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

The landscape of U.S. oil production is undergoing a significant transformation as the focus shifts from the shale industry to offshore drilling in the Gulf of Mexico. This shift is driven by technological advancements, the maturation of shale resources, and a supportive federal government. The Energy Information Administration (EIA) has projected that oil output from Gulf fields will increase from the current 1.8 million barrels per day to 2.4 million barrels per day by 2027.

Both the EIA and the Bureau of Ocean Energy Management have cited several factors contributing to this change. Federal support through streamlined permitting processes, enhanced technology that improves drilling efficiency, and a growing appetite for investment in offshore projects are all playing crucial roles. Notably, BP announced plans to invest $5 billion in its Tiber-Guadalupe project, which aims to extract approximately 350 million barrels of crude oil. This project is expected to add 80,000 barrels per day to BP’s total output in the U.S., which the company aims to boost to over 1 million barrels per day.

In addition to BP’s initiatives, Talos Energy recently made headlines with its significant discovery in the Gulf, described by Wood Mackenzie analysts as the most impactful find since Shell’s Whale discovery in 2017. The Daenerys discovery has the potential to produce an estimated 65,000 barrels per day at peak production, and industry experts anticipate further discoveries in the region. Talos Energy’s Chief Executive, Paul Goodfellow, expressed confidence in offshore production’s increasing role in meeting global energy demands, stating, “Questions are starting to arise about the continued long-term economic viability of onshore basins.”

Historically, shale has been favored for its rapid production capabilities. Shale wells can start producing oil within months, while offshore projects typically require years of investment and development. However, this quick production has led to faster depletion rates in shale wells. As prime drilling locations become scarce, shale producers face rising costs and declining well productivity, complicating growth plans. An executive from the Dallas Federal Reserve noted, “We can make money at today’s oil prices. But with costs climbing and politics in play, we’d rather pay dividends than take big risks.”

In contrast, offshore drilling, while initially requiring significant upfront costs, has become more viable due to advancements in drilling technology. These innovations allow companies to access deeper waters and previously unreachable reserves. As a result, the breakeven point for offshore operations could drop significantly. Goodfellow highlighted that Talos’s offshore projects would remain economically feasible even if international oil prices fell to $35 per barrel, with breakeven costs potentially approaching $20 per barrel. In comparison, the average breakeven for onshore production is around $48 per barrel.

The EIA anticipates that Gulf oil production will rise to 1.89 million barrels per day in 2023 and reach 1.96 million barrels per day by 2026. In contrast, onshore production is projected to grow by only 190,000 barrels per day, excluding Alaska, marking the slowest growth rate since 2010, aside from the pandemic years. Analysts from Energy Aspects suggest that offshore production could fully offset declines in onshore output, provided that favorable federal policies remain in effect.

The previous administration’s focus on boosting domestic energy production has facilitated offshore growth by easing regulations, thereby enhancing productivity. A potential shift in control to the Democratic Party could alter the landscape for offshore oil dramatically, leading to increased restrictions and impacting future investments.

As U.S. oil production evolves, the transition from shale to offshore drilling presents both opportunities and challenges. The industry’s adaptability and the effectiveness of federal policies will play critical roles in shaping the future of oil production in the nation.