US Minerals Management Service
Wide variations in natural gas prices over the past few years have led to spec-ulation regarding future prices, supply, and demand. Because the Gulf of Mexico outer continental shelf accounts for about 26% of domestic natural gas production and supplies about 22% of the total US demand, the future of GoM gas production is a key to maintaining the nation's energy stability.
Natural gas production in the GoM increased during the 1960s and 1970s before reaching a plateau in 1981. During the 1980s, production fluctuated with seasonal demands: high volume in the winter months and lower volume in the summer months. In 1996, gas production in shallow water – less than 1,000 ft – began a sharp decline. A significant increase in deepwater gas production during that period offset this decreasing production. Overall, the total GoM gas production has hovered near 5 tcf per year for over 20 years and is likely to remain fairly constant through 2007.
At the beginning of 2002, deepwater gas represented about 25% of the Gulf's total gas production, compared with 58% for oil. Although deepwater gas does not dominate GoM production as deepwater oil does, it represents a significant portion of the Gulf's total gas production and is an integral part of the nation's supply. Furthermore, deepwater gas wells have unique production characteristics.
While average shallow water production rates steadily declined over the past decade, average deepwater rates are near their highest levels. The average deepwater gas completion produces at roughly seven times the rate of the average shallow water completion. Although gas wells completed in the late 1990s, especially those in deepwater, produced at significantly higher initial rates, they also declined more quickly than those wells completed in the early 1990s. By the third year of production, average rates from wells completed in the early and late 1990s were nearly identical.
Taking advantage of the high deepwater production rates, major oil and gas operators Shell, BP, ExxonMobil, and ChevronTexaco shifted focus in the late 1990s. The major companies maintained steady gas production levels by allowing shallow water production to decline but offsetting this with deepwater gains. Much of this shallow water decline may be attributed to major companies farming out their shallow water production to non-major companies. The non-major companies also maintained steady gas production levels, but they operated wells predominantly in shallow water.
In addition to focusing on different water depths, major and non-major companies followed opposite trends regarding operational activity. The number of producing gas well completions operated by major companies decreased steadily throughout the 1990s, whereas the number operated by non-major companies increased steadily during that period. In summary, the major companies operated fewer wells, in deeper water, with higher individual production rates. The non-major companies, however, operated more wells, predominantly in shallow water, with lower individual production rates.
Gulf operators have maintained a steady flow of gas production in recent years while gas prices have fluctuated significantly. The correlation between gas prices and the total number of producing gas well completions is poor, with the exception of a moderate change in activity associated with the January 2001 price spike. It should be noted that the large drop seen in the price versus completions chart is probably attributable to the declining number of completions operated by major companies combined with the effects of several large GoM hurricanes in the fall of 1998.
It is likely that many marginal gas wells were never returned to production after shutting-in for the hurricanes. The price versus completions graphic suggests that some operators drill new gas wells or re-complete to gas zones when prices increase. However, the impact of short-term gas price increases on the total GoM production is minimal. The increasing reliance on deepwater gas production may further diminish the relationship between short-term price fluctuations and offshore activity because deepwater projects are more costly and require longer lead times than shallow water projects.
Recent spikes in gas prices raise concerns over the future of the nation's natural gas supply and demand. Several forecasts project the US demand for natural gas to increase steadily and significantly over the next decade. The Energy Information Administration, for example, projects an increase in demand from 22.7 tcf in 2001 to 29.5 tcf in 2015. Similarly, the Gas Research Institute estimates that the total US demand will reach 32 tcf by 2015.
The EIA predicts that this increased demand will be met by a combination of increased imports and higher onshore production from the lower 48 States. The GRI, however, anticipates that the largest single source of increased gas supply will come from the GoM.
While natural gas demand is likely to increase substantially by the year 2015, the GoM gas output chart illustrates the notable discrepancy as to what role the GoM will play in meeting this demand. The EIA projection includes all "lower 48 offshore" production, assumed to be roughly equivalent to GoM production. The apparent decline at the end of the Minerals Management Service forecast is probably an artifact of the agency's forecasting method. Finally, the annualized monthly production data for 2002 are Minerals Revenue Management estimates and not actual monthly production volumes.
The MMS estimates a significant volume of oil and gas resources remain in the GoM. An estimated 282 tcf of conventionally recoverable gas resources remain in the Central and Western GoM planning areas, with 233 tcf of that volume being economically recoverable at $3.52/Mcf gas prices. Considering the intense focus on the deepwater GoM, it is no surprise that the vast majority – 82% – of the mean remaining oil resources are located in water depths greater than 200 m. It is surprising, however, that almost half – 44% – of the remaining gas resources are located in water depths less than 200 m.
The remaining shallow water gas resources can be divided into two categories.
The first category includes those gas resources that can be found by drilling to depths less than 15,000 ft. This portion of the GoM has been heavily explored and the remaining gas resources in this category are in a large number of smaller, isolated reservoirs. Therefore, numerous marginally economic wells are required to exploit these resources.
The second category includes gas resources below 15,000 ft. Since these resources are relatively unexplored, the potential exists for large reservoirs with high production rates. However, this play requires more expensive wells and involves much higher risks.
On March 26, 2003, the MMS published a proposed rule in the Federal Register that, if finalized, will provide royalty incentives to encourage exploration of this deep gas potential.
The GoM will continue to be an integral part of the US natural gas supply, but it is unlikely that the anticipated increase in demand will be met through increased GoM production unless a significant new play is established. Although significant gas resources exist in the GoM, the MMS forecast suggests that operators are unable to increase the total GoM gas production above current levels. To maintain annual GoM production levels near 5 tcf, a high level of exploration activity in both the shallow- and deepwater areas of the GoM will be necessary. ;
Richie D. Baud is supervisor of the rate control unit for the US Minerals Management Service. For references, contact the author at firstname.lastname@example.org.