Oil Production in the Gulf of Mexico Is Here to Stay

For several decades, the U.S. Gulf of Mexico has been one of the most sought-after areas of upstream investment. Following the oil embargo of 1973 and the subsequent surge in oil prices, energy companies intensified their Gulf operations and began targeting deeper reservoirs.

This trend continued into the 1980s, bolstered by the Reagan administration's decision to expand the area available for development in the Gulf. With the introduction of 3-D seismic technology in the late 1980s and Royal Dutch Shell's discovery in water depths greater than 5,000 feet, the "ultra-deepwater" era began in earnest. Over the subsequent two decades, major oil and gas finds, such as BP's billion-barrel Thunder Horse discovery in 1999, ensured that the Gulf stayed in high demand.

But that quickly changed in 2010, when a rig operated by BP caught on fire and subsequently exploded, resulting in the deaths of 11 workers and discharging nearly 5 million barrels of oil into the Gulf of Mexico. This incident, commonly referred to as the Deepwater Horizon oil spill or the Macondo blowout, led to a six-month long moratorium on drilling new wells in the region -- a ruling that had a profound impact on drilling activity in the Gulf.

Fast-forward to today, though, and things are looking a whole lot brighter. A new study by consultancy Wood Mackenzie found that deepwater drilling activity in the Gulf finally returned to pre-Macondo levels last year. And going forward, the Gulf is likely to make a strong comeback, as a host of leading exploration companies continue to invest in the region, encouraged by recent exploration successes.

3 companies seeing success in the Gulf
Chevron
(NYSE: CVX  ) , for instance, has had a string of exploration successes in the region, including its most recent deepwater oil discovery in the Coronado prospect about 200 miles off the Louisiana coast. The company's test well, jointly owned with ConocoPhillips (NYSE: COP  ) , has a 35% interest, and Anadarko Petroleum (NYSE: APC  ) , which has a 15% interest, unveiled more than 400 feet of oil-bearing rocks.

ExxonMobil (NYSE: XOM  ) also unveiled two major oil discoveries and a gas discovery in the Gulf of Mexico last year, after it drilled its first deepwater exploration well in the region since the moratorium was lifted. In fact, its Hadrian find has been hailed as the biggest since BP's billion-barrel Thunder Horse discovery in 1999. As one of the largest leaseholders in the area, Exxon remains committed to exploration and production in the Gulf.

And finally, Anadarko announced in March what may be one of the largest discoveries ever made in the Gulf of Mexico, after its Shenandoah-2 deepwater well struck oil deposits more than 1,000 feet thick. The well, which is operated by Anadarko with partners Cobalt International Energy, ConocoPhillips, and Marathon Oil, lies in a field that could contain 500 million to 1 billion barrels of oil, according to some estimates.

The future of Gulf drilling
As these companies' progress indicates, drilling activity in the Gulf of Mexico has rebounded sharply. Already, there are dozens of companies operating in the Gulf in more than 400 meters of water. Going forward, production from the Gulf is expected to reach 2 million barrels of oil equivalent per day in 2018-2019, according to Wood Mackenzie.

The consultancy also projects that global spending on deepwater drilling will almost triple over the next decade, from $43 billion last year to $114 billion in 2022. WoodMac further forecasts global deepwater drilling to grow at a compound annual growth rate of about 9% over the next 10 years and expects Gulf of Mexico activity to grow at a similar pace.

Despite this increasing supply of oil, crude oil prices having avoided the broader sell-off in commodities, now might be a good time to pay attention to some high-quality, oil-levered stocks. If you're on the lookout for some currently intriguing plays, check out The Motley Fool's "3 Stocks for $100 Oil." For free access to this special report, simply click here now.


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