We Pulled the Plug': As Oil Prices Plunge, Drillers in the Gulf of Mexico Shut Off Wells--2nd Update
22 April 2020 - 9:48PM
Dow Jones News
By Collin Eaton
Offshore oil drillers have begun shutting off wells in the U.S.
Gulf of Mexico following a collapse in crude prices due to the
coronavirus pandemic, and some executives worry that the region's
production may take years to fully recover.
A historic decline in energy demand that has led refiners to
make less fuel and caused storage tanks to fill up with crude is
pushing Gulf Coast producers to shut down high-cost wells in both
shallow and deep federal waters. The offshore oil sector last year
accounted for about 15% of U.S. production, or nearly two million
barrels a day, a record level.
The Gulf drillers' response to the crisis is expected to have a
longer-lasting regional impact than the pullback in onshore plays
like the Permian Basin of West Texas and New Mexico. Offshore
shut-ins and other cost reductions are among the factors pressuring
companies such as Schlumberger Ltd., Halliburton Co. and Baker
Hughes Co. to lay off the oil-field-service workers that they
provide to producers on a contract basis.
While offshore companies are accustomed to turning off wells
temporarily during hurricanes and other extreme weather, shale oil
production is known for shorter cycles from drilling to initial
extraction.
Offshore producers pay comparatively high costs to produce and
transport crude oil to onshore refineries and storage facilities.
They typically offset those costs by collecting premium prices for
barrels delivered into Gulf Coast trading hubs in Texas and
Louisiana, supported by high demand from U.S. refiners.
Richard Kirkland, chief executive of shallow-water Gulf producer
Cantium LLC, ordered his company at around 1 p.m. Monday to shut in
all production as U.S. prices went negative. By 6 a.m. Tuesday,
almost all of it was shut.
"We pulled the plug," he said. Cantium's fields, which were
producing 20,000 barrels a day, will be shut for at least two
months, possibly four. Gulf Coast refiners told Mr. Kirkland they
would substitute Gulf crudes with Saudi barrels from two tankers
sitting offshore.
"This could very well be the peak for years," Mr. Kirkland said.
"We've got to survive with our hedge money and cash in the bank.
We're not getting much help from anybody."
Gulf operator Fieldwood Energy LLC decided to immediately shut
in the vast majority of its production of 100,000 barrels a day
after oil plunged into negative territory this week, Chief
Executive Matt McCarroll said.
"Storage is full. Refineries are full. They don't want the oil,"
Mr. McCarroll said.
Offshore drillers and allies including Sens. John Kennedy and
Bill Cassidy of Louisiana have asked the Trump administration to
waive royalty payments for oil production in the Gulf for a year.
But so far, the administration has been reluctant to issue any
blanket royalty waiver for producers. On Tuesday, President Trump
said on Twitter that he had directed his administration to look at
aiding U.S. oil-and-gas companies, but details of the plan were
unclear.
The Interior Department didn't respond to a request for comment
Tuesday.
In an interview, Mr. Cassidy said the department has indicated
it may not have the legal authority to provide blanket royalty
relief to offshore producers. But he said Secretary David Bernhardt
has assured him that companies applying for royalty relief on
individual offshore leases would be guided through the regulatory
processes as quickly as possible. "We have to make allowances to
protect jobs," Mr. Cassidy said.
Mr. Kennedy in a statement thanked the department for its
efforts. "We're desperate to get our oil and gas workers back on
the rigs, and royalty relief is one of the smartest, most strategic
ways we can do that."
Major oil companies such as BP PLC and Exxon Mobil Corp. held
about 54% of deep-water leases in the Gulf and produced about 89%
of the region's crude in 2017. Smaller companies held 95% of the
leases in shallow waters, and produced 11% of the region's crude,
according to a November study by the Bureau of Safety and
Environmental Enforcement.
In the previous downturn about five years ago, Gulf operators
worried about storage and a global oversupply of crude, and though
drilling slowed, few ever shut in production. But the industry has
never run up against storage limitations like those that caused
prices to crater this week, executives said.
Older production platforms are at risk of being shut down and
removed, and if there is no regulatory relief, a lot of oil and gas
buried under the ocean floor will remain undiscovered, said Tim
Duncan, chief executive of offshore producer Talos Energy Inc. "In
offshore, we don't shut in fields, we shutter them. You begin the
process of leaving them forever," he said.
Talos, which expects to produce up to 67,100 barrels of oil
equivalent a day this year, said last month it would cut capital
spending about 34% from 2019.
While oil hedges have protected much of the company's output
from the volatility, Mr. Duncan acknowledged current prices have
given him pause.
"There's an oil price where you always consider the option of
shutting in, and we seem to be staring at it," he said.
Write to Collin Eaton at collin.eaton@wsj.com
(END) Dow Jones Newswires
April 22, 2020 15:33 ET (19:33 GMT)
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