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Going Deep in Shallow Water

Soaring oil prices have sparked a boom in the Gulf of Mexico. Rig-rental rates are skyrocketing, employees are in short supply and property prices are climbing.

Yet one part of the gulf has missed the boom: the shallow, coastal waters.

Big oil companies, lured by the promise of larger reserves and easier drilling, are fleeing these areas and moving onshore and out to deeper waters. The gulf's shallow waters have fallen out of favor because of their aging fields, declining production and annual hurricane risk. Lofty oil prices have made drilling in deep water and the continental U.S. more lucrative and offset the higher expenses of drilling in unconventional areas.

That's spawned a land rush among small independent drillers with an appetite for risk. Over the past year, the pace of big operators leaving the gulf's shelf, where water depths are 1,000 feet or shallower, has surged along with energy prices. And that's meant more deals for small companies eager to bet big.

Over the past two years, 13 companies have cast off their shallow-water assets, nearly triple the number in deep water. In April, Noble Energy (NBL) announced it was selling almost all of its shallow-water fields to privately held Coldren Resources for $625 million. BP (BP) shed its remaining fields on the shelf for $1.3 billion in cash to Apache Energy (APA), and Pogo Producing (PPP) sold a 50% stake to Mitsui (MITSY) for $500 million.

Earlier this year, Kerr-McGee (KMG) and Houston Exploration (THX) each dumped their properties for a total of $2.1 billion to W&T Offshore and Merit Energy, respectively.

To be sure, the exodus has been partly inspired by the extensive damage oil companies suffered after hurricanes hit 113 offshore platforms and 457 pipelines last fall, shutting down much of the gulf's petroleum industry. Millions of dollars in damages boosted insurance rates and pressured oil companies to reconsider their strategy in the gulf. Well over a month after the start of the hurricane season, 12% of the area's daily oil production and 9% of its gas output remains offline.

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