New RR fuels growth for Independents

The US Minerals Management Service has heard the call.

The US Minerals Management Service has heard the call. It recently published a new royalty relief rule for shallow-water deep gas wells in the Gulf of Mexico. The new rule is the latest in a series of efforts to encourage more exploration.

Just a few years ago, the shelf was all but written off by operators as a mature sector of the Gulf. Majors, for the most part, divested their shelf properties, selling them to independent operators. The independents were supposed to gratefully assume ownership of these aging shelf properties. The independents would then cuts costs, streamline operations, do some workovers, and basically steward these aging fields through to P&A.

Clearly it didn't work out that way. While the majors went out spending hundreds of millions developing new technology to conquer deepwater, the independents were quietly waging their own crusades closer to shore. Not content to play nursemaid to existing production, these companies worked hard to make the properties more profitable. They then invested the profits in new technology to extend the life of the fields and further increase production. Beyond this, the independents began applying what they had learned drilling on shore to search for new reserves in deeper horizons. This evolution has led to one of the most talked-about offshore trends in recent memory, "deep-shelf natural gas."

To its credit, the MMS recognized the opportunities. Suddenly, what was at best a steady source of income has become a highly sought-after area of development and new exploration. New wells are now being drilled on the shelf in search of the large, deep-gas reserves.

Two years ago, in an effort to get the ball rolling, the MMS came out with royalty relief on new wells drilled past the 15,000-ft TD mark. This was an important step because these deep wells are expensive and technically difficult to drill. At this depth, the drill bit is very far from the rig, limiting the quality of data received. These depths are also home to high-pressure/high-temperature formations requiring special equipment and skills. The upfront cost of drilling such wells is out of reach for all but the largest independents, so the MMS decided to give these operators a break on early production to, in essence, pay the cost of the first well they drill on a prospect.

This program is working, but the promise of deep gas has yet to blossom. While this trend has been long on discussion, there has not been the rush to new drilling the MMS hoped.

Now, a second effort has made accessing these deep reserves much less painful. The new deep gas rule offers royalty relief to wells already in place prior to 2001, when the first royalty relief was offered. It also extends royalty relief to sidetrack wells.

In essence, this new rule brings the existing wellbores into the fold. This means operators can re-enter and extend their existing wells in areas where they hope to find deep gas. Obviously, it is much cheaper to extend an existing well than it is to spud a new one. In addition to this, the existing wells can be sidetracked in search of new reserves. This additional technology greatly broadens the scope of on-shelf drilling.

Tom Michels, director of Public Affairs for the National Ocean Industries Association, said his group worked with the MMS to encourage the passing of this rule. He said the activity at recent lease sales suggests there are high hopes for deep gas. Operators are snatching up on-shelf properties, encouraged by the existing royalty relief. The new rule covers existing wells or those spudded after March 26, 2003. Michels points out that those enjoying royalty relief under the previous rule have the opportunity to switch to the new rule if they feel its pricing threshold would be more beneficial. This shows the willingness of MMS to accommodate the operators, he said. The new rule also offers a dry well credit, which, Michels said, reflects the challenging nature of this deep drilling.

While the new rule contains a five-year limit between granting of royalty relief and drilling, Michels said there is the opportunity to appeal for a one-year extension. That is important, considering the time it takes to interpret the seismic data and plan such a complex well program. Michels said the only thing this new rule didn't grant was a third tier of relief to assist with wells in the 18,000-ft to 22,000-ft range.

There is a great deal of speculation that the bulk of deep gas finds will be made in these horizons, but the cost and complexity of such wells is much greater than even those in the 15,000-ft zones. This may limit the companies who can explore at such extreme depths, but Michels said NOIA is pleased with the new rule and expects it will further encourage operators to take a second look at on-shelf properties.

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