MMS royalty relief piques interest in the Gulf of Mexico's shallow water

Analysts have been predicting a rebound in the Gulf of Mexico since the end of last year.

Drilling contractors get ready for the next round of GoM drilling

Judy Maksoud
International Editor
Jaime Kammerzell
Associate Editor

Analysts have been predicting a rebound in the Gulf of Mexico since the end of last year. But despite a calmer business climate, the boom hasn't arrived.

With the war in Iraq over and the world returning to "business as usual," the shallow-water deep-shelf promise of the GoM might be the catalyst that brings more exploration drilling home to the US.

With the possibilities identifiable through new seismic on the shallow shelf, at least one contractor has begun newbuilding.

Rowan expands

The GoM has been a core area for Rowan Companies for years. The company's harsh-environment Gorilla rigs are regularly contracted for deep Miocene wells in the Gulf.

According to Danny McNease, president and CEO, Rowan has dominated the deep-shelf drilling market.

"Last year, Rowan drilled 50% of the wells drilled deeper than 15,000 ft," McNease said. Going forward, Rowan expects to stay on top. "We think we will have 50% of the deep shelf drilling market in the Gulf," he said.

One way the company intends to make that happen is by building equipment specially designed for shallow-water, deep gas wells. The first Tarzan-class jackup will be the Scooter Yeargain, which is to be finished in mid-2004. A second Tarzan-class rig is scheduled for delivery by the end of 2004, and a third is to join the fleet by mid-2005.

The Scooter Yeargain will be rated for 250 ft water depth and will be able to handle 7.5 million lbs of combined payload. The jackup will be equipped with a mud system that delivers 7,500 psi via three 3,000 hp pumps.

According to Eddie Robertson, a project engineer who is part of Rowan's design team, this provision is essential for drilling the high pressure/high temperature wells that are being targeted on the continental shelf.

Pumping capabilities set this rig apart from others in its water depth class. The mud pumps can pump over 3,100 gal/min. The objective is to deliver the greatest volume possible in the shallow hole sections and to deliver higher pressure, up to 1,800 gal/min at 7,500 psi, when the well reaches greater depth.

McNease explained, "You've got to have three mud pumps. You've got to have the solids control systems to handle the large flow rates. And you've got to have the horsepower. We think it takes 6,750 hp to do the job with a conventional 116-C with three mud pumps." The Tarzan-class rigs will have in excess of 10,000 hp.

McNease believes Rowan's investment in newbuilds will position the company to take advantage of what he sees as a major opportunity.

"A lot of people are still doubting if this is a real pay. People are trying to downplay it, but it's a real deal. The fact of the matter is that the only way we're going to be able to stop the depletion in production in the Gulf of Mexico is by finding larger reserves," McNease said.

Proceeding with caution

GlobalSantaFe has undertaken an upgrade and newbuild program based largely on changing trends in the world drilling market as opposed to focusing solely on the GoM marketplace.

According to Jon Marshall, president and CEO, the GSF's newbuilds are ideal for the deep shelf, but will likely end up working internationally. But that is not to imply that the deep shelf opportunity is not on the radar screen.

"There's hope in the deep shelf, and it's an area that is largely unexplored. We want to see this market evolve," Marshall said.

Nonetheless, Marshall remains conservative in his view of the market's immediate viability. "We're cautiously optimistic about it. For one thing, the wells are going to be extremely risky. And they are going to be very expensive."

Capex allocations are an important consideration.

"The vast majority of capital in exploration budgets is dedicated to low-risk wells. A small amount of the investment portfolio is designated for high-risk wells. There are not large volumes of capital available for these wells. The most likely scenario is that a major oil company or a very large independent will be the driller," Marshall said.

Furthermore, he believes the move to deep shelf drilling will take time. "Moving from this point to the stage when drilling will begin is going to be a slow process because the operators will be shooting more seismic and re-processing it. This process is not one that happens expeditiously. And it is further exacerbated by the fact that these are extremely expensive wells, which requires a higher degree of caution," Marshall said.

