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After a steep drop in oil production in the wake of the Deepwater Horizon disaster, the U.S. Gulf of Mexico is set for an energy boom.

Gulf oil flows will increase by nearly 28% by 2022 to 1.8 million barrels per day, according to consulting firm Bentek Energy. Output will be boosted by huge projects like Exxon Mobil Corp.’s XOM +1.05% Hadrian field 250 miles off the coast of Louisiana and Chevron Corp.’s CVX +1.07% nearby Jack and St. Malo projects.

The Gulf accounted for nearly a third of U.S. oil production as recently as 2009. But onshore oil production has surged as oil companies use new extraction techniques to tap dense shale formations in places like the Eagle Ford shale Texas and the Bakken shale North Dakota. The Gulf now accounts for just 20% of U.S. output, and that number is predicted to decline to 15% by 2022 despite the expected surge in Gulf production.

Oil found offshore generally sells for more than onshore crude. That is partly because Gulf oil is easier to transport to Europe and trades at the higher prices crude fetches there. The result is that oil companies are eager to gear up offshore production, despite the growing challenges of drilling in new areas and deeper water.

The resurgence in the Gulf belies warnings from the energy industry that tougher regulations would curtail exploration there following the 2010 explosion at BP BP.LN -0.34% PLC’s Macondo well. The blast killed 11 people on the Deepwater Horizon drilling rig and led to the worst offshore oil spill in U.S. history.

Today the industry says it is learning to live with stricter safety oversight and slower permit reviews. The tougher regulatory environment is palatable because of high global oil prices, which have remained above $90 a barrel for nearly two years.

“Bottom-line, the Gulf of Mexico is in considerably better shape than even the most ardent optimists envisioned following Macondo,” said Bill Herbert, a managing director with investment bank Simmons & Co.

Some major energy companies are increasing their commitments to the Gulf, including Royal Dutch Shell, RDSA -1.02% which earlier this year spent more than $403 million to lease several new areas there. “The importance of the Gulf continues to grow for Shell, with significant discoveries and major projects in the pipeline,” says Marvin Odom, president of Shell Oil Co.

BP, which is the area’s largest oil producer and is expected to remain so, agreed recently to sell $5.5 billion of assets to Plains Exploration & Production Co., PXP +1.88% while Brazilian oil giant Petroleo Brasileiro SA PBR +0.90% said this week that it may sell some of its Gulf projects.

But those moves reflect company-specific challenges rather than concerns over the Gulf, analysts say. Petrobras needs to focus on many projects back in Brazil.

BP, which will invest about $4 billion a year in the Gulf over the next decade, needs money to pay for the aftermath of the 2010 spill. It has six deep-water rigs at work in the Gulf and plans to add two more by year-end, a record for the company.

The Gulf benefits from the extensive infrastructure in place there, which makes development easier. It is the most developed offshore oil-and-gas region in the world, according to Tyler Priest, a University of Iowa history professor who focuses on the energy industry.

Beginning with just a handful of wells off the beaches and marshes of Texas and Louisiana in the 1950s, the Gulf now has more than 4,000 platforms pumping oil and gas from 35,000 wells through nearly 30,000 miles of pipelines.

Including natural gas as well as oil, production in federal waters reached a peak of almost 1.8 million barrels per day in 2009. But the 2010 Deepwater Horizon spill led to a six-month drilling moratorium as the government drafted new safety rules.

Oil and gas flows in 2010 were off just slightly from the 2009 peak, but dropped 18% in 2011 to 1.4 million barrels of oil equivalent. They are expected to bottom out this year at 1.3 million barrels.

Worst-case predictions for environmental damage didn’t materialize following the spill, though a number of continuing studies indicate there may be long-term impacts on the Gulf’s ecosystem. On Thursday, the National Oceanic and Atmospheric Administration reported that in 2011 the Gulf’s commercial seafood industry saw its highest volume of catches since 1999.

New regulations imposed after the oil spill spelled out specific standards for well design and construction, added new requirements for safety equipment and inspections, while requiring that drillers have quick access to a containment system similar to the one that ultimately stopped the Deepwater Horizon spill..

The new regulations also have slowed the pace at which energy companies receive federal permits. Exploration and development plans now take about 150 days compared with 54 days in the past, according to investment bank Tudor Pickering & Holt. Permits to drill specific wells now take about twice as long as before the disaster.

