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Big Oil Optimistic On Gulf Of Mexico Projects

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After the 2010 Deep Water Horizon oil spill disaster, it seems that economic activity in the Gulf of Mexico has picked up again as big oil companies, like BP and Shell, have started to undertake major projects in the region

Published: November 25, 2014 at 7:13 am EST

By: Micheal Kaufman

The Gulf of Mexico used to be the hub of US crude oil and natural gas industry, before the Deep Water Horizon oil spill in 2010. BP plc (ADR) (NYSE:BP) along with Transocean Ltd (NYSE:RIG) and Halliburton Company (NYSE:HAL) got involved in a massive oil spill in 2010, which killed 11 people and caused major environmental damages. The 2010 oil spill is estimated to be 8-31% larger than Ixtoc 1, which has now become the second-largest oil spill to have occurred in the region.

In 2001, the Gulf of Mexico accounted for one-quarter of the US crude oil and natural gas production. However, after the oil spill production has declined by almost 50%. The oil spill has probed the US government to take necessary precautionary measures and issue fewer permits to avoid future similar incidents.

It has been four years since the spill and now big companies have started to step in the region again with their projects. However, the companies are more prepared now and have undertaken costly projects. One such project was the Olympus tension leg platform (TLP), which was initiated in the region with Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BP partnering up, having a 71.5% and 28.5% ownership, respectively.

The project was estimated to be completed by 2015 but the production of oil and gas processing started earlier from February 2014. The Olympus tension leg contains 48 wells and weighs more than an aircraft carrier. The estimated capacity of the leg is around 100,000 barrels of oil equivalent per day, which constitutes 3% of Shell’s global production.

Other companies have also decided to undertake projects in the region despite the 30% decrease in oil price since June. Hess Corp. (NYSE:HES) has started to pump crude oil from its deep water Tubular Bells of Gulf of Mexico for the next ten years. Exxon Mobil Corporation (NYSE:XOM) and Anadarko Petroleum Corporation (NYSE:APC) have collaborated on two major projects to commence in December.

The combined projects of oil giants like Exxon Mobil, Chevron Corporation (NYSE:CVX), and Hess Corp are said to amount to 900,000 barrels per day (bpd), surpassing the total oil and gas production in California. Hess is also planning to undertake a $6 billion Stamped project.

Although the companies are optimistic and active regarding their ongoing projects, they are still at a disadvantage. Oil price has declined substantially and its future seems uncertain. The rise and fall of oil price depends on the outcome of the November 27 OPEC meeting.

Compared to 2010, production costs are 25% higher now. Companies are drilling deeper than before, causing them huge overheads. However, the companies now undertake greater precautionary measures and use extra bundles of valves to stop a well if it goes out of control. Moreover, production is estimated to be 13% slower now due to an increase in inspections and maintenance of the wells.

The production from the Gulf of Mexico region is expected to reach 1.9 billion bpd by the end of 2016 but after that growth is expected to decline due to higher costs. This coupled with low oil price does not indicate good prospects for the oil industry. However, Shell’s Executive Vice President of Deep Water, John Hollowell, remains optimistic with the oil industry and predicts higher fuel demand in the future.

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