On the subject of royalty relief as the impetus for increased drilling activity, Marshall is somewhat skeptical. "Royalty relief will have a positive impact, although marginal," he said. "I don't think royalty relief in and of itself will significantly drive drilling on the deep shelf. It will have a positive impact, but it is not the primary catalyst. The primary catalyst is the potential for very large reserves."

Planning to succeed

Ensco International acquired Chiles Offshore last year. In the process, Ensco increased its fleet by adding five high-specification rigs. In addition, Ensco has added three ultra-premium newbuilds, the last of which is under construction.

According to Jon Cole, Ensco's vice president of business development and marketing, one of the primary reasons for the acquisition was Ensco's desire to have rigs ready for the shallow-water, deep-shelf market. "Ensco saw the demand for higher capability, deep-gas capable drilling rigs," Cole said.

Premium assets have put Ensco in the running for deep-shelf drilling in the GoM, and the company's continuous upgrade program will bring other components of the jackup fleet into that market as well.

According to Cole, although Ensco as a company is focused on servicing the deep gas market, the upgraded rigs can work many other places in the world. In the event that the market doesn't develop, we haven't exposed a lot of unnecessary capital on upgrades, he said. "Our capital program included these upgrades anyway."

Cole sees the Gulf as a likely place for many of the Ensco rigs to work. And he believes the shallow-water, deep-shelf reserves will bring increased rig utilization to the region. "We are optimistic that deep-shelf gas is going to be the next major new horizon in the Gulf."

Cole draws an analogy between today's deep-shelf royalty relief and the relief that spurred deepwater drilling in 1996 and 1997. "At that time, the big deepwater risk was the geology. Royalty relief provided the financial incentive for operators to move into deepwater," Cole said. "Geologic risk is also the number one risk for deep gas."

Today, one of the impediments to exploring the deep shelf is the quality of seismic data. "The industry has got to be working on improving our ability to see blow the salt. We need more reliable seismic. Better imaging at greater depths will mitigate some of the operators' reluctance to take the exploratory risk," Cole said.

In Cole's opinion, independents are most likely to take advantage of the royalty relief. "If the majors move in, we are going to be really busy," he said.

Operators on the move

ConocoPhillips has drilled one exploratory well in the Green Canyon area and has plans for two more deep-shelf exploration wells, Yorrick and Heidelberg, this year. But the company has not announced significant plans for additional drilling.

In contrast, independent Newfield Exploration Co., one of the Gulf of Mexico's most active drillers, has already had a deep-shelf success. In early May 2003, Newfield saw a significant deep-shelf discovery at West Cameron block 73, in 30 ft of water. The well encountered two zones below 15,000 ft, which means the discovery qualifies for royalty relief on the first 20 bcf of production. The company expects production from the field in early 2004.

Newfield has an interest in more than 180 blocks in the GoM and operates 85% of them. According to Steve Campbell, manager of investor relations, "When majors divested a significant amount of property in the late '90s, companies like Newfield purchased the properties and found very economic things to do on those fields."

As the basin has matured, Newfield has begun to look deeper for reserves. According to Campbell, Newfield is spending about $200 million in the GoM this year. A large portion of that will be spent on deep-shelf wells. About $40 million will go toward drilling alone. And up to $20 million will be spent on seismic and other geological and geophysical work.

Campbell attributes some of the stepped-up interest in the deep shelf to royalty relief, but believes that the relief alone will not spur operators to drill the costly deep-shelf wells. On the other hand, "Certainly, 25 bcf of relief in deep targets helps make a borderline project economic," he said.

Campbell summarized the relief this way: "If the intent is to put more rigs to work, it probably is not going to do that. If the intent is to help operators complete more wells, then it's a good step in the right direction."

