Gulf of Mexico deepwater gas critical to meeting US demand

GRI report cites major shift in market

The US will have to rely upon natural gas from the deepwater Gulf of Mexico to meet 30-31 Tcf of demand growth that the GRI says will develop in the 1999-2015 period. [10,225 bytes]
GRI expects an expansion in US natural gas demand, corresponding with the last large gas increase in the 1955-1970 period. [5,417 bytes]
As US carbon reduction mandates grow tougher, energy consumers will substitute for fuels with less carbon per energy unit. [4,102 bytes]
US energy demand growth will continue, according to GRI's study. [6,062 bytes]

While nominal gas prices are expected to increase gradually through 2015, real prices will vary little. [5,872 bytes]

Natural gas from expected deepwater developments in the Gulf of Mexico will be needed to meet growing demand in the US as a result of gas substitution for heavier carbon fuels and declining gas production from some onshore basins. Until new US Gulf gas reserves can be brought onto the market, growing demand will have to be met by Canadian onshore supplies.

The Chicago-based Gas Research Institute (GRI) projected an additional demand of 9 trillion cu ft (Tcf) per year of demand developing between now and the year 2015 and outlined the sources with the greatest opportunity of filling that need. The projection was part of a GRI study undertaken in late 1998.

GRI projects that supplies to meet that gas demand will come from the following: 4.8 Tcf from the Gulf of Mexico, 1.0 Tcf each from the Rockies and North Central regions, 0.9 from Appalachia, and 0.6 Tcf from Canadian imports. The addition of 9 Tcf to reach a market demand of 30-31 Tcf in the year 2015 will require a gas growth rate of 500 Bcf each year.

If US carbon reduction mandates are more stringent than projected, the need for 30 Tcf could be advanced by as much as five years to 2010. The result would shift the annual growth rate to 0.8 Tcf per year, comparable to the rate experienced in the 1955-1972 economic period, when gas demand grew in the wake of installation of major trunklines and substitution for coal in residential heating.

Rig fleet growth

In order to meet the 4.8 Tcf output needed from the US Gulf of Mexico in the coming years, the GRI projects that the US Gulf of Mexico rig count will exceed the 300 mark just after the year 2000. This is roughly equal to the rig presence during the mid-1980s.

The US Gulf rig fleet will continue expanding during the next decade to about 575 units. The Gulf of Mexico will draws it share of required rigs "in a world of projected flat crude oil prices due to the increased viability of gas economics, and particularly the lure of significant offshore discoveries in an expanding gas market exhibiting a moderately positive long-term price bias," states the GRI report.

Reserve additions in the US Gulf of Mexico are averaging "well over 12 times that of an average onshore well," the GRI states. In fact, the reserves/well impact was so great that they largely offset the recent drag on drilling (wells per year) during the 1997-1998 period as drilling costs rose.

Deepwater play

While the 60,0000-sq-mile deep water play in the US Gulf is now viewed as a world-class oil province, GRI maintains it is equally promising as a gas province, both for associated as well as free gas. "The sandstone reservoirs in the established Gulf of Mexico shelf plays were deposited in shallow water fluvial-deltaic and barrier bar environments, which were located near the ancient shoreline. It is now known that an extensive system of high quality Tertiary (Miocene through Pleistocene) reservoir sands was deposited across an area of thousands of square miles in current deepwater areas off Texas and Louisiana.

"The sands were deposited in deepwater environments and represent turbidite flows originating on the ancient shelf edge. Underlying salt movements played a role in both the localization of the sands and the subsequent development of trapping conditions."

The GRI report cited high oil and gas production rates from current deepwater wells as a major attraction for development. "Because of the high porosity, permeability, and reported low levels of reservoir heterogeneity, well drainage areas and volumes are high, allowing development of large reservoirs with just a few wells."

Gas resource size

Resource assessments of the growing deepwater play in the US Gulf of Mexico vary widely, the GRI claims. "One method of evaluating resource assessments in a rapidly developing area is to compare estimates of undiscovered resources with what has already been found."

Based upon this model, the GRI estimates that 217 Tcf of undiscovered gas potential lies in the deepwater play, less than one-fifth of what has already been found. This breaks down into about 65 Tcf in the 200-1,000 ft water depth interval, and about 152 Tcf for water depths in excess of 1,000 meters.

