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EXPLORERS USA 2005: Gulf leasing boom ahead Thousands of ‘newly available’ deepwater blocks to hit market beginning in ’06 Ray Tyson Petroleum News Houston Correspondent
The U.S. Gulf of Mexico will become a candy store for industry beginning next year as thousands of deepwater oil and gas leases currently held by companies start to expire without ever being explored.
Many of these so-called “newly available” blocks carry 10-year lease terms dating back to the mega-buck lease sales of 1996 to 1998, when a major government-sponsored drilling incentive known as the Deepwater Royalty Relief Act was introduced in the Gulf.
However, the U.S. Minerals Management Service concludes that “given the fact that most companies can only drill a small percentage of their active leases, it is likely that many high-quality leases will expire without being tested.”
On average about 10 percent of the deepwater leases acquired in large lease sales are ever drilled, MMS said, noting that of the roughly 3,200 deepwater leases issued from 1996 through 2000, only about 6.5 percent had been drilled as of mid-2004. Tracts in central and western Gulf So, the newly available or previously leased blocks should make for highly spirited bidding in future central and western Gulf sales, areas that have been heavily picked over since areawide leasing began in the Gulf during the early 1980s. Newly available blocks typically account for roughly 25 percent of all blocks receiving bids in a lease sale.
“The availability of previously leased blocks is expected to increase dramatically in 2006 as a result of the leasing boom that began in 1996 and continued through 1998,” MMS said.
MMS estimates that 2,527 of these previously leased blocks are scheduled to expire in the 2006-2007 timeframe compared to just 741 leases in the 2004-2005 timeframe, a nearly four-fold increase. The agency projects that the number of expired leases will decline to 1,077 leases in 2008-2009, to 558 leases in 2010-2011 and to 525 leases in the 2012-2013 timeframe. Pace of drilling has quickened As expected, companies have stepped up the pace of deepwater exploratory drilling in the Gulf in anticipation of the fast-approaching lease expiration deadlines.
For example, day rates for high-specification rigs capable of drilling in 10,000 feet of water have rocketed more than 40 percent since early 2004 and likely will go higher as the supply of “ultra-deepwater” rigs begins to dry up, according to big offshore rig contractor Transocean. In fact, Transocean is expecting a global shortage of so-called fifth-generation units, or technologically advanced deepwater rigs constructed since the late 1990s.
Additionally, day rates for lower specification, second-generation offshore drilling rigs in the Gulf during February 2005 appear to have reached their highest levels since the last drilling boom, according to Diamond Offshore. The contractor said that as the supply of high-end deepwater rigs dries up on strong demand for both exploration and development activities, explorers are being forced into available lower end “mid-water” rigs.
MMS has recognized the anticipated rig shortage, projecting that on average 25 drilling rigs will be operating in deepwater Gulf in 2005 and 2006, compared to a peak of 41 rigs on average in 2001.
“The combination of huge deepwater lease inventories and a limited rig fleet dedicated to the GOM means that the vast majority of today’s leases will remain untested when their terms expire,” MMS said. Explorers in the relatively shallow waters of the Gulf’s gas-prone continental shelf are in a similar predicament when it comes to jack-up rigs, particularly high-specification jack-ups capable of drilling to zones well below 15,000 feet. Rowan: some 1,280 shelf leases set to expire Offshore rig contractor Rowan said that with an estimated 1,280 leases set to expire on the continental shelf over the next few years, exploration and production companies will be looking for long-term contracts to drill as many prospects as they can before their leases expire. Shelf leases carry five-year terms so they turn over much more rapidly than deepwater leases.
Rowan said in January 2005 that 99 percent of the company’s 25 offshore rigs were in use during the fourth quarter of 2004, compared to 92 percent during the same period in 2003. Moreover, the company noted that exploration and production companies plan to boost their capital budgets by 10 to 20 percent in 2005 over 2004 and that oil and gas prices are forecasted to remain strong through at least 2005.
Giant oilfield service company Schlumberger said in January 2005 that the current business climate for the upstream industry was the most favorable the company had witnessed since the early 1970s, for both short-term and long-term activity. The company noted that seismic spending, which had been under pressure the past several years, had returned to its historic correlation with exploration and production spending.
Despite the rig shortage, MMS remains bullish on the Gulf of Mexico’s future, forecasting a lofty 43 percent increase in oil production coupled with a 13 percent rise in natural gas production over the next decade.
However, MMS is quick to note that its forecast is based on the assumption that operators commit to developing existing oil and gas discoveries and continue to explore the deepwater Gulf, where most of the remaining elephant fields are thought to exist. Nearly 80 percent of oil production in 2011 is expected to come from this region, according to the MMS forecast.
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