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EXPLORERS USA 2005: Big Oil returns to shallow waters of Gulf of Mexico in search of gas after working deepwater
Major oil companies, after years of withdrawing from exploration on the Gulf of Mexico’s heavily exploited continental shelf, are returning in search of giant natural gas fields thought to lurk deep beneath the shelf.
Until fairly recently, the majors invested most of their time and money looking for elephant-size oil fields in the deepwater Gulf, leaving the relatively shallow waters of the Gulf to independent exploration and production companies.
While deepwater remains the primary focus of Big Oil in the Gulf, the possibility of uncovering trillions of cubic feet of gas on the continental shelf has proved to be just too tantalizing for the big guys to ignore.
That became evident at 2004’s Western Gulf of Mexico oil and gas lease sale when the likes of BP, Petrobras America, Shell and ConocoPhillips swept in to the region gobbling up leases, particularly on the gas-prone continental shelf.
Hess, BP and Petrobras dominated the Western Gulf Sale 192, collecting 143 blocks between them, or nearly 41 percent of all blocks receiving bids in the sale. ConocoPhillips alone accounted for nearly 36 percent of the total high bids and captured 50 percent of the 351 exploration blocks that received bids in the sale. Large companies: blanket bidding For the first time in years, the large companies reverted to blanket bidding in Sale 192 in an effort to amass tracts in specific areas. That generally spells a concerted effort to secure large acreage positions in developing hydrocarbon trends, in this case the lure of potentially large, untapped natural gas reserves in the deep and particularly the “ultra-deep” geological horizons below 25,000 feet on the shelf.
Nearly 160 or 45 percent of blocks receiving bids in Sale 192 were located in or near the relatively shallow waters of the continental shelf. Eighty-seven or nearly 54 percent of all shelf bids were placed on blocks in High Island region, a hot area for deep drilling. Sale 192 stars BP and Petrobras, along with ExxonMobil, already had farmed in to Newfield Exploration’s ultra-deep Treasure Island and Treasure Bay leases, and in early February 2005 the operator, ExxonMobil, began drilling a 32,000 to 38,000-foot exploration well at the Blackbeard West prospect on South Timbalier.
BP also is said to be negotiating with drilling contractor Rowan to drill a separate 35,000-foot well. Rowan said that in addition to Blackbeard West, ExxonMobil intends to drill three more ultra-deep wells on the shelf, even if the first three wells are dry holes.
Shell is believed to be the first explorer to break the 25,000 foot ultra-deep barrier on the shelf at the company’s Shark prospect, also located on South Timbalier. That well was declared a dry hole. Ultra-deep requires major participation Because of the huge expense of ultra-deep exploration, going after these deep targets generally requires the financial participation and expertise of a major company. A single ultra-deep exploration well could cost anywhere from $30 million to $60 million or more, depending on problems encountered down hole, where extreme temperatures and pressures could cause major damage to drilling equipment.
The federal government, faced with declining natural gas production in the United States, has pitched in with an array of incentives to encourage both the deep and ultra-deep drilling on the continental shelf.
In early February 2004, MMS announced a new package of shelf incentives that dramatically expanded both the size and scope of the government’s royalty relief program on the continental shelf to include some 2,400 existing leases offshore Texas, Louisiana, Mississippi and Alabama.
Under the new program, MMS offered a royalty suspension on the first 15 billion cubic feet of gas produced from depths greater than 15,000 and less than 18,000 feet, or on the first 25 billion cubic feet produced from 18,000 feet or deeper. A royalty suspension volume of 15 bcf could be increased to 25 bcf from a second successful well to 18,000 feet or deeper.
The rule applied to all qualified wells on a specific lease. In the event of a dry hole below 18,000 feet, a producer would qualify for a royalty suspension supplement of 5 bcf of gas equivalent that could be applied to future oil or gas production from any depth. Two supplements were available per lease prior to production from a deep well. The maximum relief a lease could earn from either successful or unsuccessful deep wells was 35 bcf. Additionally, sidetrack wells could earn royalty suspensions in amounts based on drilling depth and sidetrack length.
Regarding ultra-deep drilling below 25,000 feet, explorers had long grumbled that more time was needed to prepare for drilling than was allowed under federal regulations. So, the U.S. Minerals Management Service issued a separate Notice to Lessees and Operators saying the agency would extend current primary terms on the shelf of five and eight years on a “case-by-case basis,” provided applicants followed a few rules that included submitting “a reasonable schedule of work” that leads to drilling.
The potential for large discoveries is what attracts large oil and gas companies. In late 2003, MMS more than doubled its gas reserve estimate for the deep shelf, from 20 trillion cubic feet up to 55 tcf.
—Ray Tyson
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