After years of steady wildcat exploration in the deepwater Gulf of Mexico, Unocal plans to release its workhorse drilling rig Discoverer Spirit by September to concentrate on the money end of the business.
“We reshaped our budget to dedicate more capital to the next tier of appraisal and development projects,” said Charles Williamson, Unocal chief executive officer.
Williamson said in a Feb. 1 conference call that Unocal also plans to curtail wildcatting in Indonesia, so the company can focus on its so-called ‘Big 5’ development projects in Azerbaijan, Bangladesh and Thailand, as well as in the U.S. Gulf and Indonesia.
“I think we simply have to deliver that and we’ll have a pretty good looking year, just as we forecast,” he said. The company expects worldwide production to exceed 425,000 barrels of oil equivalent per day in 2005, up at least 4.5 percent from 2004.
However, Unocal plans to spend only about $175 million on the exploration in 2005 versus roughly $250 million in 2004, Terry Dallas, Unocal’s chief financial officer, said, adding that Unocal plans to spend a total of $1.9 billion on capital projects this year compared to last year’s $1.74 billion.
“We see a major shift from exploration and development as we focus on our major gas development projects in Indonesia, and we look to appraise the discoveries we’ve had in the Gulf of Mexico deepwater over the last year and a half,” Dallas said.
One more appraisal well at St. Malo
Before releasing the Discoverer Spirit, Unocal said it intends to drill another appraisal well at the company-operated St. Malo prospect at Walker Ridge, among the more impressive discoveries in deepwater Gulf of Mexico. The well will test the western portion of the discovery, the company said.
“We’re not ready to say what our plans for the rig are after St. Malo, but I will note that we will release the rig no later than September,” said Joe Bryant, Unocal’s president and chief operating officer.
However, Unocal is not yet ready to give up on exploration in the U.S. Gulf. Discoverer Spirit is currently drilling an exploration well on the southwestern fault block of the BP-operated Mad Dog field in Green Canyon, which recently came on stream producing about 7,800 barrels of oil per day from a single well. The partners plan to bring on three more development wells this year as the field ramps up production.
However, the owners believe that additional exploration drilling at Mad Dog prospect could prove up as much as 450 million barrels of oil equivalent reserves. “This southwest ridge well is taking a down dip limit to the field and testing it,” Williamson explained.
Along with production from Mad Dog and the K2 field when it comes on stream in this year’s second quarter, Unocal will gain an additional 11,000 to 12,000 barrels of oil equivalent per day by the end of 2005, the company said.
Knotty Head prospect will be drilled
Before moving to St. Malo in the second quarter of this year, Unocal said Discoverer Spirit will head from Mad Dog to Green Canyon Block 512 to drill the highly prospective Knotty Head prospect, which drew some of the highest bids in last year’s Central Gulf of Mexico lease sale. Knotty Head is just north the of the giant Tahiti discovery operated by ChevronTexaco.
Unocal and its partners are considering additional drilling ventures this year, including an exploration well to test a deeper zone that underlies the producing Mad Dog field, the company said, adding that an appraisal well also may be drilled at its Puma discovery.
But appraisal drilling at St. Malo, followed by a possible rare deepwater production test of the prospect’s lower tertiary trend, likely will be the centerpiece of Unocal’s 2005 plans for the U.S. Gulf.
“We’ve been evaluating data from both of our initial wells, which will help us understand our development options in more detail,” Bryant said. “We believe that we will add significant value by drilling a third well on the western half of the structure.”
He said a third well also would provide a usable well bore to conduct a production test in 2006 should the owners decide to pursue the test. Because of time and expense, production tests are seldom conducted in deepwater Gulf of Mexico.
“I might add that a useful production test will take about 15 to 18 months to plan and executive,” Bryant said. “But we are putting all of the pieces in place in the event that that is what we decided we need to determine commerciality.”
Production declines in shallow waters
Aside from pursuing its ‘Big 5’ projects, Unocal is fighting major production declines in shallow waters of both the U.S. Gulf and Indonesia. On the U.S. Gulf’s continental shelf, where the company already has sold a major chunk of its maturing assets, Unocal faced an annual 2004 production decline rate of about 18 percent.
“I think one of our biggest challenges ahead will be around managing the decline of our more mature assets,” Williamson said. “The Gulf of Mexico shelf has higher declines and depletion than the rest of our North American portfolio.”
However, Williamson pointed out that overall Unocal’s North American production should decline between 5 percent and 10 percent in 2005, not including production from the company’s deepwater projects. With Unocal’s new deepwater projects, “we roughly hold North America flat,” he said.
Despite this year’s lower exploration budget and lagging North American production, “for the first time in a very long time at Unocal, we do not feel like we have to chase production, especially with undisciplined capital programs,” Unocal’s Bryant said. “We’ve waited a long time to be in a position to exercise quality through choice in our investment decisions.”