BHP Billiton has recently come back to the Gulf. The company, which will partner with Newfield on 30 blocks in the Central GoM, has returned to shelf exploration after a five-year hiatus. In some respects, the deep shelf play is a new play for BHP. The company says the royalty relief has enhanced the attractiveness of these prospects.

The deep-shelf play has also given rise to an agreement between Newfield and BP. In early June BP announced its intent to drill an initial well to test the Treasure Island exploration concept.

Treasure Island is a concept developed to explore for oil and gas in ultra-deep horizons below a salt weld typically found between 18,000 and 22,200 ft in the GoM shelf. The Treasure Island area covers horizons below specified depths in 116 lease blocks offshore Louisiana.

Apache Corp. added to its GoM holdings in mid March 2003, when it closed on the GoM portion of its previously announced $1.3-billion acquisition of BP producing properties.

The properties are offshore Texas and Loui-siana in areas where Apache has substantial existing operations.

"We are evaluating those properties now and probably will start drilling on them by the late third quarter or early fourth quarter," said Tony Lentini, Apache's vice president of public and international affairs. "Our goal in the Gulf with the decline curve is to at least keep our production even. Over all, this is going to be one of our most active years ever in the Gulf."

Deep shelf drilling is not presently a major focus for Apache. "We are evaluating all of our properties for deep-shelf opportunities at this stage," he said.

Because Apache hasn't purchased new leases, the present legislation will not affect its holdings. "There is pending legislation offering royalty relief for existing deep shelf activity. That would certainly be a point in its favor in terms of the economics," Lentini said.

Although the industry is unlikely to see an enormous increase in shallow-water drilling activity in the next quarter, relief has certainly stepped up interest. And that interest has changed the wait-and-see mood in the Gulf to one of cautious optimism. Time and the drill bit will tell if the optimism was warranted.

IHS Energy prepares operators to drill the deep shelf

A deep shelf production performance study recently released by IHS Energy analyzes 94 existing GoM fields, including 64 active fields, in water depths less than 1,000 ft. The study is designed to help E&P companies make informed decisions about production optimization or market entry.

The IHS study yields a number of key findings for operators interested in better understanding the opportunity and managing the technical risks of deep-shelf drilling and production. Among the study's results is an innovation in applying amplitude versus offset (AVO) seismic technology in combination with pressure data to more accurately predict the shelf's deep, productive reservoirs.

PetroSolutions Ltd. teamed with IHS to create the study. Tom Harris, president of PetroSolutions, explained some of the reasons for the study. "Smaller operators can bring new wells online much more quickly as a result of the shelf's infrastructure and production incentives, and they are much more able to manage the $4.5-$9 million completion costs per well on the shelf than the $10-$50 million costs per well in the deepwater. However, the shelf does present technical risks, including compartmentalized reservoirs, difficulties getting clean seismic at greater depths, and the real possibility of erroneous seismic AVO anomalies that lead to costly drilling mistakes."

Study objectives were to categorize each completion by fluid type and depositional style, then evaluate the production performance for each zone. The study highlights only producing fields where producing zones were from perforations greater than 16,000 ft measured depth. The AVO responses from 24 deep-shelf fields across the study area were modeled to characterize the seismic signature of deep-shelf production. In the study, researchers used decline-curve, material balance, and advanced production-analysis techniques to determine, where possible, the original volumes of hydrocarbons in place, expected ultimate recoverable volume, schedule of recovery, specific productivity indices, drainage areas, permeability thickness, skin, decline rates, plateau lengths, elapsed time for water break-through, abandonment conditions, and reservoir drive mechanism to evaluate efficiencies.

The evaluation highlights that the deep-shelf GoM has more deep, active fields and deep producing wells than any deep offshore shelf environment worldwide, with a growing resource and production base. The industry has seen a four-fold increase in maximum-flow rates during the last 40 years and a three-fold increase in monthly production volumes during the last 10 years. Cumulative monthly production from 126 active wells exceeds 30 bcf.

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