Bullish on the Gulf of Mexico

by Roderick D. McKenzie, Jr.,
Managing Director Equity Research, RBC Dominion Securities

The Gulf of Mexico (GOM) represents a very important province for the US oil and gas industry. Approximately two-thirds of GOM production is natural gas. While only 28% of the US’s natural gas production comes from the shallow and deep waters of the GOM, 55-75% of the natural gas reserve additions from new field discoveries and new discoveries in old fields come from the GOM. With a strong outlook for domestic natural gas consumption, we expect this trend to continue in coming years. Much of the new natural gas capacity will likely come from deepwater.

Technology improvements and the relative maturity of the shallow reserves have accelerated decline rates to the point that wells are producing 48% of the reserves in the first year. With this fast production profile, about 78% of natural gas production in the GOM is from wells first placed into production in the last five years. Deepwater discoveries have not been enough to offset the drop in natural gas reserves – although they are expected to increase in importance in the next three years. As long as natural gas demand continues to grow, both the shallow and deepwater markets will need to sustain a high level of drilling to keep natural gas deliverability up.

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