US Gulf leasehold cash flow shortfall forcing E&P revisions

Leonard Le Blanc Editor Current Lease Status As of 4/30/98 [54,028 bytes] Lease Water Depth [40,626 bytes] Federal OCS leasehold BOE income model [114,047 bytes] Central and Western US Gulf OCS leased acres versus unleased acres by water depth ranges [62,920 bytes] Top 40 leaseholders in all water depths ranked by net gas produced [183,141 bytes] Top 40 leaseholders in all water depths ranked by net BOE produced [183,643 bytes] Top 40 leaseholders ranked by net oil produced and water depths

Tightening budgets, many leases, few rigs

James Dodson
James K. Dodson Co.
Leonard Le Blanc
Editor
A 1998 model of US Gulf of Mexico leasehold income, net of royalty, shows a projected $1.9 billion less wellhead income during 1998, a result largely of lower oil prices. The $1.9 billion shortfall in the 1998 model could have been used to drill another 130 wells at 1997 dry hole cost (DHC) figures, assuming that the aggregate of 1998 DHC budgets equal 23% of leasehold income, net of royalty.

Leasehold income, minus royalty, produced at the wellhead is projected to be $14.294 billion in 1998, if oil averages $16/bbl and natural gas averages $2.25/Mcf. The 1998 model, based on $16/bbl oil and $2.25/Mcf gas projects a 12% decline in the number of wells drilled in 1997, or equal to the same percentage drop in the 1998 model of wellhead income.

Budget expectations in late 1997, based on $19/bbl oil and $2.50/Mcf gas amounted to a bbl oil equivalent (BOE) unit value of $19.40/bbl or $19.4 billion from 1.001 billion BOE produced in 1997 at the wellhead, net of 16% royalty, which is $5.2 billion higher than the 1998 model based on $14.28 BOE value on 1.001 billion BOE produced net of royalty.

The numbers change more significantly from higher or lower natural gas prices that industry forecast to average from $2.25-2.40/Mcf in 1998. The BOE component from 5 tcf annual gas produced is equivalent to 833 million BOE of total 1.217 billion BOE, including 384 million bbl of oil forecast to be produced in 1998.

Leaseholders with a larger bbl oil equivalent (BOE) share in crude oil appear to have taken a bigger cash flow hit; those heavy in natural gas have been able to offset some losses. In the US Gulf, oil prices affect only one-third of total BOE values. Natural gas takes up the remainder of the BOE value. Also, two-thirds of BOE reserve values are still in water depths of less than 601 ft water depths, where 90% of gas is produced.

Shortfall impacts

The shortfall in leaseholder income comes at a time when drilling costs continue to rise, and the US Department of Interior is raising the possibility of hiking royalty rates in deepwater to one-sixth, from one-eighth.

As a result of the lower leasehold income, budget cuts have been enacted. A modest (so far) pushback in drilling and development programs has taken place. How much of a delay in programs actually materializes in the coming months will depend on whether oil prices recover this summer (transportation fuel) or fall (heating).

Most major producers have kept budget reductions to a minimum because of the need to replace produced reseves and the expectation that global oil demand will resume increasing in the years ahead, but the reductions are fairly widespread.

Those independents experiencing the greatest impact are oil-reserve-heavy without downstream operations. Refining crack spreads have increased substantially as feedstock prices dropped during the first half of 1998. Without the cash flow from natural gas or refining crack spreads to offset dwindling oil sales revenue, a number of independents are making the heaviest cuts in previously appropriated funds.

Independents are being pressured from two other directions: (1) With weak oil prices, equity investors have forced down oil industry evaluations, depriving smaller producers of ready E&P cash. (2) With low cash flow and rising drilling and service costs, independents become tempting takeover targets.

As producer valuations drop, buying reserves becomes as economic or risk-averse as drilling for them. If oil prices remain low into the winter, cash-starved oil producers may offer to sell reserves. In addition, a rush to find partners to re-fund troubled exploration programs or development projects will ensue.

Leasing

For unexplored tracts, the clock is running on leases. Under-funded exploration programs are likely to result in a rash of leases being farmed out in order to get the tracts drilled before expiration.

The pursuit of deepwater opportunities in the US Gulf and the differences in technology and business approaches, are creating further divisions within producing companies. Most large producers have created separate business units for specific water depth ranges. For example, Shell has created a shelf (1,500 ft and less) business unit and a deepwater (slope seaward) unit. Some producers use the 1,500 ft contour as the divider between business units.

All US OCS Gulf of Mexico producers generated a projected $16.28 billion in BOE leasehold income net of royalty (pro forma) in 1997. Based on year-to-date and forecast oil and gas prices, as shown in the accompanying figure on leasehold BOE income, 1998 income is projected to be $14.29 billion, a drop of $1.99 billion from 1997 pro forma totals.

