1947 Shaking the bounds of land 1997 Probing 10,000 ft depths

After 50 years, industry finally mastering surface, subsea challenges

Long jackets took up huge sections of yard space at McDermott's Morgan City yard in the early and mid 1980s.

This Gulf of Mexico production platform is positioned halfway between shallow waters off eastern Louisiana, where industry emerged in 1947, and 10,000 ft water depths near mid-Gulf.

Kermac Rig 16 was the first platform built outside of sight of land in the US Gulf of Mexico in 1947. The platform was also the first to have a tender vessel. Note the shrimp trawler to the left used to ferry workers and supplies. (Photo courtesy Tidewater and Kerr-McGee)

After fixed steel piled platforms emerged as the production structure for the US Gulf, fabricators built nearly 5,500 of them in all sizes. The largest built was Shell's 1,500-ft-long Bullwinkle platform jacket, shown here in fabrication at Harbor Island, Texas in the late1980s.

Shell is building a series of tension leg platforms to exploit lucrative deepwater finds in the US Gulf. Shown here is the Mars Field platform, which followed the Auger TLP. The Ram-Powell TLP is now being assembled at Aker Gulf Marine's yard at Ingleside, Texas.

Activity in the US Gulf of Mexico is once again running at full speed. Drilling pipe, shown being loaded aboard supply boats at Fourchon, Louisiana, is in short supply, as are drilling units and other equipment items (Photo courtesy Brown & Root).

Computerization offshore has reduced the time and cost of many functions, from seismic processing to automation of drilling and production functions to mass balance of pipeline throughput.

Fifty years ago, the petroleum industry shook the bounds of land forever. This 50-year-long voyage has brought the industry to the edge of the 10,000-ft water depth contour, and as long as the sediments in abyssal depths show promise, the pursuit of hydrocarbons will not end there.

The significance of 1947, more than anything, was the confirmed marriage of land-based drilling systems with adaptations of marine technologies previously suited only to naval warfare and ocean transit.

Before 1947, drillers in the US Gulf of Mexico had few illusions about producing oil and gas offshore. Offshore was a place to transit, not to remain - and the shaky wooden islands weren't places to be during rough weather. Marine engineers, newly emerged from naval warfare, were floored by expectations that piled structures at sea would have to survive for years in order to provide an investment payback.

Fifty years before, in 1897, drillers spudded wells on piers off Summerland, California to probe oil seeps, but often watched in dismay as piers sank in the soft sand under the weight of drilling equipment. By 1924, construction engineers actually fabricated an independent wooden platform and derrick in Lake Maracaibo (Venezuela), only to have woodborers eat out the support pilings before the second well was completed. Off Azerbaijan, circa 1930, long piers were installed in the Caspian Sea. The wells aboard these early structures required years to drill and complete. The return was hardly economic, but Russia and Europe needed the oil after World War I.

Laying down structure

By the 1930s, drillers finally were able to disconnect shoreline links. Independent wooden platform islands were installed off Rincon, California (1932) and Creole, Louisiana (1933). Wave conditions were mild and creosote piles helped fend off the woodborers.

But it wasn't until 1937 that an offshore well tested commercial quantities of crude. By that time, the wooden islands were in 10 ft of water one mile from the beach. The following nine years brought a series of steps into deeper water, further from the shoreline.

By 1946, civil engineers realized that wood imposed physical and economic barriers for offshore structures. Not only did drill floor supports require large quantities of wooden pilings that were time-consuming to drive, but the drill floor could not be lifted out of range of storm waves.

Several years earlier, caissons made of steel enclosed concrete had been used to underpin a drilling deck in Lake Maracaibo. They were an effective replacement for wooden piles, but were expensive to build. Magnolia Petroleum decided to use steel H beams instead of either wood or concrete on a structure six miles offshore. The success of the beams and variations in the years following effectively converted the industry to steel.

The move to steel was significant in that it opened the door to other possibilities: (1) Fewer pilings were required, eliminating the dense thicket of wooden piles that were time-consuming to drive. (2) Steel piles and legs could be spaced apart, creating wave transparency. (3) Parts of the structure could be assembled onshore, reducing construction time offshore.

These opportunities laid the groundwork for the next big step offshore in 1947 - one that was just as significant, but in a different way.

