MMS weighing options for ‘ultra-deep’ incentives

Ray Tyson

Petroleum News Houston Correspondent

Government help appears on the way for “ultra-deep” explorers on the Gulf of Mexico’s continental shelf, where wildcatting expenses are sure to be astronomical in this new and financially risky gas play situated more than 25,000 feet below the ocean floor.

The U.S. Minerals Management Service, in a continuing effort to reverse the rapid decline in natural gas production on the shelf, is now seriously working on drilling incentives especially designed for ultra-deep exploration, including extension of lease terms and possibly additional royalty relief for commercial discoveries.

“We are intent on doing something in that area. Frankly, I’m surprised we haven’t done something already,” Chris Oynes, MMS regional director for the Gulf, told Petroleum News May 4 at the Offshore Technology Conference in Houston, Texas.

Extending the current five-year term on shelf leases, to give deep drillers more time to prepare, is something industry has advocated the past few years.

“Clearly industry is pushing into those (deeper) intervals and that’s where most of the gas is being found,” Elliot Pew, vice president of exploration for Newfield Exploration, said at a conference press briefing.

However, drilling below a geologic depth of 25,000 in the relatively shallow waters of the Gulf is its own ball game. Only one company, Shell, has actually drilled into the ultra-deep zone in what turned out to be a dry hole at the company’s Shark prospect in South Timbalier.

Newfield, a Houston-based independent that concedes it does not have the bucks to drill half way to China, recently managed to pull together an impressive group of partners — ExxonMobil, BP and Brazil’s Petrobras — to pick up the tab on a couple of ultra-deep wells on its Treasure Island and Treasure Bay acreage on the shelf.

Newfield and partners plan to drill deepest wells yet on Gulf shelf

Newfield’s Pew agreed the wildcats its partners plan to drill, which at 30,000 feet plus would be the deepest wells drilled on the Gulf continental shelf, could run $50-to $60 million each, assuming everything went smoothly. Temperatures and pressures at those depths are intense and could raise havoc with drilling equipment.

Pew said that while the ultra-deep contains prospects that could hold trillions of cubic feet of gas reserves, “this is truly a frontier play.”

Nonetheless, with those types of mega-prospects looming below and facing declining gas production on the shelf, MMS appears more than willing to help out in the ultra-deep, just as the agency did earlier this year when it vastly expanded royalty relief incentives in general for deep drilling on the shelf.

Question of how to provide incentives

“We just started sort of giving up on the energy bill; it doesn’t look like it’s going to make it,” MMS’ Oynes said. “So we have to shift gears and that’s going to take a lot more work. We are still looking at a transition stage.”

He said MMS concluded it couldn’t make the change administratively through a policy change, which would have been a relatively quick way to resolve the issue.

“The way I think the way we are fashioning it now is that it would be through a proposed rule and a final rule, so it takes awhile,” Oynes said.

He said another option would be to include the ultra-deep incentives in specific lease sales, something MMS did several years ago before adopting broad based rules for deep drilling on the shelf. However, that approach would apply only to leases acquired in a sale, he added.

“But you presumably could have this in a year or a year and a half, maybe sooner,” Oynes said. “So we’re assessing whether we want to have a rule at all, or go with a lease provision.”