The GRI estimates that 40 Tcf has already been found, mostly in the 200-1,000 ft water depth interval, slightly lower than the 46 Tcf estimated made by the Minerals Management Service. "The GRI assessment for the 200-1,000 meter water depth interval is roughly equivalent on a yield basis to the shelf, while the 1,000-meter plus interval is slightly lower than the shelf."

In addition to deepwater, a second offshore growth area for new gas is the Eastern Gulf of Mexico. According to the GRI, Jurassic and Cretaceous age sediments offer great promise as a major gas province. "The primary producing trend is the Jurassic Norphlet eolian sandstone."

A total of 20 Norphlet fields have been found (eight in state waters, 12 in federal OCS waters). GRI estimates the undiscovered gas potential in the larger Norphlet region at about 27 Tcf. A new carbonate reef trend found by Chevron recently should establish production in the Cretaceous, and expand the gas potential for the region.

Energy demand

The GRI projects that US energy demand will grow from 94 quads in 1997 to over 115 quads by 2015, or a growth rate of 1.2% per year. Demand consumption has grown at a rate of 1.7% per year since 1983.

However, of this total demand figure for all fuels, the rate of growth for gas consumption is higher. Gas consumption is projected to increase from 22.5 quads in 1997 to almost 32 quads by 2015, an annual rate of about 2.0 per year, about 67% faster than the rate of growth for total energy demand. Gas's share of the total energy consumption will increase from 24% in 1997 to almost 28% by 2015.

Energy conservation restrains the potential growth in energy demand. The GRI estimates that energy consumption per dollar or gross domestic product (GDP) is projected to fall from 13,100 Btu per 1992 dollars down to 11,300 Btu, an average decline of 0.8%. This conservation offsets 20 quads of energy consumption, which would have been normally required of the supply market.

Most of the increased demand (75%) for US gas will occur in the price-sensitive electric generation (excludes cogenerators) and industrial markets. The bulk of this growth will come from independent power producers; the slowest growth will take place in residential and commercial applications. Gas demand for vehicles is expected to grow from virtually zero in 1997 to 0.5 quads by 2015, and virtually all the growth will take place after 2005.

Technology impact

GRI further points out that growth in the gas supply through 2015 will only occur if two out of three of the following factors take place:

Continued investment consistent with historical experience.
Moderate increase in drilling activity.
Continued gas supply technology improvement at levels similar to historical experience.

"By the year 2014, about 35% of gas supply depends on the availability of new technology," the GRI maintains. "Under a static tech nology picture, US gas supply continues to grow through the year 2005." Thereafter, U. S. gas supply begins to decline, and actually falls to a level below that recorded in 1997, the GRI states.

"To the extent success (finding) rates can be improved, costs reduced, or risks lowered beyond the assumptions embedded in the 1999 baseline (GRI) projection, gas supply can grow to levels above those shown in the projection."

Revenue shift

The demand for natural gas in US markets will force a shift in revenue relationships, according to the GRI. "By 2005, natural gas should surpass crude oil as the leading contributor to total producer revenues in the US. This represents a reversal of the historical revenue relationship between oil and gas.

"Traditionally, crude oil has dominated revenues, but natural gas has been closing the gap in recent years as volume expanded and wellhead prices improved follow ing exhaustion of the 1980s supply bubble."

The reversal comes about with crude oil revenues under continuing downward pressure as a result of flat real oil price growth, the GRI states. "Natural gas, on the other hand is projected to have a growing production profile along with a modest real increase in well head price.

"For producers, a 31 Tcf market (US) represents both a challenge on one hand and a solution to the crude oil revenue fall-off problem on the other. An added bonus for producers is the growing natural gas liquids (NGL) revenue contribution and will expand along with growing gas production. The offshore Gulf of Mexico, particularly the deep waters, is responsible for most of the NGL volume increase."

References "Changing Perceptions of Remaining U.S. Conventional Gas Resources," GRI-98/0253, Gas Research Institute, 1998. "GRI Baseline Projection of U.S. Energy Supply and Demand, 1999 Edition, Gas Research Institute, 1998.