The 1997 projections were determined using a BOE average of $16.27/bbl, consisting of $20.60/bbl WTI for crude and $2.39/Mcf Henry Hub for gas. BOE values in 1998 are projected to be $14.28/bbl, consisting of $16/bbl WTI for crude and $2.25/Mcf Henry Hub for gas.

Central, Western acreage

Leasing in water depths at or deeper than 3,000 ft has not reached the proportions established in water depths under that figure. Only 36% of 42 million acreas available at those depths has been leased, leaving 27 million acres (64%) unleased, compared with 11.8 million acres unleased in under 601 ft depths. There are 5.2 million acres unleased in the 600-3,000 ft water depth range.

Leased acreage in water depths exceeding 2,999 ft occupies 18% of all available acreage available in the US Gulf of Mexico (Central and Western Gulf). When leased and unleased acreage in water depths exceeding 2,999 ft are totaled, they occupy over 50% of all US Central and Western Gulf acreage available for leasing. Over 64% of all available acreage in depths greater than 2,999 ft remains unleased.

Availability of deepwater drilling units will drive leasing programs. A good example is Conoco, which was the high bidder on 44 leases and participated in bidding on 118 other leases. Conoco has joined Shell in acquiring major drilling time on a new deepwater drilling unit.

Leasehold BOE production

In the 11 months ending November 1997, Chevron had the largest leasehold BOE volume in the US Gulf in all water depths. Chevron's leaseholdings produced 86.4 million BOE, 97% in water depths under 601 ft, and none in excess of 1,500 ft depths.

Exxon leasehold BOE ranked second, producing 56.6 million BOE total in all water depths. Behind Exxon was Texaco, with 54.5 million BOE.

The leasehold BOE leader in depths greater than 1,500 ft was Shell Deepwater, the deepwater component of Shell in the US. Shell's deepwater leaseholdings produced 42.6 million BOE in that depth. Following behind Shell Deepwater in depths beyond 1,500 ft was BP Exploration, with 8.1 million BOE, and CNG Producing, with 4.2 million BOE.

Only 11 of the top 40 leaseholders in the US Gulf of Mexico have production in water depths beyond 1,500 ft. At water depths between 601 ft and 1,499 ft, 10 of the top 40 leaseholders in the US Gulf have no production in water depths.

Leasehold gas production

In natural gas produced in the period beginning January 1997 through November 1997, Chevron again was the leader, with a cumulative production in all water depths of 318.9 Bcf. Following behind Chevron was Exxon, with 229.2 Bcf, and Texaco, with 225.5 Bcf.

Chevron had 96% of its gas production in under 601 ft water depths and no gas production in excess of 1,500 depths.

Behind Chevron's number one ranked gas production (304.5 Bcf) in water depths under 601 ft was Texaco, with 201.5 Bcf, Shell Offshore with 186.7 Bcf, and Exxon, with 165.3 Bcf.

In water depths of 601-1,499 ft, Exxon ranked number one with 63.2 Bcf, following by Unocal with 26.6 Bcf, Texaco, with 14.8 Bcf, and Chevron, with 14.2 Bcf.

In water depths exceeding 1,500 ft, the number one producer was Shell Deepwater, with 80.1 Bcf. Following Shell was BP Exploration with 14.3 Bcf and CNG Producing with 11.4 Bcf.

Leasehold oil output

Chevron was again the leader in leasehold oil production, with 33.3 million bbl. Virtually all of Chevron's production was in water depths under 601 ft. Following Chevron was Shell Deepwater, with 29.6 million bbl, of which 29.2 million bbl was in water depths beyond the 1,500 ft contour, and Exxon, with 18.4 million bbl. Ironically, Chevron ranked 43rd in oil production in water depths between 601 ft and 1,499 ft.

After Chevron, the leader in less than 601 ft water depths was Exxon with 15.8 million bbl, Shell Offshore (separate from Shell Deepwater), with 14.8 million bbl, and Texaco with 12.0 million bbl.

In water depths of 601-1,499 ft, the leader was BP Exploration with 9.1 million bbl, followed by Marathon with 6.3 million bbl, Texaco with 4.1 million bbl, and Exxon, with 2.5 million bbl.

In water depths beyond 1,500 ft, following the leader Shell Deepwater, was BP Exploration with 5.7 million bbl, CNG Producing with 2.3 million bbl, Oryx Energy with 2.0 million bbl, and Conoco with 1.9 million bbl.

COPYRIGHT 1998 BY JAMES K. DODSON COMPANY, ALL RIGHTS RESERVED; P.O. BOX 1419 GRAPEVINE, TEXAS 76099 (TOLL FREE PH.1.800.275.0439) fax.817.488.4273;email@infogulf.com; www.infogulf.com

Copyright 1998 Oil & Gas Journal. All Rights Reserved.

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