No new projects in the US Gulf of Mexico (GoM) are expected to receive the final investment decision (FID) this year. Even as costs of facility development, drilling and completion have fallen, bringing average development breakeven prices near $36 per barrel, the current low levels of oil prices have made the economics of deepwater projects challenging.

However, main operators in the Gulf of Mexico have been cutting costs through designs and procurement to make projects viable and less vulnerable to oil price in the low price environment. As a result, post-FID deepwater and ultra-deepwater projects are generally resilient to the present price conditions. Key players are still the top major international oil producers with strong financial positions and some independents with sound GoM experience.

Although some shallow water operators are shutting down their operation due to the sector crisis, deepwater projects have a relatively stronger outlook. More than 95% of Gulf of Mexico production comes from the deepwater. Currently, daily production from producing assets is averaging 1.9 million barrels per day (mmbd) and will be declining to around 1.6mmbd by 2025. The addition of the current post-FID projects will help alleviate the decline by 2025.

Most post-FID projects have relatively low breakeven price below $30 per barrel. As for projects currently waiting for their FIDs, most have an oil breakeven price above $30 per barrel. These projects will see the FID postponed until oil prices have improved. With low revenues expectations and reduced funding levels, operators might focus more on projects with short-term paybacks such as tiebacks, which have lower breakeven prices. Ultimately operators in GoM need to reconsider their offshore portfolio strategy in order to keep oil production steady or grow it.

There are currently 21 rigs drilling in the deepwater (DW) and ultra-deepwater (UDW). Major operators have contracted 12 of these rigs and the remaining are operated by independent companies.

Offshore exploration has suffered a drastic cut in almost all operators’ budgets. The last deepwater Lease Sale 254, on 18 March was not very competitive, yielding only $93m of winning bids. Only 10% of the bids were competitive, a low not seen in the last three and a half years. However, the expectation is for the US domestic demand for crude oil to gradually rebound, ultimately sustaining an oil price upward trend and eventually bringing back investment in exploration.