Deep trends in shallow water

What is most exciting about the upstream offshore market is how it continues to surprise followers by reinventing itself. For a while in the late 1980s and early 1990s, the Gulf of Mexico was written off by most pundits as the Dead Sea.

What is most exciting about the upstream offshore market is how it continues to surprise followers by reinventing itself. For a while in the late 1980s and early 1990s, the Gulf of Mexico was written off by most pundits as the Dead Sea. Then, deepwater came into its own, and all of a sudden the region everyone had so handily dismissed became red hot, or at least a portion of it did. On the tails of this rush to deepwater, majors shed their onshelf GoM properties to concentrate capital on very expensive deepwater plays.

Glad to have the prospects, independent operators bought up these onshelf leases and suddenly we had a mini boom in the conventional depths. The independents found they could make a handsome profit developing smaller fields that the majors didn't have the time or temperament to mess with.

Now many of those fields have been sifted through and triaged. The most promising are being drained quickly, and activity is slowing. But wait, just as the jackup market seems to be steadily softening in this region, a new trend develops.

Not deepwater this time, but deep gas, beyond the 15,000 ft TVD point, to be more precise. It would appear there is a lot of potential at these levels in very conventional water depths (100-ft water depth anyone?). The catch is you're talking about independents developing these finds. Such deep wells can cost upwards of $15 million to drill, and the finds are typically high-pressure, high-temperature, with a potential for sour gas. While these are headaches, it would appear the prize is worth it. Still, how to get independents to take the risk?

In steps the US Minerals Management Service with a royalty relief program. The details of this program are outlined in the lead story of this issue, but basically it is a plan that offsets the bulk of the cost incurred in drilling the discovery well in these plays. The goal of the MMS would appear to be two-fold. They are always interested in bringing more prospects on line, and these are fields that are not currently paying any royalties into the government. The second goal is to replace the nation's rapidly decreasing gas production. If there is going to be a serious push to convert power plants from coal to gas, then one of the key components will be a cheap and dependable supply of natural gas. These deep trends are a best bet to supply that feed stock.

Without the frightening prospect of a $15-million well hanging over their heads, the independents are rushing to explore in these deeper trends. And the increased activity has spurred some big news in the rig market. Jim Wicklund, reporting on the Chiles Offshore buy by Ensco, notes that there is a refocus of attention on the offshore drilling segment, specifically the shallow-water sector. Wicklund reports Rowan is working on an escalating dayrate for one of its Gorilla class rigs in the GoM that could push the $70,000/day barrier. Considering dayrates for 300-ft jackups in the Gulf are currently around $30,000/day, with some of the less specialized rigs contracting in the mid-$20,000/day range, this is big news. In any case, Wicklund reports these rates are up from the previous month (these are April 2002 numbers), indicating a rise.

More importantly, the possibility of a trend is reinforced by utilization numbers. Again, referring to Wicklund's report, it appears the utilization numbers for marketed rigs is approaching the magic 85% mark. Why is this magic? Beyond the threshold of 85% utilization of currently marketed rigs, called effective utilization, contractors look at putting cold-stacked rigs back into service. Yes, it's true this addition of rigs will have a dampening effect on the day rates and utilization numbers, but this should be temporary, while the overall trend would still be very positive.

Is all this rig market activity due to the MMS deep shelf royalty relief? Probably not. Pemex is also driving up US GoM dayrates by pulling jackups out of the market to work on its fields, but that doesn't change the fact that the GoM shelf, so often thought to be dead or dying, is currently the hottest place to be.

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