U.S. Oil Production Shifts Focus from Shale to Gulf Offshore

U.S. oil production is undergoing a significant transformation as the focus shifts from shale oil to offshore resources in the Gulf of Mexico. This change is driven by advances in technology, the maturation of shale reservoirs, and supportive federal policies aimed at enhancing oil production capabilities. According to the U.S. Energy Information Administration, oil output from Gulf fields is projected to rise from 1.8 million barrels daily to 2.4 million barrels daily by 2027. This estimate aligns with data from the Bureau of Ocean Energy Management.

The transition reflects a broader trend in the energy sector, where federal support has made offshore drilling more economically viable. Increased investment, streamlined permitting processes, and technological advancements are driving this shift. Recently, BP announced a $5 billion investment in a new offshore project, the Tiber-Guadalupe project, which aims to extract approximately 350 million barrels of crude oil. This project is expected to contribute an additional 80,000 barrels daily to BP’s U.S. output, which the company plans to boost beyond 1 million barrels daily.

In addition to BP’s initiatives, the company, in collaboration with Chevron, reported a discovery in the Far South prospect earlier this year. An executive emphasized that this finding underscores the Gulf of Mexico’s potential for growth and opportunity for BP. The company aims to increase its Gulf output to 400,000 barrels daily by 2030.

Another significant development came from Talos Energy, which announced a discovery in the Gulf that Wood Mackenzie identified as the most substantial since Shell’s Whale find in 2017. The Daenerys discovery could yield an estimated 65,000 barrels daily at peak production rates and may lead to further discoveries in the region. Talos Energy’s Chief Executive, Paul Goodfellow, noted the increasing importance of offshore production in meeting global energy demands, highlighting concerns regarding the long-term economic viability of onshore basins.

Historically, shale production was favored due to the rapid onset of oil flow, allowing wells to start producing within months. However, the fast depletion rates of shale wells have posed challenges, forcing producers to continuously drill in search of viable locations. As high-quality acreage diminishes, some shale producers are entering more expensive areas, leading to increased caution in spending. Industry executives have indicated a preference for dividends over high-risk investments, especially amidst fluctuating oil prices.

In contrast, offshore drilling is characterized by high upfront costs but has benefited from technological improvements that enable exploration in deeper waters. Over time, the breakeven point for offshore fields is expected to decrease significantly, potentially making them more competitive than shale operations. Goodfellow remarked that Talos’s offshore projects could remain profitable, even if international oil prices dropped to $35 per barrel, with projections suggesting breakeven costs could fall as low as $20 per barrel.

The Energy Information Administration forecasts Gulf oil production to reach 1.89 million barrels daily in 2023, with a gradual increase to 1.96 million barrels daily by 2026. In contrast, onshore production is projected to grow by only 190,000 barrels daily, excluding Alaska, marking the slowest growth rate since 2010, not accounting for the pandemic years. Analysts such as those from Energy Aspects expect offshore production growth to fully compensate for declines in onshore output, provided favorable federal policies continue.

The current landscape of U.S. oil production has been shaped by the previous administration’s focus on enhancing local energy production, which included regulatory rollbacks that benefited offshore drilling. A potential shift in political power could result in changes to the regulatory environment affecting offshore oil exploration and production.