David Paganie • Houston
MMS damage assessments
The MMS has been compiling damage reports from last year’s hurricanes Katrina and Rita, granting leniency to lessees and operators dealing with economic constraints, and recently, drafting a proposed five-year leasing program for the OCS.
The MMS in its latest assessment of damage estimates that 3,050 of the Gulf’s 4,000 platforms and 22,000 of the 33,000 mi of pipeline were in the direct paths of the hurricanes.
Hurricane Katrina, which was a category 5 when it entered the Gulf’s OCS, destroyed 46 platforms and damaged 20 others. All of the destroyed platforms were in less than 400 ft of water and all but four of the damaged platforms were situated in water depths less than 1,000 ft. Deepwater (>1,000 ft) platforms damaged by Katrina include Shell’s Cognac fixed platform in Mississippi Canyon block 194 andMars TLP in Mississippi Canyon block 807, Total’s Matterhorn TLP in Mississippi Canyon block 243 and fixed platform Virgo in Viosca Knoll block 823.
In addition, the MMS reports that Katrina damaged 100 pipelines, 36 of which were 10-in. diameter or greater and caused 211 “minor pollution incidents” on the OCS. The agency defines minor pollution incidents as those involving less than 500 bbl of oil that does not reach the coast line.
The MMS’ assessment results of damage from Hurricane Rita, which was a category 4 when it entered the OCS, indicates 69 destroyed platforms and damage to 32 others. All but one of the destroyed platforms - Chevron’sTyphoon TLP in Green Canyon block 237 -- were in less than 1,000 ft of water, and all of the damaged platforms are in less than 600 ft of water. In addition, the MMS reports that Rita damaged 83 pipelines, 28 of which are 10-in. in diameter or greater, and caused 207 minor pollution incidents.
According to Chris Oynes, MMS regional director, “The overall damage caused by hurricanes Katrina and Rita has shown them to be the greatest natural disasters to oil and gas development in the history of the GoM.” He also noted that Hurricane Ivan in 2004 only destroyed seven platforms, compared to a combined count of 115 platforms that were demolished by Katrina and Rita.
The MMS says the damage assessment counts will likely increase as underwater inspections are still ongoing.
Lease extensions
The MMS has decided to offer leniency to the Gulf’s lessees and operators directly impacted by developing economic constraints. In effect, the agency issued two Notices to Lessees and Operators (NTLs) to help offset these problems and other associated issues. Both NTLs became effective on Feb. 10, 2006, and expire on March 31, 2007.
The first NTL issued explains that the MMS will consider requests for lease or unit Suspensions of Operations (SOOs) based on rig delays. The MMS is also implementing a temporary policy for granting SOOs based on the lack of rig availability and for unanticipated time frames needed to secure long-lead equipment such as high pressure/temperature tubulars and wellheads.
The second NTL says the MMS is implementing a temporary policy for granting lease extensions in cases where the party is unable to complete the necessary damage assessment work resulting from hurricanes Katrina and Rita, or to restore production from a given lease or unit prior to lease expiration. The NTL also notes that lessee or operator should request a Suspension of Production (SOP) if the damage assessment has been completed and production restoration is underway.
Under the governing OCS Lands Act, lessees and operators are expected to explore, develop, and begin production within the initial period of a given offshore lease. However, under certain circumstances, in this case related to rig delays and availability, long-lead items and hurricane damage inspection, the lessee or operator may request a lease or unit (e.g. production platform) suspension, which extends the term of the of the lease or unit.
Five-year leasing plan
The MMS has released its draft five-year plan for OCS leasing, which is currently under development. The final draft is expected to be approved in the spring of 2007. The current five-year program is scheduled to lapse on June 30, 2007
Under the proposed plan, the MMS will study the potential for oil and gas development off the coast of Virginia and a previously undeveloped area in the North Aleutian basin off the coast of Alaska. The MMS is also considering realigning the boundaries of its Central GoM Planning Area to correspond with new federal OCS offshore administrative areas announced in early January.
