US Gulf continental shelf being 'milked' to fund deepwater

Amomentous event occurred in the Gulf of Mexico in November of 1999 - deepwater oil production surpassed continental shelf oil production. This bodes well for the future of the US Gulf in general, but raises questions about the future of the shelf. The shift is indicated by production data, but also shows that production patterns between inde-pendent and major oil companies are changing. In effect, the shelf is being "milked" to fund US Gulf deepwater development.

Is this unusual behavior? No, it is normal that mature producing properties are used to fund projects with a future. What is significant is the magnitude of the shift.

Major producers shifted the focus to deepwater several years ago, in the process selling hundreds of shelf properties to independent oil companies to fund that expansion. On the shelf, producers continue to extend existing fields and test the limits of extension technologies. New production on the shelf will have to come from deeper targets, below salt bodies or toward the farther reaches of the shelf (see map Offshore, June 2000).

Economic drivers

Costs continue to be the industry's primary concern, even in this flush period of higher oil and gas prices. The industry is not repeating the 1970s pattern of spending with the expectation of continuing high oil prices. The hurdle rate for projects is still set at $15-17/bbl of oil for most larger producers, which limits the number of projects considered. Producers do not want to be caught with an inventory of high-cost reserves, as they were in the 1980s.

On the shelf last year, 700 wells were drilled at a cost of $3.7 billion. The average production for those 700 wells was 194 b/d per flowing interval. For deepwater, 121 wells were drilled, at a cost of about $3.8 billion. Deepwater wells were more productive, averaging 2,380 b/d. High flow rates lead directly to higher cash flow, quicker project payout, and greater long-term profit per well. Thus, deepwater is getting the attention of both majors and independents.

Production totals

The accompanying data tables are composites of three factors: intervals, oil production, and gas production for the top 35 US Gulf producers in each segment - shelf or deepwater. Thirty-five producers are the corporate universe in deepwater. The tables are limited to that universe for comparison purposes, and are split into shelf and deepwater at the 600-ft bathymetric contour.

In the aggregate production tables, shelf oil production was 13.6 million bbl of oil from 2,602 intervals, while deepwater oil production was 21.2 million bbl of oil from 315 intervals. Even when the 7 million bbl of oil of associated oil from shelf gas intervals (not included in the tables) are added to the shelf oil total, the shelf trails deepwater slightly by 20.6 million bbl of oil to 21.2 million bbl of oil, respectively.

By opening oil intervals in deepwater, totaling 12.1% of the number of shelf oil intervals (315 of 2,602), the industry has achieved production equaling and exceeding oil production from the shelf. Shelf oil production totaled 5,255 bbl/interval in November 1999, while deepwater oil production totaled 67,419 bbl/interval. This is why the major's interest on the shelf has waned.

King of gas

The US Gulf shelf is still the "king" of natural gas, producing in total 251.1 bcf to deepwater's 60.5 bcf. However, the gas production per interval is sobering. The continental shelf produced 86,839 Mcf of natural gas per interval (3,163 Mcf/interval/day), while deepwater produced 390,651 Mcf/interval (13,592 Mcf/interval/day).

The flow rates from deepwater trends are significantly higher than the established production on the shelf. The larger totals will shift to deepwater in time, once pipeline connections are in place to bring the gas reserves to market, barring significant new discoveries of natural gas on the shelf.

Interval rankings

The companies in the tables are ranked based on the number of intervals each has reported to the Minerals Management Service (MMS). By this ranking, Chevron is the absolute leader on the shelf with 2,028 reported intervals. Its closest competitor is Vastar Resources, an independent soon to be absorbed by BPAmoco, which has less than half the intervals (952).

Unocal follows next with 843 intervals. The major producers drop after that, with Exxon- Mobil in fourth place, and Shell Offshore in seventh place. Texaco ranks 19th and BPAmoco ranks 21st. Conoco ranks 28th. Independents fill the gaps between the major producers.

