Deepwater Drilling

Rising oil prices, which are now above $70 per barrel, offer hope for a resurgence of drilling activity in the Gulf of Mexico.

The price of U.S. crude oil has hovered around $70 a barrel for the past four months, and it’s 40 percent higher than a year ago.

That hasn’t been enough to revive deepwater oil drilling, where the rig count — the most closely watched indicator of activity — is virtually unchanged from two years ago.

Still, as crude prices recently hit four-year highs, many throughout Louisiana’s oil patch remain optimistic that the hard-hit energy industry has finally turned the corner and will emerge leaner and meaner after shedding tens of thousands of job since the downturn began in 2014.

“It’s a slow recovery, and I think it’s moving along, you know, at a pace that I’d like to see get a little quicker,” said Lafourche Parish President James Cantrelle. “But if it stabilizes the oil industry and if it stabilizes the prices, that’d be a great thing for us.”

In a sign that the industry is recovering, Lafourche’s sales tax revenue — a key measure of economic activity — was up more than 10 percent in the first nine months of the year.

“What we’d really like to see happen is more of the offshore drilling taking place, where all of the (oil service) boats could start going back to work, and the activity would increase and our economy would increase,” Cantrelle added. “Lafourche and the neighboring parishes are dependent on the oil business. When the oil business goes down, we go down with it.”

Although many in Louisiana’s oil and gas industry have already spent years trying to trim costs, experts and analysts have long warned that it’s going to take a sustained rise in crude prices to pull the industry out of the doldrums. In the meantime, areas like the highly productive, cheaper-to-drill Permian Basin in Texas continue to benefit from even modest fluctuations in oil prices.

In fact, there were 869 rigs exploring for oil in the U.S. last week, up by eight from a week earlier and 126 more than a year ago, according to Houston oilfield services company Baker Hughes. The U.S. rig count bottomed out in May 2016 at 316.

The latest tally includes 22 rigs in the Gulf of Mexico, only two more than a year ago and about a third of the number in the Gulf when U.S. oil prices hovered around $100 a barrel.

The year-over-year increase was led by the Permian Basin, where 489 rigs were at work last week, up from 384 a year ago.

Benchmark U.S. crude stood at $71.34 per barrel Friday after averaging $51 per barrel in 2017, up $7 a barrel from the 2016 average. Federal forecasters anticipate it could average $70 in 2019.

Falling inventories

Prices climbed even as U.S. crude production continued to increase, averaging 11.1 million barrels a day in September, up slightly from the month before, the U.S. Energy Information Administration said last week. U.S. crude inventories also have fallen for more than a month, further fueling the recent price rise.

Brent crude, the international benchmark followed by many refineries, stood at $80.43 per barrel Friday after averaging $54 a barrel in 2017, up $10 a barrel from the 2016 average. U.S. forecasters predict that it could average $75 in 2019.

Meanwhile, OPEC and its allies, including Russia, have capped oil production since January 2017 in order to reduce a global glut and lift prices. However, the cartel's output fell below its targets, in part due to declining production in Venezuela, and in June the group agreed to boost the oil supply. 

In turn, OPEC pumped nearly 32.8 million barrels per day in September, according to figures cited by the group’s monthly report. The cuts are slated to last through the end of the year.

Several cartel members, including Saudi Arabi and Libya, have boosted production in order to offset shortages caused by U.S. sanctions on OPEC’s third-largest producer, Iran, and Venezuela's crippling economic crisis. 

Many viewed the November 2016 reduction, which cut 1.2 million barrels a day starting two months later, as larger than expected, but it left OPEC's daily output at 32.5 million barrels.

Facing pressure over rising prices ahead of next month's midterm elections, President Donald Trump's administration has tried to sway OPEC to open up the spigot more to keep a lid on oil prices, partly to compensate for revived U.S. sanctions on Iran that will make it more difficult for Tehran to sell its oil abroad.

“We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices!” Trump tweeted on Sept. 20.

Despite the recent uptick in oil prices, U.S. producers have, so far, responded cautiously, in some cases using the opportunity to sell assets to boost liquidity and pay down debt incurred during the boom years before 2014.

“We really haven’t seen the run-up on drilling activity that has corresponded with price this time around that we have seen historically,” said David Dismukes, executive director of the LSU Center for Energy Studies.

Even with onshore areas putting U.S. oil production on pace to beat the previous record of 9.6 million barrels per day set in 1970, it’s not time to write off the deepwater Gulf. Federal forecasters expect the region will be the second-largest contributor to domestic production growth through 2019, lagging behind only the Permian region.

For its part, the consulting firm McKinsey predicts that by the mid-2020s, U.S. shale oil output will plateau in areas such as the Bakken in North Dakota and Eagle Ford in south Texas.

“At lower break-even prices, shale plays begin to become exhausted,” the firm said in July. “As that happens, the (Gulf of Mexico) and, more broadly, deepwater will become more attractive relative to the higher-cost onshore shale resources."

That prospect is having an impact on investment decisions.

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Shane Guidry, chairman and CEO of Harvey Gulf International Marine, said his New Orleans-based supply vessel company has two dozen bids for global drilling projects through the end of next year. A half-dozen of them are targeting the deepwater Gulf — tied to public companies ranging from medium-sized independents to large operators — and are creating a flurry of activity that “we hadn’t seen in a while.”

Louisiana-based oilfield services companies, such as the ones that are big players in hubs like Lafayette, likely will benefit from additional work — even if it is located elsewhere.

“From what we’re hearing and seeing, people are going to start drilling campaigns around the world and start replenishing depleting reserves that all oil companies are seeing,” Guidry said.

That would be welcome news in Lafourche and Terrebonne parishes, where 6.6 percent of jobs are directly tied to oil and gas extraction — nearly four times the statewide average.

“It’s encouraging because some people are going back to work and they’re starting to see help-wanted signs where we hadn’t seen them for a good while, so the signs are all encouraging,” said Cantrelle, the Lafourche Parish president. “It’s just that we’ve got to be patient, and hopefully it continues in the same trend.”

Already there are signs that it’s on the right track.

“Our machine shops are doing a lot of manufacturing for the west Texas and New Mexico shale fields, and that’s been keeping Houma pretty busy,” said Terrebonne President Gordon Dove, where unemployment hit about 5.6 percent in August, compared with 5.0 percent statewide.

Chett Chiasson, executive director of the Greater Lafourche Port Commission, which operates Port Fourchon, the nation's leading energy supply port, said the port has seen increased activity in the past several months.

Through August, truck traffic over the La. 1 bridge in Leeville was up 15 percent compared to the same period last year, according to Chiasson, who said he's also seen more equipment heading down to the Gulf.

“It’s about certainty of the market and certainty of the price, and making sure that it’ll stay at a steady rate, and that way the oil and gas companies can make some good investment decisions to start spending some of that capital,” Chiasson said.

While uncertainty about the future remains high, some observers are willing to be patient.

“I think it’s kind of a positive sign to see the growth being more gradual and not having the spikes that we’ve had in the past,” said Troy Wayman, president and CEO of One Acadiana, a Lafayette-based agency that leads economic development efforts in nine parishes. “Granted, it’s not nearly as exciting as those spikes are, but the correction’s not nearly as devastating.”

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Follow Richard Thompson on Twitter, @rthompsonMSY.