Under the proposed revision, a portion of the Sale 181 area offshore Louisiana, as well as a deepwater area to the south, would be included in the Central Planning Area and could be considered for future oil and gas development.
According to the MMS, current presidential withdrawals or congressional moratoria have placed more than 85% of the OCS around the lower 48 states off limits to energy development, including all areas off Virginia. The Administration has indicated support for the moratorium, but will consider the comments from adjacent coastal states.
“The idea of leasing federal waters off the coast of Virginia comes in response to discussion in the state’s legislature about the potential of energy development off its coast,” says Johnnie Burton, MMS director. “However no offshore development will occur off of Virginia unless the state’s congressional delegation works to lift the moratorium.”
The North Aleutian basin is also included in the proposed draft because the State of Alaska requested that the area undergo further analysis.
The proposed Sale 181 area, which has significant potential oil and gas resources, according to the MMS, is not under moratorium. In addition, the MMS does not intend to offer for leasing areas within 100 mi of the Florida coast that were once part of the Eastern Gulf Planning Area.
The proposed leasing would not interfere with military readiness or training or pose an environmental risk to Florida, adds the MMS. No leasing would be proposed in the newly configured Eastern Gulf Planning Area.
Overall, the draft program proposes a total of 21 OCS lease sales in seven of the 26 OCS planning areas, some of which are also included in the current five-year program for 2002-2007.
Concurrently, and as directed by Congress in the Energy Policy Act of 2005, an inventory of oil and gas resources on the OCS has been conducted. The MMS estimates that 85.9 Bbbl of oil and 419.9 tcf of natural gas are technically recoverable from all federal offshore areas.
According to the MMS, “technically recoverable” estimates represent the quantities of oil or gas that could be produced using existing or reasonably foreseeable technology. Current technologies include drilling in water in excess of 10,000 ft and subsea depths beyond 31,000 ft.
The MMS will accept comments on the draft proposal for the 2007-2012 five-year leasing program through April 1, 2006.
Meanwhile, the National Ocean Industries Association (NOIA) needed less than one day to formulate a response to the draft proposal. According to a statement issued by the NOIA, the proposed plan is a step in the right direction, but it will ultimately fail to help the US meet its growing energy requirement, specifically because it does not include enough flexibility.
“More areas should have been included in the draft proposed program to ensure the greatest possible flexibility for the 2007-2012 time frame,” says Tom Fry, NOIA president. “At some point, we will need to get serious about addressing the critical imbalances in the supply and demand equation in the US.”
“The president wants to reduce our reliance on imports for energy, yet at home we continue to keep more than 80% of the US’ OCS off-limits.”
Sub-salt
exploration
Kerr-McGee intends to allocate a portion of its $400 million deepwater E&P capital budget for 2006 to search for reserves in sub-salt formations in the GoM.
The company estimates that the deeper, older rock in the Miocene and Eocene formations that are often covered by salt may hold up to 24 Bboe of undiscovered reserves. The operator’s 2006 exploration program in the Gulf will target “high-impact, sub-salt non-amplitude plays” in these formations located in deepwater areas. Kerr-McGee plans to drill five to seven wells under this program in 2006.
The first well scheduled to be drilled during the first half of 2006 is on the Grand Cayman prospect in Green Canyon block 561 in 2,400 ft of water. According to Kerr-McGee, the $80 million well will target 250-800 MMboe, more than 30,000 ft below the ocean surface in the Miocene formation.
The company contracted Diamond Offshore’s semisubmersibleOcean Valiantto drill the exploration well. This rig is expected to move to Grand Cayman following completion of operations on the Dawson Deep discovery, which is anticipated to be in late April. This is the first of at least three wells planned under the company’s Tradewinds project.
The company plans to spud the other two wells (Andros Deep and Norman) in the Tradewinds area in 2007.
