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Industry gets MMS incentive for ultra-deep Several companies have submitted exploration plans, including Exxon (38,000 feet, Blackbeard) and Shell (29,000 feet, Shark) Ray Tyson Petroleum News Houston Correspondent
Federal regulators have come to the aid of explorers who long grumbled that more time was needed than allowed under government lease terms to prepare for the drilling of tricky and expensive “ultra-deep” gas wells in the relatively shallow waters of the Gulf of Mexico’s outer continental shelf.
So, the U.S. Minerals Management Service has issued a so-called Notice to Lessees and Operators saying the agency would extend current primary terms of five and eight years on a “case-by-case basis,” provided applicants follow a few rules that include submitting “a reasonable schedule of work” that leads to drilling.
“MMS believes the ultra-deep frontier offers the potential for significant resources, but with accompanied high economic and technological risks,” said Chris Oynes, the agency’s regional director for the Gulf of Mexico. Several plan to go ultra-deep Thus far, Shell is believed to be the only explorer to have ventured below the 25,000-foot ultra-deep barrier on the continental shelf, where thick sheets of salt tend to cloud the seismic imaging of prospects, and extreme temperatures and pressures can play havoc with drilling equipment.
Still, a number of companies have submitted plans to go ultra-deep. The list includes the ExxonMobil-operated Blackbeard prospect. That well could go as deep as 38,000 feet, just a few thousand feet off the world record. Also, Shell is said to be planning a roughly 29,000-foot offset well to its ultra-deep Shark wildcat, which reportedly came up dry.
The new MMS rule governing the extension of lease terms on the shelf can be viewed as an important addition to a broader incentive package that now provides royalty relief on natural gas production stemming from discoveries below 15,000 feet.
With U.S. natural gas production on the decline, “MMS recognizes the importance of expediting domestic exploration to address the critical national need,” Oynes said of the recent rule aimed at encouraging companies to drill below 25,000 feet, where huge gas reserves are thought to lurk. No initiative no giveaway However, the new drilling initiative is no giveaway incentive. To qualify, an operator would have to acquire and interpret full 3-D depth migrated geophysical data beneath the salt sheet and over the entire lease area before the end of the fifth year of the primary term, plus submit to MMS a work schedule that leads to the commencement of drilling.
Moreover, the lease must have been in its primary term on or before Aug. 1, 2004, and the potential target must involve drilling below 25,000 feet true vertical depth that begins at the ocean floor, MMS said.
MMS launched its deep-gas incentive program several years ago by including in lease terms the suspension of federal royalties on the first 20 billion cubic feet of gas produced from discoveries below 15,000 feet. But the provision applied only to leases awarded in a particular sale.
Last year MMS vastly expanded the program to include about 2,400 existing federal leases on the Gulf of Mexico’s continental shelf and added sliding scale royalty relief based on depth and the number of wells drilled on a lease.
Under that program, MMS offers royalty suspension on existing leases for the first 15 billion cubic feet of gas produced from depths greater than 15,000 feet and less than 18,000 feet, or on the first 25 billion cubic feet of gas produced from 18,000 feet or deeper.
A royalty suspension volume of 15 billion cubic feet can be increased to 25 billion cubic feet from a second successful well to 18,000 feet or deeper. In the event of a dry hole below 18,000 feet, a producer qualifies for a royalty suspension supplement on 5 billion cubic feet of gas equivalent that can be applied to future oil or gas production from any depth. Two supplements are available per lease prior to production from a deep well. The maximum relief a lease can earn from either successful or unsuccessful deep wells is 35 billion cubic feet.
Additionally, sidetrack wells could earn royalty suspensions in amounts based on drilling depth and sidetrack length.
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