Apache exploits GoM shelf with acquisitions, exploration

Most recently, Apache cast its speculative eye on BP properties on the shelf in the Gulf and in the UK sector of the North Sea. BP was looking to offload properties that no longer fit the supermajor's portfolio. But its Forties field in the North Sea, with a 45,000 b/d production rate, and a group of 61 fields over 113 blocks along the GoM shelf, producing 200 MMcf/d and 19,000 b/d of liquid hydrocarbons before co-owners in BP's shelf fields exercised their preferential rights, held major appeal for Apache at a price tag of $1.3 billion. Production could – and did – immediately bring in a new source of cash, and the GoM shelf properties were ripe for exploiting.

Apache has traditionally shied away from the capital-intensive deepwater GoM, though it is active in other arenas, with four deepwater discoveries off Egypt. Apache works the Gulf out to about 1,200 ft of water and operates more than 295 platforms on the shelf.

"Being that it's a fairly mature area, I'd call us an exploitationist," Jon Jeppesen, senior vice president of the Gulf Coast region, says, noting that the bulk of Apache's production dollars are earmarked for exploitation. "It's not that we don't do exploration, but we're not geared toward making a living doing exploration only. We've got a good mix of prospects in our portfolio."

The company expects an active year in the Gulf, with plans to drill 40 to 50 wells on the shelf over the next year. Some of the budget will go to drilling and completion as well as recompletion and compression, possibly including work on the new fields, Jeppesen said. Apache expects to spend about $110 million drilling in the region with 75% of those drilling funds going offshore.

With each new acquisition, David Carmony, engineering and production manager, said, Apache wants to immediately increase cash flow, which means the company tends to initially focus on recompletions on current zones, stimulations to increase production, and other activities that can make a speedy financial impact by bringing production onstream. Concurrently, Apache moves through the slower development agenda of processing and reprocessing seismic data, choosing a drilling location, and getting a rig ready to drill, he said. That procedure can take six to eight months, even at a streamlined company like Apache, Carmony said.

Following an Apache acquisition in the Gulf, Carmony said, one will "typically see us in a wave of rigs." The first wave of rig activity on the former BP fields is now under way, and drilling projects will follow. Jeppesen said the BP properties could reach drillable status later this year. Apache has its geologists and reservoir and production engineers poring over a mountain of data to bring the new GoM assets to drillable status. Apache has or will purchase 3D seismic data over all the properties.

In the $1.3-billion deal, Apache spent $509 million for the British company's GoM fields, with the remainder paying for the Forties field in the UK sector of the North Sea. The GoM buy closed in March, and the North Sea transaction closed April 2.

The blocks in the GoM hold an estimated 72.2 MMboe of proved reserves after exercise of preferential rights. Apache sees four as the major value fields: Pelto blocks 10/11, High Island block 573, Ship Shoal block 126, and West Delta block 40. Apache now holds 100% interest in all four.

The fields are fairly large and somewhat complex, Jeppesen said.

"Our focus will be geared toward getting production up as quickly as possible on the properties we've acquired," Jeppesen said.

Closing about half a month before the March 31 ending of the first quarter, the purchase has already boosted Apache's bottom line. In its 1Q 2003 earnings report, Apache posted a record quarterly net income. Its $340 million 1Q 2003 net income exceeds Apache's yearly net income for all but three years of the company's 48-year history. G. Steven Farris, president, CEO, and COO, attributed the results to "a combination of robust commodity prices and strong production added at responsible costs."

The independent's oil and gas average outputs were both up on 4Q 2002 production. Apache's 1Q 2003 oil production averaged 158,815 b/d, up from 150,253 b/d in 4Q 2002. Natural gas production averaged 1.09 bcf/d in 1Q 2003, up from 1.07 bcf/d 4Q 2002. The 1Q 2003 results reflect 18 days of oil and gas sales from the GoM properties Apache bought from BP. The Forties field did not figure into the results because that portion of the deal closed after the end of the first quarter.

Trickling down

Just as BP sold off acreage no longer producing on the scale to which it is accustomed, Apache periodically relieves itself of older properties, Jeppesen said. The company is working on a divestiture package of some of Apache's more mature properties, he said, and the package was expected to go on offer in 2Q 2003. Apache uses several factors when considering divestiture: operating efficiency, production rate, and perceived remaining upside potential.

Preparing the divestiture package includes reviewing all properties to make sure Apache didn't miss any large deposits, Jeppesen said.

"We've put them through the mill a few times," Jeppesen said. "We feel pretty good about anything that we say is ready for divestiture, that we've wrung out what we can."

At that point, smaller companies buy properties and continue producing the fields, he said.

