The Gulf of Mexico remains a significant source of revenue for exploration and production companies as the major oil companies and independents moved forward on long-planned projects and reported large finds of oil and gas.

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This activity might come as a surprise to some investors since the price of oil and gas was so weak in 2008, but typically large offshore projects are planned using a lower long-term commodity price and operators don't cut drilling so quickly in reaction to volatility in commodity prices. (To learn how to invest into oil companies, read Unearth Profits In Oil Exploration and Production.)

The Gulf of Mexico saw a dozen discoveries at depths of more than 1,000 feet, representing 1.35 billion barrels of oil equivalent (BOE), according to Wood Mackenzie, an energy research firm. The firm estimates that production will increase from 1.3 million BOE per day in 2008 to 2 million BOE per day by 2011.

Much of the exploration is targeting the Lower Tertiary, a deep formation notable for its high pressure and temperature. As technology improves, it becomes possible to drill regions previously thought undrillable.

British Petroleum plc (NYSE:BP) has seen several major discoveries in the Gulf of Mexico. Recently, it reported a discovery at its Tiber prospect drilled to a depth of over 35,000 feet. BP is the operator of the project with partners Petrobras (NYSE:PBR) and ConocoPhillips (NYSE:COP) having 20% and 18%, respectively. BP also reported a second successful well at its Kaskida prospect. The find extended the field to a larger area to the west. (Read more in BP Ramps Up Oil Production.)

Chevron Corporation (NYSE:CVX) was another winner in the Gulf of Mexico, finding oil at the Buckskin development in the deep water. The Buckskin No.1 well was drilled to nearly 30,000 feet and tapped into the Lower Tertiary formation. The company also started production from its Tahiti project, and reached its peak production levels by the middle of the year.

One thing to consider is that despite the proliferation of these successful wells, it will take years before the projects see full development, as the companies involved must drill several expensive wells to test and delineate the extent of the formation, and then build infrastructure to bring the hydrocarbons to the end user.

Among the independents, Anadarko Petroleum (NYSE:APC) has had several successful discoveries in the Gulf of Mexico. The company found pay at the Vito, Shenandoah, Heidleberg, and Samurai prospects, targeting either the Lower Tertiary or Micocene formations.

Its most recent success was at the Lucius prospect announced in December 2009. The company drilled to 20,000 feet and discovered net pay of 200 feet. Anadarko Petroleum is the operator of the well and has a 50% interest; partners Plains Exploration & Production Company (NYSE:PXP) and Mariner Energy, Inc. (NYSE:ME) own the rest.

Some exploration and production companies decided to focus elsewhere. Devon Energy (NYSE:DVN) decided to sell its offshore properties in the Gulf of Mexico to focus on its onshore assets. (Read more in Devon Energy Downsizes.)

The Bottom Line
The Gulf of Mexico is a hot spot for the exploration and production industry because it represents one of the best domestic areas to find oil and gas, and help reduce the U.S. dependence on imports.

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Tickers in this Article: BP, CVX, APC, DVN, ME, PXP, COP, PBR

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