1947 economics

The major US integrated oil companies got their start in the early decades of the 20th Century, not only by taking substantial risks, but also by being good property managers afterward. These major companies flourished in the years following, and by mid-1940s controlled most of the US onshore prospects and production.

New companies (most of today's large independents) were left with the high-cost, high-risk remains: truly frontier acreage, the margins around known trends, and offshore. There was some production offshore, but not such that major producers would take a risk. Just as the huge Spindletop discovery onshore at the turn of the century, small companies began recruiting investors and betting entire companies on offshore opportunities.

Kerr McGee was one of those companies. The trouble was that one of its best prospects was nine miles away from Louisiana's outer islands - on Ship Shoal 32. With deeper water and limited finances, Kerr McGee decided to build a smaller platform and tie up a vessel next to it for support - probably the first platform tender used offshore. The vessel was a surplus US Navy YF (yard-freighter) tenders which had quarters aboard and space on the deck for storage.

The tender solved two problems - it lowered the cost of the platform by reducing the size, and it provided a way to support drilling operations for longer periods of time during the day. Previously, drilling crews bunked ashore or on vessels anchored in sheltered bays and were transported offshore every day.

The use of US Navy surplus vessels expanded quickly after Kerr McGee's success on Ship Shoal 32. Within six years, the US Navy tripled the prices of surplus YFs and LSTs (landing ship-tank), and eventually ran out of them. By 1953, operators were building their own support vessels. Also, by then, the shrimp trawlers used for offshore transport were being replaced by cabin-forward crew and supply vessels.

Well-to-well mobility

Piled steel platform jackets, and especially battered leg jackets that emerged in the years following, solved the problems of providing a stable deck for drilling as well as keeping the structure in place during the frequent summer storms.

But all the work on stability and survivability did nothing to reduce the high cost of exploration. Building platforms for separate well sites was not economic. Something had to be done about well-to-well mobility.

The process of mounting drilling operations on a barge, developed around 1933 for shallow bays and rivers, was given closer scrutiny in the years following 1947. As naval architects turned from designing vessels of war to the peacetime search for petroleum, a wealth of developments surfaced over the following 17 years:

1949: First submersible (Breton Sound 20).
1954: First jackup drilling unit (Barge No. 1) Submersible with 40-ft depth capability (Mr. Charlie).
1955: First mat-supported jackup (Mr. Gus) First 3-legged jackup (Scorpion).
1956: First drillship (Cuss 1) Bottle sub mersible (Rig 46).
1962: First semisubmersible (Bluewater No. 1)
1964: 2nd generation semisubmersible (Bluewater No. 2).

All of these developments were inspired by the drive to push exploration into deeper water depths, highlighted by the transition from drilling platforms (jackups, submersibles) fixed to the seabed to floating vessels (semisubmersibles, drillships) coupled to surface conditions (see accompanying story on mobile rig history).

Marine seismic success

By 1950, drillers were hitting hydrocarbons on 25% of the exploration wells drilled, versus a 10% finding rate onshore. Seismically, there was ample evidence of big reservoirs offshore, and the earlier theories about production formations pinching out with water depth were dumped.

New geological evidence showed that hydrocarbon reserves existed from continental edge to continental edge, and were a function of past deposition as well as fracturing produced by deeper continental drift, rifting, and salt structures.

Some geologists speculated that continental drainage or runoff contributed to greater sedimentation offshore than found onshore. So, the trick was to find where thick deltaic deposits and faulting occurred together. Initially, these were found near salt domes, but gradually the focus turned to stratigraphic discontinuities.

A great deal of data to support deposition theories was emerging from a growing marine seismic industry that was converting from seabed based seismic processes using dynamite as a noise source to towed arrays using receivers and air guns. Additional support of theories would come from experimental deepwater drilling programs that tapped the sediments on the deepwater slopes.

The success of marine seismic and offshore prospectivity induced major oil companies to try drilling off Java and Sumatra, Brazil, Mexico, and West Africa. But the US Gulf of Mexico in the 1950s was largely the bastion of the early independents, just as it is today.

Explosion in 1950s

The explosion of offshore activity in the US Gulf of Mexico in the 1950s was also due to the settlement of the long-running tidelands ownership dispute between the US states and the federal government.