"There is a food chain in the energy business, and projects that no longer fit Apache's portfolio often are attractive to smaller companies, just as some assets no longer attractive to the majors may be of value to Apache," he said.

The company has honed its focus on exploitation in the last several years, especially following its 1999 acquisition of shelf properties of South Timbalier block 295, South Pass block 62, Ship Shoal block 189, and West Delta block 103 from Shell. Jeppesen said Apache put teams of geoscientists and reservoir engineers to work to bring these fields onto production and exploit remaining reserves.

"We have a strong sense of urgency," Jeppesen said about Apache's approach to rapidly bringing the properties onstream. "There are a lot of opportunities on these properties that have a significant impact on our bottom line."

The independent measures how it has performed on each purchase. The Shell purchase, for example, cost $716 million, and within 3.5 years had returned 91% of the investment with 74% of the reserves still to be tapped.

Jeppesen said the Shell fields, heavily oriented to oil, increased Apache's oil output by four or five times as well as getting the company into much bigger fields and spreading Apache across the Gulf shelf.

"We've grown offshore mainly through acquisitions," Carmony said.

The constant search

Apache is always looking for more reserves – both through purchase and exploration. To find reserves, the company uses and reprocesses 3D seismic data, amplitude versus. offset (AVO) analysis, seismic inversion, and reservoir studies.

Apache is "aggressively using 3D seismic-related technology both for exploitation and exploration," said Mike Bahorich, executive vice president of E&P technology.

Using 3D seismic is central to Apache's ability to maximize the value of assets, he said. "Virtually everything we drill, we're using 3D seismic technology."

Some uses are more advanced 3D techniques, such as in-house processing of AVO and seismic inversion, he said. Inversion of seismic data to rock properties, which tends to work best in the shallower section, helps predict reservoir characteristics such as velocity, density, and resistivity. AVO analysis helps calibrate seismic attributes that in some cases relate directly to hydrocarbons.

"At Apache, we have archived the majority of our pre-stack seismic data in-house so we can rapidly re-image a prospect area within a few days, which cuts cycle time and enables a more thorough analysis to take place," Bahorich said.

In the hunt to improve the ability to locate and exploit hydrocarbons, Apache developed and patented spectral decomposition software that it sold to Halliburton in 2001.

"We were trying to image subtle channel systems," Bahorich said. "In the process of improving some existing methods for doing that, we developed the intellectual property that we sold to Halliburton."

He said the technology enables the 3D seismic imaging of subtle stratigraphic features and helps identify thick pay sections. Halliburton's Landmark unit has released a software product called SpecDecomp based on this technology.

"The Gulf has been explored for a number of years now, and the reserve targets are getting smaller. Using appropriate and cost-effective technology is critical to future success," Bahorich said.

The need for the technological edge increases as the Gulf ages.

"As we develop these mature fields, our targets are becoming smaller," Carmony said, adding that the decreasing reserves bring well costs to the front of the line in terms of issues. Even when gas is pulling in $5/Mcf, he said, it still can cost quite a bit to replace reserves, which is Wall Street's measure of a company. Increasing costs, such as skyrocketing rig rates, can make what would otherwise be an economic field development uneconomic, he said. One answer, Carmony added, lies in new technology. The company has been looking at expandable screens to control costs related to sand control in completions, he said.

Following the purchase of acreage from BP, the GoM is now the area with Apache's highest daily output. The GoM transaction includes interest in 113 blocks over 61 fields. Apache is the sole interest owner in 19 of those fields.

Bahorich said he hopes to see cheaper 4C seismic in the Gulf, but hardware innovations are needed to get there. He also wants to see expanded use of 4D seismic on the shelf. He said 4D seismic has been very useful in the North Sea and deepwater plays, but is little used by the industry on the shelf in the GoM. Apache is in a shelf project on which it is likely to use 4D, he said. This would mark Apache's first use of 4D on a project on the GoM shelf; 4D seismic data already exists for the Forties field.

Exploit, exploit, exploit

Apache exploits the shelf in a manner similar to many other independents exploiting shelf hydrocarbons – frac packing, gravel packing, drilling horizontal wells. The difference, Carmony said, is the urgency credo at Apache, not technology.

"There's not anything that Apache's doing offshore on the production side that the other producers are not doing," he said. The approach at Apache is more "let's get out there and get this done."

Apache can move in weeks rather than at the slower speed of larger companies, where projects may take months or years to weave through often multi-tiered approval processes and budget allocations.

"Time is of the essence to get in there and do our thing," Jeppesen said. "That's where the economic opportunities are."

He doesn't see Apache slowing down on the acquisition front, either.

"We don't own everything on the shelf," Jeppesen said. "There are still a lot of good properties out there. Majors will still probably divest more properties, and we'd like to be the buyer."