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 producers to shutter high-cost wells in both shallow and deep federal waters. The offshore oil sector accounted for about 15% of the nation's production, or nearly two million barrels a day last year, a record level.

Their response to the crisis is expected to have longer-lasting impacts on the region than the pullback in onshore plays like the Permian Basin of West Texas and New Mexico. Offshore shut-ins and other oil-company cost reductions are among the factors pressuring oil-field services companies such as Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. to cut jobs in recent days. Many offshore producers rely on service companies to provide contract workers.

While offshore companies are accustomed to turning off wells temporarily during hurricanes and other extreme weather, a longer-term disruption to their businesses may have more severe impact on future activity than shale drilling, known for shorter cycles from drilling to first oil.

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 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. His fields producing 20,000 barrels a day will be shut for at least two months, possibly four. Gulf Coast refiners told him 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 100,000 barrels a day of production 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 gulf oil production 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.

Mr. Kennedy said in a statement that Interior Secretary David Bernhardt "and his staff have been very helpful during this incredibly difficult time, and I'm grateful. 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 have 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.

Last month, Talos said it would cut capital spending about 34% from the prior year, and expected to produce up to 67,100 barrels of oil equivalent a day.

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 12:16 ET (16:16 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
Halliburton (NYSE:HAL)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Halliburton Charts.
Halliburton (NYSE:HAL)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Halliburton Charts.