National Journal)

For well over a decade, oil and natural-gas drilling in the shallow federal waters in the Gulf of Mexico have been in a seemingly unending decline.

Federal data show that oil production in waters less than 1,000 feet deep — a rough benchmark for shallow water, or the "shelf" — fell from 830,000 barrels per day in 1997 to 381,000 a decade later and has kept falling. Gas production dropped significantly too.

Hurricanes such as Katrina in 2005 and Ike in 2008 took their toll, but they only exacerbated a decline that was already long underway. And then the 2010 BP disaster — in vastly deeper waters farther from shore — brought permitting to a crashing halt for a time as regulators imposed new safety requirements. The production drops continued through 2013, according to federal data.

In the aftermath of the BP spill and the permitting freeze that followed, industry officials and Obama administration critics warned of a mortal blow to the Gulf's oil and gas development.

The ensuing slowdown in permitting played a role in the overall drop in post-spill Gulf production. But in shallow water specifically, if the policies are a hurdle, they've not been enough to stop a recent flurry of development.

Four years later, the shallow-water region has seen a whirlwind of deal-making as aggressive players snap up assets. According to the prominent energy consulting firm Wood Mackenzie, over the past year, merger-and-acquisition activity focused on the shallow-water Gulf of Mexico has totalled roughly $7 billion.

Late last year the private-equity-backed Fieldwood Energy closed its $3.75 billion deal for the shallow water assets of Apache, a big company with worldwide operations. Another aggressive player, Energy XXI, this month completed its $2.3 billion deal for EPL Oil & Gas. It also bought $1 billion worth of Exxon Mobil's assets in late 2010.

"It is a very significant amount of money for an area that is often forgotten about by a lot of people," said Jeremy Sherby, a research analyst with Wood Mackenzie.

While oil-and-gas giant Chevron remains a major shallow-water producer, and Exxon still has a small presence, a number of the so-called supermajors are no longer active in the region, which has been picked over for decades.

The biggest companies "sold massive amounts of the shelf properties to new, more aggressive, singularly focused [exploration and production] companies," said Jim Noe, an executive with the rig company Hercules Offshore. His customers now include shallow-water players that several years ago "didn't exist or you had never heard of them."

The activity among independent players in recent years may translate into an unexpected oil-production revival at a time when the industry is focused inland on the fracking-fueled shale energy boom and on the deepwater frontiers far from shore.

Shallow water-focused companies and analysts say a convergence of factors has led to the renewed interest in oil production.

"There is a big resurgence of the Gulf as far as the oil plays are concerned," said Greg Smith, vice president for investor relations with Energy XXI, who notes the company has more rigs currently active than ever before.

Oil prices are strong, while natural-gas prices — which unlike oil prices are not global — have tumbled over the last decade thanks to the inland U.S. fracking boom.

According to a recent investor presentation from Hercules Offshore, "As oil prices diverged from natural gas, [exploration and production] companies have shifted drilling program[s] to target oil."

"The economics are a lot better on an oil well than a gas well," Sherby said.

Sherby said companies that have been snapping up shallow-water assets are likely focused specifically on that region, compared to much larger firms that can make strong returns in inland shale plays like the Eagle Ford in Texas, or have the massive capital needed for deepwater projects.

"It is becoming a region dominated by specialty players," he said. "The buyers in these transactions are more likely to drill more and drill more aggressively."

Noe said that advances in seismic exploration technology have yielded information that shows oil production could make a big comeback in shallow waters.

"The industry by and large advances very methodically from a technology standpoint and some would say slowly," says Noe, the company's senior vice president, but adds: "One area that has advanced at breakneck speed is seismic."

"We are finding oil that was long since believed to have been produced," said Noe, whose company has been able to substantially increase its per-day rates for rigs as demand rebounds. Newer technologies have given companies the ability to see oil through salt formations.

Smith, of Energy XXI, said use of horizontal drilling in areas with existing development is enabling the industry to "stabilize" the region's oil production decline. "At $100 per barrel, we can drill these horizontals all day long," he said.

To send it back upward, Smith said, depends on the success of new projects enabled by technological advances such as better seismic technology, which he said can "redefine the shallow-water Gulf."

Not everyone is so bullish.

"The costs are so great in shallow water now and there's really no big elephants. The economics don't work, so we don't have as much play in the shallow water," said Don Briggs, the president of the Louisiana Oil and Gas Association, who says post-BP spill regulations and other factors have made shallow water less attractive.

Interior Department drilling permit data shows an upward trajectory since the major slowdown that followed the BP disaster.

Still, despite all the activity, Sherby says he doesn't expect total shallow-water oil and gas production to outright reverse the long decline.

"If anything it will just make the decline less pronounced," he said. Unless ...

"The big wild card ... is the ultradeep trend," Sherby adds. He's referring to gas resources far, far below the seafloor at high pressures in a region called the Inboard Lower Tertiary/Cretaceous that companies such as Freeport-McMoran hope to develop.

"If that ever becomes commercial and gas prices make it economically viable, that could potentially reverse the decline," he said. "But that is still pretty unproven from a commercial standpoint."

Jason Plautz contributed to this article