Prospects for Gulf of Mexico gas remain bright despite dismal oil market

June 1, 1999
Mixed signals from mixed waters

Mixed signals from the US Gulf of Mexico are causing uncertainty over the region's future supply prospects. Today, when speaking of "the Gulf," one needs to be increasingly specific as to the water depth and time frame cited. The old designations of "shelf" and "slope" no longer suffice; deepwater and ultra-deep must be increasingly contemplated.

What does the big picture hold for offshore gas supply given recent turmoil in energy markets? After analyzing various conflicting short and long term factors, Gas Research Institute (GRI) expects the following for the US Gulf of Mexico:

  • In the long run, the Gulf is poised for a significant increase in oil and gas production. GRI projects that gas production will rise from today's 5 Tcf level to a range of 7-9 Tcf by the year 2015. Despite 1999's uncertain business climate, production will continue to rise over the next five years due to the momentum already in place.
  • Shelf production will remain at historical levels. Predictions over the past 20 years for the demise of the shelf have been premature. GRI does not see the shelf diminishing appreciably in the next 15 years. The emerging subsalt play will take up much of the slack.
  • The deep and ultra-deep waters will provide incremental production growth. GRI estimates there is 40 Tcf of deepwater gas supply presently waiting in the wings for market. The number of new deepwater fields coming on stream in the next two years will double each year.
Fig. 1-Shelf gas production continues to hover at the 5 Tcf level after nearly two decades.
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The shelf endures
Forecasters have been predicting the demise of Gulf production for two decades. Figure 1 presents a long-term history of offshore gas production, building from 0 Tcf to nearly 6 Tcf over 30 years. Since 1980, production has hovered in the 5 Tcf range, with minimal year-to-year fluctuations. Statistically, this represents a standard deviation of approximately 7%, a rather narrow range given the heightened potential for frequent offshore weather disruptions. In the 17 years following the peak, annual production has decreased eight times and increased nine times. During this period, the maximum observed one-year drop was 0.9 Tcf while the maximum five year drop was 1.3 Tcf, with each occurring in the early 1980s.

The figure also shows that at the height of offshore gas reserves in 1980, the reserve-to-production (R/P) ratio stood at 7.5, inferring that gas supply could theoretically be exhausted by 1988 with annual production held constant and no new reserve additions. However, when 1988 arrived, production remained ample and the R/P ratio stood at 6.4, implying theoretical depletion by 1995. Today, four years later and over half way to the next exhaustion point, the R/P ratio stands at 5.5, yet production continues to hover at 5 Tcf following nearly 15 Tcf of cumulative production during the intervening years.

Fig. 2-Behavior has changed. Producers have doubled cost-saving recompletion activity as gas prices dropped by half.
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U.S. offshore proven gas reserves increased the past two years and production has been on the increase since 1992. This suggests that "absolute" depletion has been pushed even further out.

Faster depletion?
There has been renewed concern that new offshore wells are depleting faster than in earlier years. Some say this is a sign that the resource is depleting. Part of the answer may rest in changing operating practices as producers are seeking to recover their investment quicker.

New technology has allowed more rapid production techniques that did not previously exist.

Such accelerated flow rates allow producers to maximize the present value of expected revenues which immediately translates to their bottom line.

Comparison of current to historical statistics often does not reflect the business climate in which each occurred. Starting in the mid-1980s, when the great "gas bubble" overshadowed national gas markets, there was no incentive for producers to quickly dump their gas into a bloated market. In fact, there was extensive talk at the time of shutting in production to improve the market.

Reduced drilling in the shallow waters due to soft oil prices raises uncertainty. Reserve additions are the lifeblood of the shelf which stem from drilling activity levels and the size of discoveries. A similar situation existed in 1992 when gas prices and rig counts plummeted, yet annual shelf production eventually recovered and has not fallen back since.

Today, shelf production is being maintained without a large increase in new gas well drilling. Although the current offshore rig count is down, it is still double 1992 levels. Producers are turning to innovative cost-effective measures to maintain production.

Recompletions are generally the lowest-cost method of adding reserves to an existing field and have always been important in the Gulf. Their contribution increased significantly in the 1990s.

In 1996 (the most recent year of full data), recompletions comprised half of total gas well completions compared to about one-quarter in earlier years. Thus, there has been a definite shift in operating practices over the years. Side-track activity has also increased in recent years. These statistics demonstrate that industry is making a major effort to use existing wellbores wherever possible.

