Despite plunging oil prices, Gulf on brink of boom

Rick Jervis | USA TODAY

Show Caption Hide Caption Gulf of Mexico oil business is booming Crude prices continue to free-fall, and some oil companies talk about scaling back operations and job cuts. But in the Gulf of Mexico, business is booming. Chett Chiasson is director of the Greater Lafourche Port Commission on the oil boom.

PORT FOURCHON, La. – Whoever is warning that slumping crude prices will curb oil production hasn't told the tenants of this bustling oil port.

Cranes line two enormous slips, expanding capacity and building more facilities. Louisiana-based Bollinger Shipyards is constructing four massive dry docks able to service 300-plus-foot vessels. Workers drive pilings into the ground for what will be the expanded site of Schlumberger, an oil-and-gas technology supplier.

All this activity will soon cater to huge floating facilities in the deepest waters of the Gulf of Mexico as they drill for and produce crude and other products.

"It's an unprecedented time," Port Director Chett Chiasson said recently as he drove past the construction. "This is the busiest it's ever been."

Even as crude's rampant price plunge rattles the industry, the Gulf of Mexico is on the brink of an unprecedented oil boom. Nearly five years after the Deepwater Horizon disaster briefly paralyzed gulf drilling, analysts predict deepwater oil production is headed into one of the biggest growth spurts in history. Production is likely to reach a peak of 1.5 million barrels of crude a day by 2016, surpassing the previous record set in 2009.

In 2015, production will jump 21% from 2014 levels and grow even more in 2016 – adding to America's already bulging oil production, said Imran Khan, a deepwater Gulf of Mexico analyst at energy consultants Wood Mackenzie. The number of permits for deepwater drilling increased from 14 in 2010 and 274 in 2011 to 603 in 2014, according to the Bureau of Safety and Environmental Enforcement, which oversees the drilling.

All this while crude prices continue to free-fall as global supply outstrips demand. Western Texas Intermediate, a major benchmark, dropped to $48 a barrel in trading Tuesday, a 50% drop from last summer and its lowest mark in five years. The plunge in prices is good news for consumers – who enjoy an average of $2.20 a gallon of regular gas in the USA – but it weighs heavily on markets and some energy stocks. Monday, the Dow Jones industrial average took a 331-point plunge, the blue-chip stock gauge's worst one-day decline in three months.

Some Texas shale producers have announced they're scaling back operations, and energy giant BP plans to accelerate job cuts.

Unlike shale production in places such as South Texas and North Dakota, which rely heavily on steady crude prices to finance activity, deepwater drilling and production are long-term, multimillion-dollar projects that take several years to come online and aren't as affected by fluctuating markets, Khan said.

"There's no stopping those," Khan said of the deepwater projects. "Once you start spending all that money, it's hard to stop in the middle."

At the center of the deepwater surge is Chevron's $7.5 billion production platform – the largest of its kind in the Gulf of Mexico – which started harvesting oil this month from the Jack/St. Malo fields about 280 miles south of New Orleans in 7,000 feet of water. The platform has the capacity to produce 170,000 barrels of crude and 42.5 million cubic feet of natural gas each day and be operable for the next 30 years.

"For the deepwater business, you really have to take a long-term view," said Steve Thurston, vice president for deepwater exploration and projects. "Our investments occur over multiple decades."

The renewed Gulf activity has sparked questions as to whether the industry is any safer after the Deepwater Horizon disaster in 2010. In that incident, a drilling rig leased by BP exploded, killing 11 workers and unleashing millions of barrels of crude into the Gulf. It was the worst marine disaster in U.S. history and triggered ecological and economic effects still felt today. The event led to a temporary moratorium on Gulf drilling and a slew of regulatory requirements.

For starters, the federal government requires energy companies operating in the Gulf to show they have the capacity to plug deepwater spills. Oil companies hire marine spill specialists skilled in capping seafloor oil gushers, such as the one that took 87 days to plug during the Deepwater Horizon incident.

The number of inspectors regulating wells in the Gulf has climbed from 53 before the Deepwater Horizon incident to 99 today, according to the Bureau of Safety and Environmental Enforcement.

Those inspectors look after more than 2,400 production platforms, drilling rigs and other facilities in the Gulf – ratios that feel woefully uneven to environmentalists.

"They've taken some steps," said Athan Manuel, the Sierra Club's offshore drilling expert. "But unless they hire enough inspectors to go out and make inspections, you could see a repeat of the Deepwater Horizon."

Still, deepwater drilling continues.

At Port Fourchon, which services 90% of the rigs operating in the Gulf of Mexico, officials have seen the port's revenue grow exponentially the past few years. In 2010, when the Gulf was crippled by the Deepwater Horizon spill, the port lost $3 million. This year, it made $24 million, Chiasson said. "The sheer amount of investment that has taken place the last few years – and what's planned for 2015 and 2016 – is really unbelievable," he said.

One of the port's tenants is LLOG, a Louisiana-based oil-and-gas producer that focuses on deepwater drilling. In the coming months, it will bring online a $2 billion project that will harvest 15 deepwater wells with the capacity of producing 80,000 barrels a day, said Rick Fowler, vice president of deepwater projects.

Investment on the project was sizable, but its "break-even point" – the cost crude would have to reach before the company scales back production – is low, less than $20 a barrel, Fowler said. More than 95% of the company's upcoming projects are in deepwater, he said.

"We continue to get better at exploring for oil and gas," Fowler said. "That trend will continue."