The situation is different in deepwater. There, major producers compete head-to-head. Shell Deepwater holds 146 intervals, followed by ExxonMobil with 124. BPAmoco holds 103 intervals and Shell Offshore is fourth with 101 intervals. Other majors follow in turn: Texaco, Chevron, and Conoco.

Production rankings

But interval ranking explains only part of the story. The rest includes oil production ranking and gas production ranking, as well as aggregate volume figures and total dollars associated with those flows. For the shelf, oil production ranking begins with Chevron, ExxonMobil, Apache, and Vastar, respectively. For natural gas, the shelf rankings are similar: Chevron, Unocal, ExxonMobil, and Vastar. The independents give the majors a run for the top slots.

In deepwater, top production ranking belongs almost solely to the majors. For oil production, the majors rank, respectively: Shell Deepwater, BPAmoco, Marathon, and Chevron. For natural gas production, the rankings are a little different: Shell Deepwater, Shell Offshore, Texaco, and ExxonMobil. Shell Deepwater is the natural gas leader, extracting more than 21 bcf (46,612 Mcf/interval/day) during November 1999.

Interval productivity

A more interesting ranking is related to interval productivity. An average production/interval/day ranking provides a quick view of the productivity of producers. For the shelf, the average is 194 bbl/interval/day of oil, while for natural gas the average is 3,163 Mcf/interval/day.

For oil, the most productive producer is El PasoSonat with 974 bbl/interval/day of oil. Coastal Oil follows next with 515 bbl/interval/day, and Kerr McGee with 288 bbl/interval/day. Both ExxonMobil and Texaco tie for fourth with 278 bbl/interval/day.

The major producers lead natural gas production by interval on the shelf. In first place is ExxonMobil, with 5,451 Mcf/interval/day, followed by Seneca Resources, at 5,172 Mcf/interval/day, Conoco at 5,150 Mcf/interval/day, and BPAmoco at 5,079 Mcf/interval/ day. The number of producing intervals per company should also be taken into account when comparing averages.

In deepwater, the major producers still rule. For oil, Chevron leads with the best productivity at 12,183 bbl/interval/day of oil, followed by Amerada Hess at 10,491 bbl/interval/day, British-Borneo at 7,827 bbl/interval/day, and Shell Deepwater at 7,752 bbl/interval/day.

Natural gas is similar, with Shell Deepwater carrying the flag at 46,612 Mcf/interval/day. Amerada Hess is a strong number two with 33,732 Mcf/interval/day. Mariner Energy is next with 19,427 Mcf/interval/day and ExxonMobil is fourth with 15,017 Mcf/interval/day.

The rankings demonstrate, however, that deepwater is not limited to major producers. Independents are not yielding territory or position to the largest companies, but are pursuing new territories with vigor, and being productive in the process.

Non-producing intervals

The "sleeper" and future in all these numbers is in the "non-producing intervals" column. Reported "unknown" intervals are either oil or gas, but do not get labeled by the US Minerals Management Service until an initial potential is reported. This means that all the percentages and production ratios will change as these intervals are tested, completed, or plugged if found to be depleted.

Of the 15,444 well intervals reported on the shelf in November 1999, 5,494 intervals were producing on average 27 days/month. The total well intervals reported as non-producing were 9,950. Of these that had production within the last 12 months, almost 6,000 were shut-in . Less than 2,000 intervals were not reported as "tested." These included wells that had been temporarily abandoned. The balance of about 2,000 well intervals had not produced for more than 12 months.

Future

The future of these intervals has some obvious implications for the US Gulf workover market. The shelf will be quite active as contractors and producers continue sealing depleted zones and opening new intervals. Since the shelf is being turned over to the independents, there will be more activity on older fields and new potential will be tested in those fields. Step-out drilling and new deeper wells are to be expected. The shelf will be very busy.

Deepwater is different, with longer lead times and more complicated production solutions. Floating and tensioned production systems, including the yet untried floating production, storage, and offloading (FPSO) vessels, and deepwater pipelines are deep-water's future.