GULF OF MEXICO

Jennifer E. Smith
Houston

Low crude prices drive industry cuts, sales, mergers

At the time of this writing, the benchmark West Texas Intermediate crude is trading at $11.48. Across the United States, crude oil is cheap. This is good for the typical consumer - gasoline is now at the lowest price it's ever been, adjusted for inflation. Long-term though, the outlook is bleak for operating companies and the thousands of jobs that depend on those companies. Many of the operating companies do not foresee a sizable upswing in price this year, and are planning accordingly.

With companies large and small cutting capital expenditures sharply for 1999, it's a sobering picture. Chevron cut only 8% of its capex, but Phillips cut 31% compared to last year, and Conoco cut its capex by 21%. Smaller companies are obviously even more affected: Equitable Production, a smaller company active in the Gulf of Mexico, will spend $81 million, with $47.7 million of that going to the Gulf of Mexico area. Last year, Equitable Production spent $107 million in that area.

Capex isn't the only thing hurting. Layoffs are rampant: Conoco announced it will lay off 975 people; Phillips will lay off 1,400 positions; and Chevron said it will lay off an unnamed number of employees. Service companies are reacting to the environment too: Halliburton said it plans to reduce another 2,750 employees from its Energy Services Group business segment. Halliburton says these new layoffs are in response to the business impact of low crude oil prices and oil company customers' plans to sharply reduce spending in 1999.

Another response to painful prices is to tighten E&P concentration. Unocal said sharply lower spending reflects Unocal's narrowed focus on its core oil and gas E&P program - in the Gulf of Mexico and in Indonesia - in response to lower commodity prices. Some other companies, for instance GHP, are actually selling off properties not in their core areas in order to tighten concentration. This has the twofold effect of raising needed capital and relieving an expensive obligation.

And finally, mergers are an answer as well: In mid-November, Rutherford-Moran sent out what was essentially a cry for help, stating it expected to run out of funding for its work on the Gulf of Thailand Block B8/32 project by January. In late December, Chevron agreed to acquire the company, subject to reaching agreement with Rutherford's partner in the block.

All of these measures are common during a period of uncertainty. However, they will not be without impact: When companies cut capital expenditure this way, exploration activities are severely cut back, and the concentration is on developing reserves. Analyst James K. Dodson predicts 903 wells will be drilled in the US Gulf of Mexico in 1999, down from 1,003 during 1998. Of these wells, Dodson predicts 497 will be development wells, and only 406 will be exploration wells. Eagle Geophysical said it expects the current low price environment will result in lower exploration and production seismic activity.

MMS, USCG agree on responsibilities

The US Minerals Management Service signed a memorandum of understanding with the US Coast Guard specifying each agency's responsibilities for aspects of oil and national gas exploration, development, production, and transportation activities in federal waters. "This MOU provides an opportunity for MMS and the Coast Guard to continue to develop more efficient methods to perform our important functions," said MMS Director Cynthia Quarterman. "We are dealing with a changing industry and this new MOU gives us the framework to improve the procedures we use to conduct inspections, issue civil penalties, and conduct accident investigations." The memorandum is available on the world wide web at www.mms.gov/eod/MOU/cgmoufnl.htm.

E&P Briefs:

High Island Block A-494 well No. C-1, located in the Snapper prospect, reached TVD of 8,800 ft and found 207 ft gross hydrocarbon column with 80 net ft of natural gas pay in the objective sand, Cris. S. The well is now being completed and facilities initially capable of handling 15 MMcf/d of production are being made ready. Production to sales line is expected by early June. PetroQuest operates the discovery with 42% and Callon owns 50%.
Statoil has sold its 50% interest in the Viking gas field in the Gulf of Mexico as part of its plans to restructure its international operations. The sales deal gives ATP all Statoil's interests in E&P licenses outside the deepwater areas of the Gulf, where Statoil has interests in 92 blocks in water depths of 600-3,000 meters. Statoil acquired them when it bought Blazer Energy in 1997.
Elf Exploration's Osiris discovery was completed on Viosca Knoll 944 in 750 ft of water. The well, a subsea completion, is producing 15 MMcf/d of gas through Shell's Main Pass 62 platform. Elf operates and holds 66.66% interest.
Production began from the Ewing Bank 910 field in December. The Ewing Bank 910 development, located in 557 ft of water, includes Ewing Bank 910 and 954 and South Timbalier 320. Ewing Bank is completing the discovery and appraisal wells as producers, with plans to drill four additional production wells from the four-pile, stand-alone production platform in 1999. Recoverable reserves are estimated at 23 million boe, and daily production is expected to peak at about 16,000 bbl of oil and 23 MMcf of gas in mid-1999. Kerr-McGee is operator of Ewing Bank 910, with a 40% interest. Petrobras America holds a 60% interest in the field.
West Cameron 638 development, located in 375 ft of water, was completed as a single subsea well that flows to the West Cameron 648 platform operated by Oryx Energy. Production is expected to peak at 20 MMcf/d of gas. Kerr-McGee as operator owns a 40% interest. Partners in the field are Petrobras America Inc, 33.33%, and Burlington Resources, 26.67%.
West Cameron 204 No. 1 well tested 23 MMcf/d of gas and 90 b/d of condensate with flowing tubing pressure of 1,800 psi. After compression equipment is installed, the well is expected to flow more than 30 MMcf/d. EEX operates the well with 60% interest, and Petrobras America holds the remaining 40% interest.