US Gulf finding, development costs vary greatly by area

June 1, 2000
Gas replacement weak; oil replacement strong

The first broad-based study analyzing finding and development (F&D) cost components by strategy area for companies operating in the Gulf of Mexico has been completed by Ziff Energy Group. The analysis covers activity on the shelf and slope out to a water depth of 1,500 ft.

The Ziff Energy Group study gathered information on seven Gulf of Mexico strategy areas.
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Despite the severe industry climate in l999, a strong mix of independents and majors active in the Gulf of Mexico participated in the study to assess in great detail individual and collective results in preparation for the price recovery. The study covers the 1996-98 period, and analyses linkages between the use of key technologies and actual economic performance in each of the specific strategies. The study also examines which technologies are successful in each strategy area.

The Gulf of Mexico is the "breadbasket" of US gas supply, providing about 25% of total. There has been much controversy regarding the outlook for gas supply from the US Gulf, and whether it will soon decline sharply, as has been forecast several times during the past decade. Certainly there has been much corporate asset portfolio activity, with a number of majors and even independents selling or swapping out of certain regions of the Shelf and generally opting to focus activity on the shelf, and/or shift spending to deepwater. Mobil's sale of 23 shelf fields to Vastar in 1998, Shell's sale of 22 fields and 16 undeveloped blocks to Apache in 1999, and Texaco's sale of 82 blocks to Anadarko in 1999, are but a few examples of this trend.

The study, analyses capital spending and reserves data for each of seven strategy areas which represent the major exploration and development plays in the offshore Gulf of Mexico Shelf and Slope area. This more precise approach to the analysis of finding and development costs provides results that are not available looking solely at publicly available corporate level data.

Finding and development costs for participating companies active in the central Plio/Pleistocene.
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Total industry drilling activity remained relatively stable over the three-year period, during which a total of 3,246 wells were drilled in the Gulf of Mexico shelf and slope area. Nearly half of the activity took place in the mature Central Plio/ Pleistocene area, followed by a quarter in the Central Miocene. One third of the new wells were classified as "exploratory," of which 432 (36%) were classified as "commercial." Of the wells classified as "development," two thirds were successful.

Study participants invested over $5 billion during the period, which resulted in the addition of over 700 million boe of proved reserves. Upward revisions to drilling discoveries accounted for 10% of this total. Drilling expenditures accounted for 75% of total spending; obviously, drilling is an area for further evaluation. Costs associated with platforms and facilities accounted for only 14% of the total, reflecting the comprehensive infrastructure available on the shelf. Costs associated with leasing and prospect evaluation accounted for the remaining 11%.

Finding and development (F&D) costs varied significantly from one strategy area to another. In the mature strategy areas, F&D costs ranged from $5.20/boe to $8.50/boe, with an average cost of $6.90/boe for the shelf and slope area in general. Production replacement on a boe basis averaged 90% over the three-year period. Gas replacement remained weak at 75%, but oil replacement was surprisingly strong at 118%. Participants re-invested an average of $6.00/ boe of production over the study period.

Value versus cost

Project economics, with conventional economic indicators, were determined for 23 actual oil and gas plays within the strategy areas. These evaluations considered exploration and development capital spending, product quality, reserves, productive capability and durability, operating costs, royalties, and typical cycle times that can range from two to five-plus years.

These full cycle evaluations were compared against the F&D costs associated with finding and developing the reserves in each area. This approach pools proprietary data by strategy area from all participating companies in order to measure the relative value of each strategy by comparing F&D costs directly to the value of the resources developed.

In the most active Central Plio/Pleistocene strategy area, the average F&D cost was $6.40/boe, with production replacement averaging 100%. Expenditures on exploratory drilling increased over the period to 10%.

On the map, the shaded horizontal band indicates the range of costs, dependent on individual play characteristics, that will provide a 10% rate of return. Based on this analysis, four of the companies, as well as the average participant performance, are achieving a better than 10% rate of return, with the remaining four achieving at least 10%, based on play characteristics.

Four of the companies in the Central Plio/ Pleistocene sample are achieving full production replacement and a rate of return of more than 10%, with three achieving significant growth.

Technology impact

As an integral part of the exploration and development process, technology can have a significant impact on F&D costs, in many cases improving results, but in some cases adding unnecessarily to costs with little benefit. Schlumberger, technical consultant for the key technology applications portion of the study, and Ziff Energy conducted a technology survey designed with two goals:

  • Identify the technologies that are consistently considered being of prime importance in each of the strategy areas
  • Differentiate the technology utilization by companies adding low-cost reserves and those that are less successful.

The survey analyzed four key technology areas in the F&D process: geophysics, drilling engineering, petrophysics, and data management. Several of the key findings were that:

  • Virtually all acquired seismic data is speculative.
  • The acquisition and integration of core data into prospect interpretation correlates with lower F&D costs by exploration and production (E&P) companies.
  • Companies that spend time and involve all team members in drilling planning see a reward in lower F&D costs.
  • Data management accounts for 30-50% of an E&P professionals' time.

Through this type of study, participating companies are able to:

  • Identify true areas of competitive advantage among the various Gulf of Mexico strategies
  • Optimize the allocation of capital
  • Measure real value added by E&P activities versus peers and industry
  • Examine net present value of resources developed for each strategy area, reflecting production rates, finding and development costs, and typical cycle times
  • Identify successful technologies of prime importance in each of the strategy areas
  • Compare production replacement by F&D with overall industry performance, for both oil and gas reserve replacement, for each strategy area being pursued
  • Compare capital spending levels to peers and the industry, for each strategy
  • Develop full cycle models of field performance.

To assess the focus and balance of a company's portfolio, it is imperative to understand the full cycle risk and reward factors of each of the strategies and options available. The study presents real results of the industry, for a variety of exploration, exploitation, and development strategies.