But the number of permits has risen sharply so far this year, to 105 as of August, versus 79 in all of 2011. “Today we see cooler heads and more pragmatic leadership with the regulators in Washington, and things are now working more smoothly in the Gulf, ” says James Noe, general counsel for drilling firm Hercules Offshore Inc. HERO -1.91%

The pipeline for future projects in the Gulf continues to grow. In June, 56 companies bid $1.7 billion for the rights to explore more than 2.4 million acres of the Gulf controlled by the federal government.

Success in these new areaswon’t come easily, according to Tudor Pickering. Much of the drilling will tap into a region called the Lower Tertiary, where completed projects so far have produced about one-third the daily rate of earlier deep-water fields and taken about 30% longer to drill.

Many energy experts predicted only the biggest companies could meet new regulatory and financial requirements to drill in the Gulf, but that hasn’t proved to be the case.

Houston Energy LP, a small independent firm, won five deep-water blocks in the most recent federal lease sale. “We went to the North Sea and other offshore areas to look into exploring, but when we came back we chose to dive right into the Gulf of Mexico,” said Ron Neal, Houston Energy’s CEO.

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Petrobras USA says production has begun at its Chinook oil field in the ultra-deep waters of the Gulf of Mexico.

The company says production started last week in the field using a specialized ship that processes and stores oil and natural gas in place of a production platform. The field is being worked by BW Pioneer, a type of ship known in the oil industry as a floating, production, storage and offloading vessel, or FPSO.

Petrobras relies on FPSOs extensively in Brazilian waters. This kind of oil-and-gas processing ship is used widely around the world for years but only now has made an entry into the Gulf.

The Chinook field is about 155 miles off the Louisiana coast. The field is owned by Petrobras and Total Exploration Production USA Inc.

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Plains Exploration & Production Co.’s $6 billion move into Gulf of Mexico oil fields marks its largest acquisition ever — a bid to boost the oil component of its energy output over lower-priced natural gas via techniques for wringing more barrels out of mature fields.

The hefty price tag to be paid by Plains Exploration & Production (US:PXP) in separate deals with BP PLC (US:BP) and Royal Dutch Shell (US:RDS.A) (US:RDS.B) outweighs the Houston energy firm’s current market capitalization of $5 billion, as it bets big on tapping into the riches of the Gulf.

To fund the deal, Plains has lined up $7 billion in debt commitments, with plans to channel its cash flow to reduce its debt starting by the end of 2013.

Shares of Plains fell 8% Monday as investors initially reacted to its heavier debt load going forward.

On the up side, Plains held out the possibility of increased oil output from the fields as well as exploration potential in nearby areas.

“Significant upside production potential exists in the currently producing reservoirs through numerous low-risk, high-margin drilling/recompletion and well workover opportunities,” Houston-based Plains said.

Plains will boost oil volumes to 89% of its total production in 2013, up from about 61% projected for 2012. Since oil is much more lucrative than natural gas, Plains will boost its cash flow considerably by adding more crude production.

All told, Plains sees up to $5 billion in cumulative excess cash flow between 2013 and 2016. The deals are expected to close by the end of December.

With financing from a group of banks led by J.P. Morgan Securities LLC, Plains will gain 67,000 barrels of oil-equivalent production a day in addition to potential increases that would accrue from oil-reservoir stimulation technology.

Analysts at Tudor Pickering Holt said they’re hoping to see more details on the financing of the acquisitions, but their initial take is that Plains may not have to sell more common stock to raise money to close the deal.

That would be good news for stockholders, who won’t see the value of their shares diluted by a big equity sale. Instead, the transaction stands to be “accomplished via additional debt, asset sales and free cash flow,” the Tudor Pickering analysts said.

In the biggest chunk of the deal, BP will get $5.5 billion from Plains for its interests in the Holstein, Marlin and Horn Mountain production platforms in Gulf waters located south of New Orleans.

A shifting Gulf focus for BP

For BP, the deal represents part of a divestment plan announced in the wake of its 2010 Macondo oil well blowout, which resulted in the death of 11 workers, the destruction of the Deepwater Horizon oil rig and the largest maritime oil spill in U.S. history. Meanwhile, Royal Dutch Shell will get $560 million for its 50% stake in Holstein.

The legal fight over the oil spill took a difficult turn for BP in recent days as the U.S. government leans toward pursing gross-negligence charges against the oil company.

Tudor Pickering analysts said BP got a good price for the oil fields — about $700 million more than they projected.

“A reduced and more focused exposure to the Gulf of Mexico is welcome for BP, we think, in the midst of recently-escalated federal pursuit of Macondo gross-negligence charges,” they wrote.

For its part, BP said the sale fits its strategy to focus on “giant fields and deepwater exploration.”