The Gulf of Mexico was a relatively gentle teacher, compared with the rough conditions that would come later in the North Sea. The seabed sloped gently to the edge of the shelf and the weather was mild for most of the year. Even when hurricanes approached, drillers were usually successful in shutting down operations and running to shore before winds became too high, if only because drilling units worked relatively close to shore. There were other risks in operating offshore, but they were minor compared with the risk of dry holes.

Expansion offshore the US also took place off California in the early 1950s, but California public officials, pressured by residents, were increasingly reluctant to grant permits to allow rigs to drill along the shoreline or on wharves. Also, the continental shelf sloped steeply in the Santa Barbara channel, so producers had to find a drilling platform that did not have to rest on the seafloor. Development of the drillship there in the mid-1950s solved both problems.

The petroleum industry's presence was tolerated in California during the late 1950s and 1960s. But the uneasy relationship ended in 1969 when a platform oil spill took place off Santa Barbara.

Contractors emerge

By 1955, oil companies continued to own most of the new mobile drilling vessels their architects had designed. The cost of building these large specialized vessels was high, and if the drilling industry were to collapse, there could be little other use for them. Consequently, banks declined to fund their construction, and major oil companies had to shoulder the expense.

There were, however, a few independent designers able to convince private investors the risks were worthwhile and pursued contracts with producers to shore up the investment. Among them was Alden J. Laborde, who helped to design the first purpose-built submersible barge (from which the drilling contractor Odeco emerged) and the first offshore supply vessel (from which the marine transportation firm Tidewater emerged).

After several years, major oil companies considered themselves producers, not rig or supply boat operators. They were uncomfortable with the fact that drilling vessels sometimes logged long periods of idle rig time, waiting on seismic interpretation, well log analysis, or location of another prospect. On the other hand, these owner-operators were reluctant to lease drilling units to competitors, especially after they went to the trouble of training the drilling crews.

The idea of leasing did not go away, however. If the drilling units were owned by independent contractors, these contractors could train the drilling crews themselves and make the drilling vessels available to operators. Still, banks weren't comfortable collateralizing these specialized vessels, and contracting companies had to show long-term contracts from oil companies before banks would extend money to drilling contractors.

After the external financing for independent drilling contractors emerged in the late 1950s, contractor fleet sizes increased rapidly. By 1965, the offshore drilling contractor was a fixture in the business, and a financial success, although a few vessels were still owned by operators.

The supply of mobile drilling units and supply boats continued to lag demand for years, and oil companies were forced to maintain long-term contracts through the 1970s in order to protect allocations and drilling programs. A surplus of drilling units did not occur until the mid-1980s.

First offshore recession

With the explosion of drilling vessel construction in the early 1950s and the successful transition to offshore, there was little else to defeat operators but crude oversupply or low oil prices. Both occurred in 1955 and 1956, respectively.

The industry was too successful at finding and producing oil, especially offshore. Crude oil prices sank to the $2-3/bbl level and remained there. Offshore operations suffered more than onshore because it was still a high-cost theater. The three factors impacting activity were:

Prospectivity decline: Most of the large offshore structural traps (US Gulf of Mexico, Lake Maracaibo, Baku, Sumatra) had been defined and the number of dry holes was beginning to rise as drillers pushed the limits of geophysical knowledge.
Over-supply of crude: Reserves of oil were higher than ever before. Maximum allowable production, determined largely then by the Texas Railroad Commission and cooperative governments, had been reduced, but operators saw no point in shutting in producing wells.
Nuclear energy coming: Nuclear energy had been peacefully harnessed by the late 1950s. Scientists convinced governments around the globe that nuclear power could safely replace oil in power generation and naval propulsion. The Three Mile Island and Chernobyl accidents were far in the future.

The recession in US oil production was to last until 1970. In addition to absorption of surplus crude, two other factors changed the outlook after 1970. After major doubts about prospectivity, North Sea exploration scaled up. Also, producers began finding a market for a formerly troublesome byproduct of oil production - natural gas - and began building transcontinental pipelines to the northeast US.

Gas industry buildup

During the early years of the US offshore, producers were flaring the natural gas associated with oil production, just as they did onshore. Programs to re-inject gas or conduct gas lift were not well developed. Often, pure gas wells on the continental shelf were plugged and abandoned. Known gas-prone areas were avoided by operators, which meant that offshore Texas operations never approached activity levels off Louisiana.

