The British petroleum giant is back in the Gulf of Mexico as the US gets stuck between the black stuff and going green
A few years before going down in flames and infamy, the Deepwater Horizon semi-submersible oil rig made a sensational discovery.
In August 2006, the craft — which was on a mission for the UK petroleum giant BP Plc — was drilling in the bottom of the Gulf of Mexico when it found an enormous accumulation of oil buried so deep that no one had looked there before.
That new oilfield, named Kaskida, was both stunning and unattractive. It contained billions of dollars worth of petroleum, but the technology needed to develop it didn’t exist. The oil wasn’t just far beneath the sea. It was under a thick layer of salt and under such high pressure and temperature that it would gush out into the seabed if tapped. Nothing at the time could have contained it.
Risk was everywhere. Just four years after finding Kaskida, the Deepwater Horizon rig exploded while drilling another well at the Macondo site. The resulting fire killed 11 workers. The largest oil spill in US history would eventually go Hollywood as a blockbuster disaster movie and cost BP more than $65 billion in clean-up cost and penalties.
In the wake of the catastrophe, Kaskida was all but forgotten. The oil spill essentially closed off the gulf to advanced exploration. Some companies continued to open oilfields, but without innovative engineering. The result was stagnation. Today, the part of the gulf under US jurisdiction produces less oil than it did in the months before the 2010 spill — a sharp contrast with the rest of America where output has boomed thanks to the advent of shale. No one wanted to risk the potentially litigious challenges that came with pioneer work in the gulf, certainly not BP.
Until now. “It’s time for BP to open that basin up again after a 15-year hiatus,” Murray Auchincloss, the company’s new chief executive, told investors recently. “We’re really excited about it.” If all goes as planned, BP will greenlight the Kaskida project in the second half of this year. Two other similar oilfields, called Tiber and Gila, are likely to follow. When approved, Kaskida will be BP’s first completely new oilfield development in the Gulf of Mexico since the spill.
Gulf Oil Production Stagnant So Far
Crude oil production in the US Gulf of Mexico remains today roughly at the same level as it was in 2010 when the Deepwater Horizon exploded
The region is about to boom again. Other oil giants are already leapfrogging BP in the geological strata of the Gulf of Mexico known as the Paleogene. Chevron Corp., Shell Plc and a company backed by private equity giant Blackstone Inc. are all racing to develop their own oilfields there. “The Gulf of Mexico is the gift that keeps on giving,” Mike Wirth, the chief executive of Chevron told me in an interview. The basin may not be as celebrated as the Permian and Bakken shale regions. But it’s hugely important: The area pumps nearly 2 million barrels a day, or about 10% of the country’s total. If the Gulf of Mexico were a state, it would rank second in US production, behind only Texas but ahead of oil patch champions such as New Mexico, North Dakota, Oklahoma and Alaska.
In a few years, the new Paleogene oilfields may have the Gulf of Mexico pumping close to 2.3 million barrels a day — about 500,000 barrels more than currently. If all goes to plan, petroleum will start flowing from the first of those developments by the end of this year, with more coming in 2025. But the gamble is highest for BP because of the enormity of the Kaskida field as well as its disastrous history in the gulf. If the company screws up again, the promise of the Gulf of Mexico might well be over.
The timing of the potential bonanza is a paradox. It comes as the White House is telling Americans the country needs to transition away from fossil fuels to save the planet. It’ll be hard to break that habit if the US is swimming in oil. In fact, the country produces more oil than it consumes. It’s a politically incorrect embarrassment of riches. As long as this conundrum exists, I don’t see how the country will ever fully embrace the green energy transition. The country’s geological resources are so rich; its engineering prowess so unlimited; and its capitalist system so determined to make money that it can’t help but drill and drill and drill.
Joe Biden may have green credentials to maintain but he’s presiding over American oil production that’s thriving from Alaska to Texas and now the US oilfields in the Gulf of Mexico — despite the complaints about the administration from the petroleum industry. And Biden will find it hard to relinquish the black stuff. That’s because it strengthens Washington’s hand in the geopolitical energy game it plays with OPEC+, which includes Russia. It’s also the American ace in the hole in the contest with an ever greener China, which is still heavily dependent on imported petroleum. In the quest to stay the No. 1 superpower, the US will be loathe to go green.
That’s why the new spigots in the gulf are so important to America. And so, even as the climate warms, the most pressing issue isn’t to slow the extraction of Paleogene petroleum, but guarantee it’s done safely.
The Right Technology at the Right Time
The story really begins more than two decades ago, soon after American troops toppled Saddam Hussein in Iraq and George W. Bush declared “Mission Accomplished.” The US government opened the bids for leases over 21.7 million acres off the coast of Texas and Louisiana. The auction called “OCS 187” — short for “Outer Continental Shelf Lease Sale 187” — included an area about 400 kilometres south-east of Houston known as block 292, covering an underwater gorge called the Keathley Canyon. BP won the bidding for that lot.