Taking aim at the oil-rich region, BP said it’ll bear down on four major operated production hubs and three non-operated deepwater production hubs.

“While these assets no longer fit our business strategy, the Gulf of Mexico remains a key part of BP’s global exploration and production portfolio and we intend to continue investing at least $4 billion there annually over the next decade,” said Bob Dudley, BP’s group chief executive, in a statement.

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Hurricane Isaac could have been worse at this hub for boats, rigs and manpower that serve most of the Gulf of Mexico’s oilfield.

The port shut down Monday as a mandatory evacuation was ordered in advance of the storm. Isaac dealt a direct hit to the port early Wednesday, but the facility reopened two days later, emerging with what officials describe as minor damage.

Electricity was still out Sunday, but Director Chett Chiasson said the docks, supply yards and other facilities buzzed with activity.

“Our biggest concern was the possibility of channel restrictions and damages to facilities where we would not be able to operate efficiently,” he said, “but that doesn’t seem to have happened.”

Getting the port running was key to allow Gulf oil production to continue, he said.

As Isaac hit, the Federal Bureau of Safety and Environmental Enforcement estimated that 509 of the 596 oil-production platforms and 50 of the 76 drilling rigs the Gulf had been evacuated. By Sunday, workers remain evacuated from 131 platforms, 22 percent, and 18 rigs, 23 percent. About 71 percent of Gulf oil production and 55 percent of natural-gas production remained halted Sunday.

Through the weekend, massive oceangoing vessels could be seen navigating the port’s channels as gulf oil production resumes.

The port serves as a staging area for half the drilling rigs in the Gulf and production of about 20 percent of the nation’s oil supply, Chiasson said. Supplies, equipment and rig infrastructure are typically brought into the port by truck along La. 1 then loaded onto towering vessels before being transported to the Gulf.

Wind damage was minimal, he said. About a dozen power poles were down this weekend, and work was being powered by generators.

Chiasson said he expects power to be restored sometime early this week. Entergy crews have been moving steadily but had not restored power 20 miles to the north in Golden Meadow as of midday Sunday.

The port did receive some damage from Isaac’s nearly 100 mph winds. Some offices had roof damage, the massive, airplane hanger-like structures where ships are loaded received mostly cosmetic damage, Chiasson said.

But advocates for more federal money to upgrade La. 1, the only land route to and from the port, say Isaac — as hurricanes past — renews concern about the crippling effects a lengthy closure of the road could cause to the nation’s energy supply and economy.

La. 1 Coalition Executive Director Henri Boulet noted that 7.1-mile section of highway between Golden Meadow and Leeville was closed 78 hours as Isaac’s storm surge overtopped it. Last year, a 61-hour closure due to flooding from Tropical Storm Lee also shut down traffic to and from the port.

Sea-level rise, coastal erosion and storms have threatened the road for decades, and one section south of the port remains closed to traffic at night while workers repair Isaac’s damage.

Boulet cited a July 2011 study by the U.S. Department of Homeland Security that concludes a 90-day closure of Port Fourchon because of damage to La. 1 could result in a $7.8 billion economic loss nationwide. Domestic oil-and-gas production would also be significantly impacted for 10 years, he said.

“What other 7.1-mile stretch of highway in the nation poses a $7.8 billion vulnerability to national gross domestic product if it is washed out?” Boulet said in a news release. “None.”

Boulet said Isaac again illustrates why Congress should spend the estimated $320 to upgrade the stretch of road to an elevated expressway, money the La. 1 Coalition and others have sought for years.

Chiasson said the port area saw about 7 feet in storm surge, but because the facility sits at a higher elevation than surrounding areas, it sustained only minimal water damage.

The port reinforced many of its aging facilities following 2008’s hurricanes Gustav and Ike, which paid off as workers were able to reopen facilities shortly after Isaac passed.

The port’s northern expansion project received no damage, while the local Caminada Headlands area saw a loss of about 30 yards of beach, he said.

“It’s great to be back open,” he said. “Our mission, when these storms come in, is always to be closed for as short an amount of time as possible. We strive to do that and were very fortunate.”

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Drilling activity in the Gulf of Mexico is nearing levels not seen since the massive oil spill in 2010, though stiffer regulations have pushed up well costs by about 10 percent, a ConocoPhillips executive said at an industry event Wednesday.

Executive Vice President Matt Fox said time spent testing blowout preventers, the emergency equipment used for out-of-control wells, to meet new government mandates is the primary cause of higher well costs.

