A lot has happened since the Gulf of Mexico hit peak oil production in 2009. Around that time oil prices had plunged as the world hit the deepest financial crisis since the Great Depression. The Gulf then was besieged with a crisis of its own as the Deepwater Horizon disaster in the spring of 2010 put the Gulf's oil production growth on hold. That hold lasted a lot longer than expected as the shale revolution in the U.S. took a lot of capital and attention away from the Gulf. However, the Gulf of Mexico is about to make its way back in a big way as several new projects are about to push the Gulf past its previous production peak as its on pace to set a new record in 2016. The question that remains is if it can keep up its momentum this time, or if it production will drop off yet again after a new peak is hit.  

Reversing the decline

Oil production in the Gulf of Mexico has hit its bottom and is ready to rebound according to forecasters. As the following slide from a recent investor presentation by Enterprise Products Partners L.P. (NYSE:EPD) notes, production in the Gulf is about to begin its ascent after years of decline.

Source: Enterprise Products Partners L.P. Investor Presentation

That chart confirms the latest analysis from energy research firm Wood Mackenzie that estimates deepwater oil production in the Gulf will hit a new production peak of 1.9 million barrels of oil equivalent in 2016. This is due to an expected 18% per year surge in production from 2014-2016 as new projects come online and ramp-up production.

Overall, 15 field development projects are expected to come online and ramp-up over the next two years including Jack/St. Malo, Tubular Bells and Big Foot from Chevron Corporation (NYSE:CVX) as well as Lucius and Heidelberg from Anadarko Petroleum Corporation (NYSE:APC) and Freeport-McMoRan (NYSE:FCX). These projects are the key to pushing the Gulf of Mexico past its 2009 oil production peak.

Source: Chevron Corporation Investor Presentation

Hitting the wall

All that being said, while production in the Gulf will set a new record in 2016, it's not expected to keep growing thereafter. Instead, production in the Gulf looks like it will hit a wall and stay relatively flat throughout the end of the decade. This is because just eight projects are expected to come online from 2017 to 2020 and the production from these fields is only expected to match the depletion of legacy fields in the Gulf.

Further, given the recent plunge in oil prices, few projects will likely get the green light due to the higher costs of bringing a deepwater Gulf of Mexico production online. One project that did recently get approved was the $6 billion Stampede project from Chevron and Hess (NYSE:HES). The partners expect first oil on the project in 2018. However, the list of offshore drilling projects beyond that could be limited by the drop in oil prices.

Source: Anadarko Petroleum Corporation.

In addition to that, other once promising prospects are beginning to see that prospect status diminish, which will act as a weight on future production growth. For example, ConocoPhillips (NYSE:COP) recently wrote-off its Coronado prospect as a dry hole after an appraisal well found the discovery to be less promising than the results of an initial discovery well. ConocoPhillips has now joined Chevron in abandoning that project leaving Anadarko to take the next steps on the project without the help of its two largest partners. Given the drop in oil prices we're likely to see producers quickly abandon less promising prospects like Coronado while also pausing the development of higher cost projects.

Investor takeaway

The Gulf of Mexico is an example of just how cyclical the offshore drilling sector can be. Just when the Gulf is about to hit a new production peak it's hit with new storms that will likely cause production to begin to wane. However, as production begins to wane it takes out supplies, which can cause the price of oil to head higher once again, sending offshore drillers back into the Gulf in search of more oil. It's a never ending cycle that investors just need to get used to seeing every few years.