While most of the oil market remains in turmoil, the Gulf of Mexico is expected to see offshore drilling activity accelerate in 2015. According to energy intelligence firm Wood Mackenzie, the Gulf of Mexico will see its drilling activity increase by more than 30% over last year's levels. That's quite the opposite of the rest of the activity in North America, which is expected expected to backtrack this year.
Why the Gulf is a hotspot
According to Wood Mackenzie, there are several big drivers behind the increased activity. Its analysts expect to see development drilling from already sanctioned projects continuing while rig contracting continues as operators "fight the clock on lease expirations." Because of these trends oil production in the Gulf is expected to grow about 18% per year over the next two years and hit a new production peak of 1.9 million barrels of oil equivalent per day by the end of 2016.
All of this growth is due to previously sanctioned projects, which take years to develop. For example, Chevron (NYSE:CVX) and its partners delivered first oil from the Jack/St. Malo field this past December. However, the fields were initially discovered more than a decade ago while actual field development didn't start until 2011. Further, even after first oil is delivered it takes time to reach a production peak as this project is expected to continue to ramp up its production over the next year and will eventually produce 94,000 barrels of oil per day along with 21 million cubic feet of natural gas.
Meanwhile, another big development that's currently under way is the Heidelberg field, which is led by Anadarko Petroleum (NYSE:APC) and includes partners Freeport-McMoRan (NYSE:FCX) and ExxonMobil (NYSE:XOM) among others, and is expected to start producing in 2016. The partners plan to initially drill six development wells as part of the program, which are noted on the location map in the slide below.
Given the billions of dollars in capital necessary to bring the projects like Heidelberg online, oil companies would rather see the projects completed and producing some cash flow than shelved in the middle of development.
Hurrying before time runs out
The other big trend that should fuel drilling activity in the Gulf of Mexico next year is looming lease expirations. Oil companies bid hundreds of millions of dollars to secure leases for drilling rights in the Gulf of Mexico. Early last year Freeport-McMoRan, for example, bid a whopping $321 million to win the drilling rights to prime acreage in the Gulf while Chevron bid $104 million for the leases it won. Over the past couple of years the industry has spent more than $3.7 billion to win leases auctioned off by the U.S. government.
Suffice it to say, oil companies don't want this money to go to waste by having the leases revert back to the government. That would happen if drillers don't begin initial exploration drilling before the lease term runs out. This race against the clock is forcing drillers to start drilling on leases that might have been put on the back burner if expirations weren't looming.
While most of the offshore drilling industry is slowing down considerably, the Gulf of Mexico is expected to be a busy place next year. Oil companies have billions of dollars invested in projects that need to be completed, while billions more have been invested to secure leases that need to be drilled. It takes producers years to recoup this money because of the long lead time of offshore projects, so slowing down will only delay a return on this already sunk capital.
Matt DiLallo has no position in any stocks mentioned, however, he does think that Chevron is the best of the big oil companies. The Motley Fool recommends Chevron. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.