“The industry as a whole is experiencing a lot of flat time on BOP testing,” said Fox, the company’s executive vice president of exploration and production. “It’s a teething problem as we get through some of the newer regulations. It’s a phase.”

Fox spoke Wednesday at the North America Prospect Expo, or NAPE, at the George Brown Convention Center in downtown Houston. The seasonal event serves as a marketplace for traders of oil and natural gas prospects.

ConocoPhillips recently became the nation’s largest independent oil and natural gas exploration and production company after its refining arm spun off into a separate company, Phillips 66.

Fox said the new company structure is driving its investments in new directions, including greater emphasis on the deepwater Gulf of Mexico.

“We were criticized for having a very weak deepwater position. And the criticism was valid, frankly,” Fox said.

ConocoPhillips has bought into more than 1 million acres in the deep-water Gulf of Mexico over the last three years, to become the sixth largest acreage holder there. The company has interest in three wells being drilled there and plans to drill five to eight more annually for at least the next two years, Fox said.

The company has a goal of 3 percent to 5 percent production growth annually. Through 2016, ConocoPhillips plans to add to its daily production about 90,000 barrels from major projects in the North Sea, 80,000 barrels from deep-water Malaysia and 80,000  barrels from oil sands, Fox said.

“This is a new E&P game,” Fox said. “It changes the way we have to think about our business.”

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The U.S. Bureau of Safety and Environmental Enforcement on Thursday gave teeth to its policy that its inspectors can issue citations to oilfield service contractors operating offshore as well as the energy companies that control offshore leases.

The agency affirmed in an interim policy document that contractors as well as the oil companies they work for can be issued “incidents of non-compliance” for violating the rules. The factors inspectors must consider are the seriousness of the violation, the harm that resulted, and what control, if any, the contractor had over the situation.

Prior to the 2010 Deepwater Horizon disaster, in which a deepwater well operated by BP PLC (BP, BP.LN) experienced a catastrophic explosion that killed 11 and unleashed a giant oil spill, regulators took a top-down approach to their oversight of offshore drilling, with well operators being held responsible for any violations.

But in 2011, the BSEE issued incidents of noncompliance not just to BP, the operator and lease holder of the ill-fated Macondo well, but also to rig owner Transocean Ltd (RIG) and cementing contractor Halliburton (HAL) for separate violations the agency found contributed to the explosion.

The document released Thursday indicates this will continue to be the agency’s practice. Leaseholders and well operators will continue to be the primary focus of enforcement actions, the BSEE document states, but contractors can be cited “in appropriate circumstances…for serious violations of BSEE regulations.”

Brian Petty, the International Association of Drilling Contractors’ senior vice president for government affairs, said the group is “very nervous” about the impact the agency’s policy could have on contractors’ insurance rates.

He said contracts allow well operators to collect damages from contractors if the latter are found to have been negligent. A government agency stepping into the process upends the system currently in place, and could cause a spike in the insurance rates contractors have to pay, Mr. Petty said.

Analysts say drilling activity in the Gulf of Mexico has returned almost to pre-Deepwater Horizon levels. But Mr. Petty said if the BSEE is aggressive and “cavalier” about enforcement actions against contractors, some might decide it isn’t worth it to drill there.

“At the very least it will be more expensive,” he said, adding that in some cases the additional costs that come with exposure to civil penalties could be a “deal-killer” for drilling contractors.

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The Obama administration ignored the wishes of coastal leaders when assembling a plan for offshore drilling near their shores, says a group of Republican governors from Texas, Louisiana and other states.

In a letter to President Barack Obama late Wednesday and obtained exclusively by Hearst Newspapers, the pro-drilling governors say they are “concerned about the lack of communication from the federal government on critical matters that affect our coastal development.”

In particular, the group complains that the Interior Department did not consult properly with coastal states on its a plan for selling offshore oil and gas drilling leases from 2012-2017 before finalizing the plan in June.

The five-year offshore lease plan focuses on allowing oil and gas development in already-explored areas of the Gulf of Mexico and the Arctic, while ruling out lease sales in Atlantic waters, despite pressure from some Virginia officials eager for exploration off the commonwealth’s shores.

The administration’s program sets up 12 Gulf of Mexico lease sales as well as the possibility of three auctions for rights to drill in waters near Alaska.

The nine governors who wrote Obama on Wednesday under the umbrella of the year-old Outer Continental Shelf Governors Coalition described that drilling plan as anemic.

“The administration fails to expand adequate access to resource-abundant areas in the Arctic and fails to establish leasing in the Mid- and South-Atlantic,” the group said. And Arctic lease sales “may never occur,” the governors said, because the government is requiring further study of that area.