Because markets and transportation arteries remained poorly developed, gas prices remained weak through the early 1970s. The pursuit of gas, as distinct from oil, in the US Gulf of Mexico awaited a later period when oil discoveries waned and onshore distribution combined with rising fuel oil prices created a consumer market and demand.

By the late 1960s, US government pressure to restrain flaring was increasing. Producers were encouraged to route associated gas back to shore in separate pipelines. Large diameter transcontinental gas pipelines to the northeast US were nearly complete.

Companies dedicated entirely to natural gas transportation began to shop for associated gas. Gas sales made nice pocket money for operators. With appropriate tax write-offs for taking on the risk of oil and gas recovery, numerous investors became interested in investing in the petroleum industry in the late 1970s.

First oil embargo

Since World War II, most governments had come to accept that supplies of crude would always be available. True, the Mideast contained the lion's share of reserves, but new supplies in Latin America, the North Sea, Southeast Asia, and West Africa helped to diminish their concern.

In 1967, Egypt's Gamal Abdel Nasser shut off passage of oil to western countries through the Suez Canal, hoping to make an impression on western support for Israel's existence through oil supplies. While effective, the industry simply resorted to sending large tankers around the tip of Africa. Finally, full-scale war War broke out in 1973, where Syria and Egypt sought to reclaim land lost to Israel in the 1967 conflict. A sympathy cutback in production by other Mideast Arab nations produced the first worldwide oil shortage since World War II.

The oil-consuming world was forced to confront not only the strategic value of oil, but also that decisions made to scale up domestic production, unlike the wartime effort to build shipping, had a lag time of at least several years. Cranking up US domestic production and searching for alternative sources of crude supply got underway, but the results were not productive enough to forestall long lines of automobiles at refueling stations and fuel rationing. The impact on the industry was instant. Oil prices tripled overnight, and then doubled again within several months.

Before 1973, there had already been a shortage of drilling rigs. Since 1970, much of the world's drilling vessel fleet had been split between the US Gulf of Mexico and North Sea, with a small percentage assigned to other global areas. The industry simply had not caught up with the emerging demand. Operators in the North Sea and Gulf of Mexico could not obtain a sufficient number of vessels. Rig contracts in many cases exceeded five years. By 1973, there were 15 rigs under construction in Norwegian yards.

In 1972, something happened in the US that seriously reduced the US offshore industry's ability to respond to the Mideast oil cutoff - environmentalism. That year, environmentalists were successful in suspending a lease sale. Sales off California and Alaska were postponed, and eventually canceled. Congressional pressure forced US regulators to require time-consuming environmental impact statements for all US sales.

Industry gears up

By the end of 1973, oil demand economics pushed environmentalism to the back burner, where it would not emerge again until the late 1980s. In that year, industry spent a record amount of money at US Gulf lease sales, realizing that oil production could provide a huge windfall as crude oil prices rose each day.

Around the world, maritime seabed disputes broke out as nations sought to claim every square kilometer of continental shelf that might produce a commodity with huge future value - oil.

In the following years, the industry's ability to spot hydrocarbons was enhanced with bright spot seismic technology. And, now that crude oil commanded higher prices, industry could also afford to look beyond the edge of the continental shelf.

They did more than look. Drilling depths had already surpassed 1,000 ft. On the production side, models of tension-leg platforms and guyed tower platforms were being tested in California and the US Gulf. Seabed technology was growing, too. By 1978, there were 140 subsea completions around the world.

Second oil embargo

By 1979, the industry was prepared for the second shortage of oil, although it could not stop crude oil prices from running up. A revolution within Iran in 1978-1979 curtailed Iran's oil production from six million bbl to just over two million bbl.

In 1980, Iraq invaded Iran, an event that introduced a whole new set of worries for western nations. Iranian revolutionaries were threatening to blow up tankers in the Strait of Hormuz. By late 1980, oil prices were up to $36/bbl, and the windfall profits tax on the US petroleum industry was being planned by the US Congress.

By 1983, oil prices were still over $28/bbl, supported largely by domestic production curtailments by Saudi Arabia. As a result of shrinkage in petroleum use from a high point in 1978, oil demand was beginning to slide. But, operators had no time to think about that.

Projections for high oil prices remained in place, and area-wide leasing in the US Gulf of Mexico provided a bonanza of opportunities. From leasing to production, operators everywhere pushed to get greater production.