BP Set to Drill Deeper 24 Years After Macondo Disaster
Kaskida is the largest of the Paleogene oilfields discovered in the Gulf of Mexico
Three years later, BP drilled an exploratory well using the Deepwater Horizon and found the Kaskida oilfield. The company announced the discovery in a short statement on Aug. 31, 2006. As the well, already under 5,860 feet of water, dug deeper — a total depth of approximately 32,500 feet under the sea’s surface — it encountered about 800 feet of hydrocarbon-bearing sand.
BP was keeping mum but it knew it was on to something: Kaskida was the first ultra-high-pressure reservoir in the US section of the Gulf of Mexico. Over time, other companies discovered similar oilfields. Chevron found Anchor; Shell discovered Sparta; Beacon Offshore Energy LLC, a company backed by Blackstone, located Shenandoah. BP itself would go on finding others.
The Macondo disaster may have put a stop to BP’s ambitions to develop these sites but it never derailed them. There was just so much potential. In 2012, the company said an additional 10-20 billion barrels of reserves might be tapped that were “inaccessible with current equipment.” Indeed, two years after the spill, when the Obama administration allowed the British company to drill in the gulf again, the very first permit it applied for was Kaskida. BP also quietly bought out partners to control 100% of the field. That’s a rare practice in an industry where companies typically like to share the risks of developing a gulf project.
The technical challenges to develop the fields were mind-blowing. The oil that flows under the seabed is scorching — as high as 400 Fahrenheit, which is more than enough to roast a turkey. Even a dozen years ago, equipment could only handle temperatures up to 250 degrees. That wasn’t all. If the companies were to develop the new oilfields, they would have to use brute force to extract it from the rock. That’s what we’d call “fracking” — blasting the oilfield with water, sand and chemicals to free hydrocarbon molecules from the otherwise non-porous rock. And that means adapting the fracking techniques used on dry land to unlock shale oil and gas, but applying it to geological strata under the sea. Baker Hughes Co., one of the world’s largest oil services companies, calls it “DeepFrac.”
The biggest problem was the immense pressure. The oil comes out with geyser-like force: 20,000 pounds per square inch, akin to the weight of a London double-decker bus laid on a postage stamp. To handle such extremes, the industry has had to design tools that didn’t exist two decades ago, starting with blowout preventers (BOP) — which seal a well if anything goes wrong. The faulty BOP of the Macondo field could only deal with 15,000 pounds per square inch. Oil executives, petroleum engineers, and Wall Street investors have since been talking about the “20K” challenge.
“If you can crack the 20K, which we believe now the industry can, that opens up the next frontier of opportunities,” Shell CEO Wael Sawan said in an interview. “If I go back to the history of the Gulf of Mexico, it was only in the 1950s and 1960s when the industry drilled the first well, and every single chapter has been written on the next wave. And so I do think this is a frontier that is going to potentially play out for the next five to 10 years in an exciting way.”
With investors and engineers throwing themselves at the problem, solutions emerged. Cameron, a subsidiary of oil services giant Schlumberger NV, built blowout preventers able to handle ultra-high pressure. In 2022, Transocean Ltd., the world’s largest operator of drillships including the ill-fated Deepwater Horizon, launched the first of its eighth-generation vessels, specifically to drill 20K wells. Its Deepwater Atlas was followed last year by the Deepwater Titan. With a displacement of about 90,000 long tons — slightly less than a US aircraft carrier of the Nimitz class — the massive drillships can handle all the superlatives: ultra deep waters, ultra high pressure and ultra high temperatures.
Drillships Can Now Bore 8 Miles Into the Earth’s Crust
At that depth, the temperature generated is 450ºF and the pressure is equivalent to two London double-decker buses over a single stamp
Soon enough, Chevron, Beacon Offshore and Shell announced the final investment decisions on their first Paleogene developments, spending billions of dollars with the aim of extracting their first barrels in late 2024 to early 2028. Now, it’s BP’s turn. The British oil company expects to approve the Kaskida development before the end of the year, with the aim of drilling six production wells. Based on what other companies are spending on their own Paleogene oilfields, the project should cost BP north of $5 billion, and perhaps double that.
Drilling into the Paleogene is relatively easy compared to actually extracting the oil. Fracking is not only difficult but costly. Even though the process isn’t anywhere on the scale of the shale basins of Texas and North Dakota, it’s nonetheless far more extensive than anything attempted in an offshore field. That comes at a price: double that of other typical developments in the Gulf of Mexico, when measured on a per-barrel of reserves basis. It’s about $15 a barrel compared with between $6 and $8 for non-fracked offshore production.
The Power of the American Pump
While BP and its rivals navigate the new frontier in the Gulf of Mexico, they are being closely watched by another oleaginous party: the OPEC+ cartel. For the last decade or so, Saudi Arabia, Russia and their allies were overshadowed as the American shale revolution turned the energy market upside down, transforming the US into their largest rival instead of their biggest client. To keep oil prices higher, OPEC+ was forced into making painful production cuts.