Nexen says it will continue in 2006 with one of its core strategies, which is to explore in the Gulf’s deep waters on Miocene-aged, sub-salt prospects in the Green Canyon, Walker Ridge, and Garden Banks areas. The company plans to drill at least five exploration wells during the year in line with this strategy.
In December 2005, Nexen confirmed an unprecedented sub-salt discovery at Knotty Head with approximately 600 ft of net oil pay in multiple zones. The well was drilled to a total depth of 34,189 ft and currently stands as the deepest well drilled to date in the world. The company plans to drill at least two appraisal wells in 2006 to determine the commercial extent of Knotty Head. Pending appraisal success, Nexen expects to sanction a development a plan for the discovery within 24 months, according to the company.
Nexen’s GoM exploration strategy runs well beyond 2006, given that the company has contracted a new-build fifth generation dynamically positioned semisubmersible drilling rig, which is scheduled to be delivered in 2009. The contract provides Nexen access to the rig for two years.
Louisiana
OCS revenues
Since hurricanes Katrina and Rita slammed the Gulf Coast last year, Louisiana officials have stepped up their efforts to convince the federal government to amend its OCS revenue-sharing policy. The state’s position is that the added revenues can be used to protect the state’s coastal infrastructure.
Louisiana Governor Kathleen Blanco recently warned that the state would not support upcoming OCS Central Lease Sale 198, unless provisions are included to protect onshore service facilities. “We are unable at this time to determine the consistency of the lease sale with our coastal zone management program,” she said in a letter to the MMS.
The Louisiana Governor shared her hard-line stance on OCS revenue sharing in front of the state’s Coastal Protection and Restoration Authority as well, stating, “One source available for funding of our massive projects is our fair share of the federal OCS revenues. We want to continue fueling America’s economy, but to do that, we need the same 50% share that the other states receive, which would be applied directly to coastal restoration and the protection of the energy infrastructure that this nation depends on.”
The federal government collected $5.7 billion in total revenue from the OCS last year, of which offshore Louisiana provided 74.2%. Louisiana received $32 million from revenue sharing (less than 1% of the total generated off the state’s coast). The state receives approximately 27% of royalties produced between 3 and 6 mi offshore, but receives no portion of royalties produced outside of 6 mi.
Another strong proponent of increased OCS revenue sharing for Louisiana’s coastal facilities is Port Fourchon. Louisiana’s Port Fourchon has teamed up with the state’s LA 1 Coalition to solicit contributions to fund more than $1 billion in highway improvements for the only segment of road (LA Hwy 1) leading in and out of the port.
Port Fourchon and its more than 130 tenants have leverage to support their case in that the facilities, situated on the southern-most tip of Louisiana’s Gulf Coast, currently service at least 75% of deepwater production and more than half the drilling rigs operating in the Gulf. The port is also home to the Louisiana Offshore Oil Port, which is connected to over 50% of US refining capacity and handles 13-15% of imported oil.
Read more about Port Fourchon’s critical role in supporting GoM E&P operations, and LA 1 Coalition’s new highway construction project, starting on page 86.
Consolidation
Houston-based Northstar GOM LLC (formerly Northstar Gulfsands LLC), a wholly owned subsidiary of Gulfsands Petroleum Plc, continues its GoM expansion program through acquisition of additional assets from Petrohawk Energy Corp.
According to an SEC filing, Petrohawk entered into a definitive agreement with Northstar GOM to sell substantially all of the company’s GoM properties for $52.5 million in cash. The transaction is expected to close in March.
According to Petrohawk, the properties have combined estimated proven reserves of approximately 26 bcfe, as of Dec. 31, 2005. Through the transaction, Gulfsands bulks up its portfolio of existing interests in 64 offshore blocks, comprising 216,000 gross acres with proved and probable recoverable reserves of approximately 30.3 bcfe of natural gas. The company’s portfolio includes a further 3.4 bcfe of possible recoverable reserves with a net present value of around $14 million.•