Under the administration’s targeted-leasing approach to Arctic and Alaskan waters, federal regulators will decide what acreage to put on the auction block in a bid to avoid harming wildlife and the indigenous communities that depend on whaling and fishing for food.

The governors also criticized the administration for closing the door to eventually allowing more than 12 auctions in the Gulf of Mexico, even though several sales were delayed after the 2010 oil spill. Gulf Coast states claim a share of federal royalty revenue for oil and gas produced near their shores.

Signers were Govs. Rick Perry of Texas, Sean Parnell of Alaska, Bobby Jindal of Louisiana, Phil Bryant of Mississippi, Robert Bentley of Alabama, Nikki Haley of South Carolina, and Robert McDonnell of Virginia.

Interior Department spokeswoman Kate Kelly rejected the governors’ complaint about poor consultation.

“In developing the five-year program, Interior conducted outreach and sought input from all 50 states, tribes and other stakeholders,” Kelly said. “Through multiple venues, including formal comment periods and public hearings, states provided feedback that helped inform the final plan.”

Tommy Beaudreau, the head of the Bureau of Ocean Energy Management that assembled the leasing program, told Congress in May that his agency conducted public hearings in Gulf Coast states, Washington, and across Alaska’s North Slope and considered more than 280,000 public comments in crafting the final sale schedule.

Federal officials first began seeking public input on the five-year program with a formal request for information in August 2008.

Beaudreau also has defended the administration’s targeted-leasing plan for Arctic and Alaskan waters as an approach that takes local communities’ needs — as well as other factors — into account.

The Outer Continental Shelf Lands Act, which governs oil and gas leasing in federal waters, requires the government to consult with coastal states and localities while developing leasing programs.

The coastal governors coalition said it still is waiting for a response to a letter it sent the White House in March asking for a dialogue about offshore development.

“For five months, this administration has ignored our outreach attempting to improve the state-federal dialogue,” said Perry spokeswoman Allison Castle.

Randall Luthi, the president of the National Ocean Industries Association, said the governors were “wise to point out the flaws” in the administration’s “deeply disappointing five-year plan.”

A government advisory committee comprising state and local government leaders, which for more than three decades counseled the Interior Department on offshore leasing, exploration and development, was disbanded in 2010.

The House of Representatives voted last month to reject the administration’s five-year drilling plan and replace it with a more aggressive leasing plan backed by GOP leaders, which would schedule 29 auctions over the next five years. A bipartisan coalition in the Senate also is advancing an expanded leasing plan.

But any move to toss out the Obama administration’s five-year offshore program would halt pending lease sales, including a Nov. 28 auction of drilling rights in the western Gulf of Mexico. It almost certainly would trigger a new round of environmental studies of any new sale schedule that could take more than a year to complete.

Coastal governors’ letter to Obama on 5-year OCS plan

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Four national environmental groups filed suit in federal court in Washington, D.C., on Monday, challenging the Wednesday sale of offshore drilling leases in the Gulf of Mexico by the Bureau of Ocean Energy Management. The lawsuit contends that the federal agency has not fully addressed the risks to wildlife and the environment from oil spills in the aftermath of the BP Deepwater Horizon disaster in 2010.

The suit says BOEM officials violated the federal National Environmental Policy Act by not determining the effects of the Deepwater Horizion spill on wildlife and then using that information to rewrite an environmental impact statement supporting Wednesday’s Central Gulf of Mexico Lease Sale 216/222, and instead relied on incomplete information gathered for an environmental statement before the spill.

The Southern Environmental Law Center filed the suit with the U.S. District Court for the District of Columbia on behalf of Oceana, Defenders of Wildlife, Natural Resources Defense Council and the Center for Biological Diversity.

“The government is gambling with the Gulf by encouraging even more offshore drilling in the same exceedingly deep waters that have already proven to be treacherous, rather than investing in safer clean energy that creates jobs without risking lives and livelihoods,” said Jacqueline Savitz, vice president for North America at Oceana. “This move sets us up for another disastrous oil spill, threatening more human lives, livelihoods, industries and marine life, including endangered species, in the greedy rush to expand offshore drilling.”

A spokesman for BOEM said the agency does not comment on pending lawsuits.

The four environmental groups filed a similar lawsuit in January 2011, challenging the first lease sale after the BP oil spill in the Gulf of Mexico. That suit failed to halt the December 2011 Western Gulf of Mexico Lease Sale 218, which resulted in high bids totaling $338 million on 191 tracts.

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