More American oil is really bad news for the cartel. This time, the output at stake — several hundred thousands barrels a day, rather than millions of barrels a day — isn’t large enough to move the needle of the global supply and demand balance, as shale did. Still, every barrel counts, and certainly extra output from the Gulf of Mexico will add to the current oversupply.
Even more importantly, the development of Kaskida and similar oilfields shows that rapid technological advances will continue to open up hydrocarbon reservoirs that were previously unreachable, offering the world a source of crude beyond the control of the cartel. Ironically, that search for new oilfields is being helped by Saudi Arabia itself as it keeps its oil prices close to the $100-a-barrel level. That’s a massive financial incentive for enterprising capitalists to resolve any technical challenges to producing extra non-OPEC barrels. Today, technology has reopened the Gulf of Mexico. Tomorrow, it may be applied to other difficult-to-crack deepwater oilfields, perhaps off the coast of Suriname in Latin America, or Namibia in southern Africa.
A Fraction of Gulf Rigs Are Now Active
With better technology and more efficient production, the number of crude oil rigs operating in the Gulf of Mexico have declined to 18 from 46 in 1999
Output from the US Gulf of Mexico is now about 1.8 million barrels a day, about the same as it was at the time of the Macondo oil spill. The new Paleogene reservoirs would likely boost output to an all-time high of about 2.2 million barrels a day, according to Mfon Usoro, principal analyst for the US Gulf of Mexico at research firm Wood Mackenzie Ltd. in Houston. “It’s a defining moment for the region,” she says. “There’s significant upside.” It’s not just about the oil market and the cost of energy, it’s about raw geopolitical power. The more oil that the US pumps — whether in Texas, North Dakota, Alaska or the Gulf of Mexico — the more Washington can use the petroleum lever in global diplomacy. The fact that the US is the world’s largest oil producer is what has allowed Washington to impose energy sanctions on nations ranging from Venezuela to Russia. Those sanctions — even if at times poorly enforced to keep oil prices lower — would have been unthinkable a decade ago.
Realpolitik is part of the game. But Biden is trying to have it both ways. He’s very aware that the country needs oil, and that the US Gulf of Mexico is one of the places where that oil can be extracted profitably. The US, therefore, cannot take a leadership role in lowering carbon dioxide emissions when the national interest is actually opposed to it. He should say that out loud. We either accept realities, or we change them. It’s hypocrisy to pretend otherwise.
So, Will This Be Goodbye to Green?
As a candidate four years ago, Biden promised to clip the wings of the oil industry, including its presence in the Gulf of Mexico. “No more drilling on federal lands, no more drilling, including offshore — no ability for the oil industry to continue to drill — period,” he said.
Yet, the US is as hooked on fossil fuels as any time before — and so it needs to keep on drilling. In 2006, when Bush said that “America is addicted to oil,” the country was consuming roughly 20.6 million barrels a day; in 2024, nearly two decades later and with more electric-vehicles than ever on the roads, it’s still consuming 20.3 million barrels a day. Facing stubbornly high oil demand, Biden himself has already broken his campaign promise, allowing new lease sales in offshore federal waters and greenlighting oilfields in Alaska. Granted, he has put some limits to future exploration, particularly in the Arctic, but under his watch, American oil production has risen to an all-time high, too.
What would bring about change? A hefty CO2 tax. But no one (including Europe) is prepared to do that.
For Washington, the development of Kaskida and similar oilfields presents an additional problem. Most other US oilfields — say, the Permian in Texas or the Bakken in North Dakota — are on private or state land. However, the waters of the Gulf of Mexico being developed by BP and other oil giants are under federal jurisdiction. Whoever is in the White House in 2025, will have a big say on how the region is exploited, and whether more permits are auctioned.
The priority should be safety. The Macondo oil spill exposed the weaknesses of the old federal regulatory regime in the Gulf of Mexico under the old US Mineral Management Service. Since 2011, the Bureau of Safety and Environmental Enforcement, part of the Department of the Interior, regulates the US offshore energy industry. Its job in the next few years will be to guarantee that nothing goes wrong with the high-pressure, high-temperature Paleogene oilfields. When there’s a lot at stake, less laissez-faire and more scrutiny is warranted.
BP, in particular, has a lot to prove. Its CEO may be excited about developing the Kaskida oilfield, but environmentalists, climate activists and left-leaning US lawmakers are unlikely to be enthusiastic about the prospect of the British oil major drilling a complex and challenging well in the Gulf of Mexico of all places. Everyone deserves a second chance, but US federal regulators must keep a close eye on the future of Kaskida and all other new Paleogene oil fields. BP should focus on convincing everyone that it’s up to the task, rather than simply trumpeting the riches that await beneath the bottom of the sea.
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