Regional resource depletion and industry activity: The case of oil and gas in the Gulf of Mexico

Stable and declining oil and gas prices have changed the industry's price expectations and, along with depletion of promising exploration prospects, has resulted in reduced exploration. Even with intensive additional exploration, production in most U.S. areas is expected to decline. What does this imply for the drilling and petroleum industry suppliers in particular regions? How should planners in government and the private sector project and incorporate the consequences of these changes in their strategies? This paper answers these questions for the industry operating in the offshore Gulf of Mexico. Future oil and gas production, as well as demand for offshore drilling and production facilities, are shown to depend on the size distribution of undiscovered fields, their associated production costs, and oil and gas prices. Declining well productivity is a consequence of development of progressively smaller fields so that long-run drilling demand should not decline in proportion to the expected production decline. Calculations show a substantial payoff to the drilling industry, in terms of potential demand increases, if it can develop and implement cost reducing technologies. Implications of these results for other offshore producing areas such as the North Sea are also discussed.