The U.S. Gulf of Mexico has proved to be a bright spot for oilfield services companies over the last year or so, owing to resurgent drilling activity and an increase in capital spending in the region. Many large oilfield services firms have seen record quarterly revenues as well as improved profitability from the Gulf over the last year. In this note, we take a look at some of the factors that make us believe that the Gulf could prove the most important long-term growth driver in the U.S. Oil field services market.
Geopolitical Stability And Infrastructure Make The Gulf An Attractive Market: The U.S. Federal offshore region of the Gulf of Mexico accounts for around 23 % of total U.S. crude oil production and about 7% of total dry gas production. The region is very attractive to oil companies given its geopolitical stability, proximity to refineries as well as its strong pipeline and production infrastructure. Of late, investment in the Gulf has be fueled by higher oil prices and the rig count in the region has grown by roughly 23% over the last year alone to around 59 rigs. 
A More Stable Business When Compared To Unconventionals: According to the U.S. EIA, total U.S. oil production will rise by around 48% between 2012 and 2019, driven largely by production from shale and tight oil fields. Much of this production growth is currently being driven by strong drilling activity in the most profitable and productive fields. However, shale oil output is likely to decline post 2020 after companies have exhausted production from their most prospective acreage and could see costs rise as they move to less productive regions. The Gulf of Mexico, in contrast, is likely to provide more stability to U.S. oil production over the longer term considering the vast reserves and strong infrastructure in the region. Between 2014 and 2019, output from the Gulf is expected to rise by around 26% from around 1.5 million barrels of oil a day to over 1.9 million barrels of oil a day.  The economics of producing in the Gulf are also quite attractive, as deep-water operators in the region can produce more oil by drilling fewer wells as compared to onshore producers even after factoring in the additional safety expenses. 
Technologies Developed For Gulf Can Be Scaled Globally: Additionally, from a technology perspective, products and services developed and deployed by oilfield services companies in the Gulf can be scaled up to other offshore and deepwater markets across the world. In contrast, unconventionals are currently more specific to North America and it could take several years before other countries begin commercial scale production from their unconventional resources.
Long-Term Growth Potential Is Strong, Particularly In The Lower Tertiary: While most of the potential reserves from shale fields have already been identified, a large portion of the Gulf of Mexico still remains under tapped. The Gulf could hold a total of around 48 billion barrels of oil compared to the 13 billion barrels of reserves estimated for onshore as well as coastal oilfields, making the region a pivotal part of the U.S. Energy landscape.  Since much of these untapped resources are located in deep and ultra-deep waters, they will call for a high level of technological expertise as well as a higher service intensity translating into more activity for oilfield services companies.
The lower tertiary portion of the Gulf could also provide a tremendous growth opportunity going forward. The region is seen as the final frontier of the gulf and could unlock as much as 15 billion barrels of new oil reserves. Much of the reserves lie at great depths and this would call for advanced seismic tools for mapping the geologies of the region.  In the near term, companies like Halliburton and Baker Hughes could benefit from a shift from exploration to drilling activity while companies like Schlumberger stand to benefit from higher seismic activity over the long run as exploration moves to new frontiers.Notes: