CATEGORIZED | 2007, November/December

Industry getting in deeper in GOM

Posted on 29 October 2009

Mike Killalea, Editor & Publisher

Go deep, young man, might be the advice of a 21st-century Horace Greeley. In the deepwater US Gulf of Mexico, BP estimates that some 22 billion bbl remain to be discovered – this beyond the 18 billion bbl already found, of which that major participates in about a fourth. “We’re very much in the dearly creaming stage,” remarked BP Americas head of operations Keith Elliott, speaking at LAGCOE in October.

IADC Drilling Gulf of Mexico 2007, 5-6 December in Galveston, will examine the challenges and promise of the deepwater GOM.

Subsalt and extra salt are special considerations, as are high-pressure reservoirs. “Where we see ourselves today, high pressure is more of an issue [than high temperature] in deepwater,” Mr Elliott said.

The industry went deep in October’s record-breaking Lease Sale 205 for the Central GOM. According to the US Minerals Management Service, 40% of the tracts lie in ultra-deepwater (defined as greater than 1,600 m, or 5,249 ft). More than a quarter of high bids (26.3%) were for blocks in water depths exceeding 2,000 m (6,562 ft).

High bids totaled more than $2.9 billion, the second-highest in US leasing history. The highest bid, by Shell Offshore, exceeded $90 million for Walker Ridge Block 7. This, and Walker Ridge Block 51, tied as the blocks receiving the highest number of bids (13).

A strange highlight is the bid for the deepest block, Amery Terrace Block 206, which lies in 3,398 m (11,149 ft) of water. The bid itself was nothing if not underwhelming — $825, with no trailing zeros. This proposal, which MMS is unlikely to judge as fair value, was one of 15 by newcomer Kimberlee International Energy Corp. According to the company’s web site, KIEC was founded by the 2006-2007 Miss Black America.

In deepwater, the promise looms large, but development costs aren’t chump change, either. Mr Elliott said that, with $150 million drilling and completion well costs not uncommon, the price tag “keeps us up at night.”

And while drilling expenditures command most of the attention, it is completion costs that are driving much of the cost escalation. Some of these costs can approach 9 figures, sources say. In the deepwater Gulf, the high-dollar completions stem from a virtual zero tolerance for sand inflow.

DON’T COUNT THE SHELF OUT

Deepwater is the frontier, while shelf drilling languishes. As reported in this issue, overall GOM drilling is at a 15-year low, in terms of contracted rigs. While drillships are at 100% utilization and semis in the upper 80s, jackups are dragging the numbers down. The culprits are well known — hurricane season, low gas prices, and superior opportunities elsewhere.

While the US GOM squeaked through this hurricane season with nary a scratch, gas prices are more problematic. The Energy Information Administration reported on 25 October that storage levels rose to 3,443 Bcf, a week-on-week change of 68 Bcf and a worrisome 7.2% above the five-year average. On the other hand, this level is essentially equivalent to last year’s.

Another hiccup complicating the natural gas picture, reports Raymond James Energy, is Pemex’s success in increasing Mexican gas production. In the last five years, Raymond James notes, Mexican natural gas production rose more than 30% to nearly 6.0 Bcf/day. This has slashed US exports of natural gas south of the border by some 0.3 Bcf/day. Typically, US exports have ranged from 0.5-1.0 Bcf/day .

Despite this gloom, there are compelling reasons why activity on the Shelf will continue, despite the bad news. Observed Dennis Jordan of Mitsubishi-owned MCX USA, the shelf offers easy entry for MCX, political stability, a single minerals owner to deal with, large infrastructure, and convenient markets. Mr Jordan made his comments at LAGCOE.

Further, as we move away from hurricane season, many observers expect activity to rise.

The Gulf of Mexico has been written off before, but always recovered. Don’t be too hasty to write it off today.

Have a comment? You can reach Mike Killalea at mike.killalea@iadc.org

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