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Dry at 25,756 feet Nexen takes hit on Shark, first ultra-deep on Gulf continental shelf Ray Tyson Petroleum News Houston Correspondent
A reported dry hole at the Shark prospect, the deepest and perhaps most intriguing exploration well ever drilled in the relatively shallow waters of the Gulf of Mexico’s continental shelf, contributed to a sharp decline in Nexen shares Feb. 12, along with a reported loss in the 2003 fourth quarter stemming from a previously announced revision in oil and gas reserves.
Upon disclosure by Nexen that Shark had encountered “no commercial hydrocarbons,” the company’s stock plummeted nearly 9 percent to $35.46 per share on Feb. 12, wiping out hefty gains made weeks earlier when rumors began to spread that operator Shell and 40 percent partner Nexen had turned up a major gas discovery at Shark.
“No commercial hydrocarbons were encountered,” according to a Nexen official. “The well is being temporarily abandoned and we are evaluating the data collected from the well bore.”
Drilled to a measured depth of 25,756 feet on South Timbalier Block 174, Shark broke through the elusive “ultra-deep” zone to become industry’s first well to penetrate below 25,000 feet, where huge natural gas reserves are thought to lurk.
In a conference call with analysts, Nexen said it would not discuss specifics until well results were analyzed. Nevertheless, “we remain optimistic about the potential of the ultra-deep shelf gas play,” the company asserted. Giant structures believed to extend beneath continental shelf Geologists believe the same giant structures that produced large discoveries in deeper waters of the Gulf extend beneath the continental shelf. Until Nexen and partner Shell entered the picture, industry avoided the shelf’s ultra-deep horizon largely because of financial risks associated with an unknown drilling environment, most notably extreme temperatures and pressures.
In what appeared to be a setup for bad news on Shark, Nexen in late January issued a press release declaring that “we have no information regarding this well which would account for the increase in our share price.”
Earlier analysts began speculating that Shark likely uncovered a significant natural gas reserve of up to 2 trillion cubic feet and was preparing to drill a sidetrack off the main well bore to further test the prospect. Shell also was said to have ordered an exceptionally high pressure wellhead, also indicating the possibility of a major gas discovery.
Houston-based Newfield Exploration, which controls the look-alike but untested Treasure Island play near Shark, apparently was hurt by the fallout over Shark. Newfield, also an exploration and production independent, saw its stock fall by 6.4 percent to $46.25 per share following a run-up on the Shark rumor.
Newfield has been talking with potential partners to drill a well at Treasure Island, consisting of 27 blocks. In addition to Nexen, BP, ExxonMobil, BHP Billiton and possibly ChevronTexaco are said to be among companies negotiating with Newfield. Newfield said it is anxious to drill before Treasure Island leases begin expiring in March 2005. Success at Dawson Deep prospect It was not all bad news in the Gulf for Nexen on the exploration front. The company reported a deepwater discovery at its 15 percent owned Dawson Deep prospect on Garden Banks 625. The exploration well, which encountered 160 feet of net pay covering several intervals, has been sidetracked to delineate the reservoir’s extent, Nexen said.
“If the Dawson Deep sidetrack is successful, this could set up several potential exploration tests in the Gunnison area this year,” said Charlie Fischer, Nexen’s chief executive officer.
The Dawson Deep exploration well was drilled to a total depth of 24,450 feet, including 2,900 feet of water, and is located northeast of Nexen’s existing Gunnison facility. Gunnison came on stream in December, with three of the field’s 10 planned wells producing 120 million cubic feet of gas and 3,350 barrels of oil per day. The facility has a capacity of 40,000 barrels of oil and 200 million cubic of gas per day.
Fischer said that with Nexen’s conventional Canadian assets maturing, the company’s future lies in deepwater Gulf of Mexico, offshore West Africa, Canada’s Athabasca oil sands and the Middle East “where the opportunities and rewards for success are significantly greater.”
Nexen’s board of directors recently approved proceeding with commercial development of the Long Lake Synthetic Crude project, representing about 10 percent of Nexen’s Athabasca bitumen resource. As a result, Nexen said it converted 200 million barrels of probable reserves to new proved reserves.
In the 2003 fourth quarter, Nexen recorded a net loss of C$56 million or 51 cents per share, compared with a profit of C$129 million or 96 cents per share for the same period a year earlier. Earlier the Calgary-based company warned that it would take a C$175 million impairment charge after reducing its conventional Canadian proved reserves by 60 million barrels of oil equivalent. Without the charge, Nexen’s net income would have been 88 Canadian cents per share.
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