WTI Crude futures contracts are averaging slightly above $31/bbl YTD in 2016 and short-term price recovery continues to look bleak. The shale plays have suffered and onshore production has fallen steadily since November, a result of producers heavily cutting CapEx and overhead in order to strengthen their balance sheets. The continuing theme from the recent earnings call statements was to reduce costs, try to maintain flat production in 2016, and plan for future growth. While projects across the board have been trimmed, many of the large and expensive offshore Gulf of Mexico (GOM) projects are still on track in 2016 and 2017.

In fact, production in the GOM is projected to grow steadily over the next 3-5 years. This is continuing the trend of the previous 3 years of consistent growth as average yearly crude volumes climbed from 1.26 MMb/d in 2013 to 1.53 MMb/d in 2015. So why is offshore growing as other regions tighten their belts? One reason is the long life span of offshore wells. Offshore projects can cost billions of dollars and take years to bring to fruition, but because they are viewed for their long term potential, the investment decisions are less sensitive to short term pricing. This is due in part to the relatively flat declines and high production profiles that produce for multiple years. In particular, a move to deeper water has seen even larger IP rates, driving development towards more advanced deep-water platforms with greater production potential as seen in the chart below.

Many large projects came on line in 2015 and will provide significant production capabilities for the next 5+ years. Shell’s South Deimos and West Boreas subsea wells were completed with tiebacks to the Mars B platforms, greatly extending the facility life and ultimate recovery. Noble Energy began producing from the Big Bend and Dantzler developments, with new subsea tiebacks to Thunder Hawk. LLOG’s Delta House floating production system is online and Anadarko has seen significant growth from their Lucius platform which started production early last year. The chart below highlights the 2015 production that has come online from a select group of active operators.

And more projects are on the way for 2016. Anadarko is planning to bring Heidelberg online, an 80 Mb/d facility based on the same design as their Lucius platform. Noble expects to produce first oil at Gunflint this year, but will also be focusing on exploration and new discoveries. Shell will be completing the Stones development in the next few months and are moving forward with their 175 Mb/d Appomattox platform to be brought online in 2018. Hess also announced they are moving forward with Stampede, an 80 Mb/d platform also to be operational in 2018. Aside from the major projects planned, new wells are being drilled and connected to existing infrastructure as a cost effective way of bringing new production online under the tighter CapEx budgets. The amount of incremental production to come from the GOM in the next few years will help to temper the overall US decline in production caused by the cuts in onshore shale.

In addition to the new projects scheduled for completion, exploration will be a focus area for Gulf producers in 2016. Last August was the worst turn out to a Bureau of Ocean Energy Management (BOEM) lease sale in 30 years, however lease sales are expected to be higher for next month’s auction of Eastern and Central GOM blocks. 45 million acres are going up for sale by the BOEM on March 23, 2016, with the majority of the offering from the sought after Central GOM blocks.

However, all of this progress forward in offshore doesn’t mean the GOM is immune to the current price environment. Only the best projects or the ones closest to completion will receive final investment decision (FID), while others risk delay or abandonment. Due to the timescale of the planning and construction phases, along with the significant amount of sunk capital, projects further down the design path may be commissioned despite lingering low crude prices. However, smaller projects are more at risk and easier to cut. Anadarko recently said they have promising projects that won’t be sanctioned at $30/bbl. Noble is shutting in Danny Adkins and the Jim Day rigs, while Freeport-McMoran is also announcing rig reductions in the Gulf.