Daily Management Review

Gulf of Mexico oil companies are stopping production


Offshore oil companies have begun shutting down wells in the U.S. Gulf of Mexico following a collapse in oil prices, and some top executives in the sector fear that a full recovery could take years, The Wall Street Journal writes.

Tony Webster
Tony Webster
The unprecedented drop in energy demand as a result of the COVID-19 pandemic resulted in reduction in refining volumes and a rapid decrease in available capacity for oil storage. In these conditions, companies operating on the shelf are forced to close both shallow and deep-water wells with high production costs.

In 2019, offshore projects accounted for approximately 15% of US oil production, or about 2 million barrels per day (bpd), which is a record for offshore production in the country.

The closure of offshore operations in response to the current crisis is likely to have longer effects than a reduction in domestic oil production, for example, in the Perm basin in Texas and New Mexico, the US shale oil production center.

The closure of offshore wells while reducing costs by many manufacturers has already forced oilfield services companies, including Schlumberger Ltd., Halliburton Co. and Baker Hughes Co., cut jobs. At the same time, many companies in the field of offshore drilling often attract contract workers from oilfield services companies.

For companies working on the shelf, the costs of both oil production and its transportation are higher than for manufacturers working on land. Usually they compensate for these costs with premiums to the price of oil delivered to trading hubs in Texas and Louisiana, given the high demand for these supplies from US refiners.

During the previous recession in the oil market - about five years ago - companies operating in the Gulf of Mexico also feared a shortage of storage capacities and an excess of oil in the market, but reduced production without completely stopping it. Industry experts note that the volume of free capacity for oil storage has never reached such a low level as during the current crisis.

source: wsj.com