Shelf operators can take consolation in the fact that technology developed in deep and ultra-deep waters will find application in shallow water, thereby reducing costs and extending shelf resource life. Also, the emerging subsalt represents a fresh technological frontier that promises to extend shelf operations for additional years as success rates improve.

Fig. 3-Deepwater production activity is slated to soar in the next two years.
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Deepwater activity to surge
Figure 3 illustrates the activity in Gulf of Mexico deepwater production startups in recent years and what is anticipated in the near future. Prior to 1999, deepwater startups represented a handful each year. Presently, the number of new deepwater startups is anticipated to double in 1999 and to double again in 2000.

Shorter term, only those deepwater projects that can produce soon or are well advanced are being developed. Presently, at least one field is being delayed due to the recent soft oil price environment. Deep water development operates on an extended planning horizon and most producers are continuing development activities despite the oil price uncertainty.

Near term production from deepwater fields depends on discoveries to date which currently aggregate to 148. Of these, 49 are producing, while 99 are not yet producing, and many of the non-producing fields are under development. Ultimate recovery estimates based upon either published reserve estimates or field productivity estimates are available for 66 fields and peg recoveries at 5.2 billion bbl of liquids and 18.8 Tcf of gas. GRI's estimate of the other 82 fields for which published data are not yet available is 4.5 billion bbl of liquids and 21.3 Tcf of gas. Thus, the combined discovered total for the deepwater play is estimated at 9.7 billion bbl of liquids and 40 Tcf of gas.

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To accommodate the new deepwater production, 2 Tcf of additional annual pipeline capacity is already under construction.

Ultra-deep allure
Just how lucrative is the ultra-deep and how might resources be distributed? GRI's assessment of undiscovered deepwater potential broken down by water depth is presented in the accompanying table. Using a 200-meter dividing line, one can quickly gauge the extent of reserves on the "shelf" versus the deeper waters. The table shows shallow ultimate reserves of 113 Tcf of gas and 6 billion bbl of liquids.

Of interest is the magnitude and distribution of the resource within the ultra-deep. The table shows that 151 Tcf, or 70% of GRI's 217 Tcf deepwater estimate, lies in water depths greater than 1,000 meters. Likewise, liquids are distributed in approximately equal proportions.

How much of the deepwater has industry tapped? GRI believes that current discoveries represent approximately one-fifth of its current 217 Tcf ultimate potential estimate.

GRI's Hydrocarbon Supply Model, the analytical framework used to evaluate future North American supply prospects, is especially sensitive to three key parameters:

  • The rate of E&P technology improvement
  • The size of the gas resource base
  • Industry investment levels in exploration and production.

Addressing the recent low oil price environment and other industry concerns, five negative sensitivities were constructed to assess impacts on lower-48 gas supply. These harsh assumptions were applied continuously over the projection period out to 2015. Previous industry downturns have been periodic (1-2 years) rather than sustained in duration.

A special sensitivity case was tailored for offshore to simulate the impact of higher required rates of return due to higher perceived risk. In this sensitivity, the minimum acceptable investment hurdle rate was tripled in combination with reducing producer exploration and production reinvestment by 10 percentage points.

Fig. 4-Gulf production expected to remain robust. Even dismal economic assumptiosn can't break short term supply monentum.
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Figure 4 graphically summarizes the outcome of the five sensitivity cases on offshore supply. Suprisingly, at least through 2005, gas supply momentum continues upward in all instances. Afterwards, the negative model constraints extract varying tolls on production.

Freezing Technology
The most devastating sensitivity is freezing technology. While this constraint took time to take effect, eventually the diminished rate of technology improvement would prevent industry from extending its reach further out into the Gulf. This required industry to live off the gains it amassed during the 1990s to sustain production.

On the other extreme, a 250 Tcf cut in lower-48 resources had the least impact, but production was starting to "bend over" slightly by the end of the projection period. The 500 Tcf lower-48 resource reduction had a much greater impact, eliminating 3.6 Tcf of incremental annual offshore supply by 2015. Since GRI's model does not look beyond 2015, this raises the issue of production sustainability after that timeframe. However, a large resource base serves to defer the beginning of any moderation in production.

The special constrained Gulf sensitivity case eliminates most future offshore production growth but does not result in overall production dropping below the enduring 5 Tcf level.

Oil markets have rebounded above the psychological $15/bbl level going into early Spring. Skepticism abounds, but time will tell whether the recovery is permanent. If the price recovery holds, prospects for the Gulf of Mexico will brighten before the year is out and gas production will resume its upward march even sooner, repeating the pattern demonstrated 50 years ago.