Few operators were prepared for events in 1985 and 1986. Saudi Arabia decided to abandon its role as swing producer, and instead maintained a high production rate. The world was awash in crude. There was no break in the downward march of prices, and they went all the way to $10/bbl.

Costs surging

Unlike the North Sea, where exploration and development were controlled by leasing rates,

activity in the US expanded tremendously after 1979. Even the highly protested windfall profits tax enacted by the US government was scarcely noted in the aftermath.

Only a few large operators noticed that the size of new discoveries in the US Gulf was slipping, and that most of the new discoveries were gas, not oil. As long as oil prices remained in the $24-28/bbl range, few companies noticed that offshore costs were pushing skyward. For example:

Platform costs: In the period between 1980 and 1982, platform fabrication costs rose by 85%. Fabrication yards were severely backlogged, and could only raise prices to accommodate the load.
Mobile rig costs: In the period between 1970 and 1980, mobile rig day rates in the US Gulf rose by five times. The shortage of drilling units was serious, and fabrication facilities were already crowded with platform and tanker construction. Rig contractors were forced to pay a premium for newbuild units, so they raised day rates accordingly.

With oil price projections rising to the $60-90/bbl range, the industry was bent on bringing as much production on line as possible. There were no limits, either to prices or capabilities.

So the plunge in oil prices, beginning in the fall of 1985, was as disastrous as it was unexpected for US Gulf operators. Almost overnight, hundreds of leases were returned to the US government, and drilling was sharply curtailed. At first, employment was cut as contracts dried up, then entire businesses went into bankruptcy. Integrated producers were protected with a windfall from downstream operations as feedstock prices fell, but everyone else had to take action on costs immediately.

In 1984, industry produced a record 14 million b/d from offshore fields around the world, as a result of the previous three years of activity. Ironically, 1985 brought the first decline in exploration experienced by the offshore operators. The demand for drilling rigs fell from a high of 530 units in 1985 to a low of 275 in 1987.

US Gulf collapse

The sudden collapse in oil prices had another effect on large and small operating companies. Their equity stock prices plunged. The devaluation caused some large investors, stuck with under-valued stocks, to consider whether segments of oil companies might be more valuable than entire integrated operations. The availability of cheap money aided this re-examination.

A run on oil companies began in 1985 and escalated in the following years. With low oil prices, high finding costs, and cheap funds provided by junk bonds, companies were almost powerless to defend themselves. Among the first large operators to go down was Gulf Oil Co., which was swallowed up by Chevron.

Though seriously weakened by continuing over-production, oil prices gradually rose. By 1988, major oil companies, as well as their large stockholders, were examining their productivity worldwide. Increasingly, the US Gulf of Mexico was coming out short.

Development costs were high, especially in the deeper water where the search had moved, and the oil reserve pools being found were declining in size. Operators, especially the majors, needed something to suit their size and ability - larger reserves with higher risk. That meant moving overseas. So, they quietly began to downsize participation in the US Gulf. Three elements were at play here:

Deepwater: A number of exploratory wells in the deepwater Green Canyon and Viosca Knoll areas of the US Gulf were very successful in the late 1980s, but developing these discoveries would be expensive and long-term. Operators had to choose between investing in deepwater programs, continue with infill drilling high up on the shelf, or disinvest. With gas prices still weakened by low oil prices, a decision was made to invest elsewhere.
Investor pressure: Oil companies were over-committed worldwide and had to find a way to lower their finding and development costs while replacing produced reserves. This was easier said than done, operators were to discover, even among those that had already moved much of their investments to other areas overseas.
Ready US buyers: Able to extract a profit out of depleted oil and gas fields left behind by the majors, independent operators became a force in the US Gulf. They were hungry for better prospects, and US majors saw an opportunity to rid themselves of acreage they could not use. Farm-outs in the US Gulf were already running at an all-time level by the mid-1980s.

Many of the new independents went heavily in debt to make the acreage purchases. In order to make these new acquisitions pay off, they quickly moved to develop the acreage. As a result, exploration drilling in the US Gulf gave way to development drilling for the first time. By 1988, independent operators in the US Gulf were drilling more wells than the majors.

Surviving the recession

Oil prices, which had dropped to $10/bbl in 1985, were unable to rise above $18/bbl by late 1988. The strategy of holding onto reserves until oil supplies dwindled or oil prices rose again was shattered forever when oil price rallies failed, again and again.

After 1988, it became evident that industry could no longer rely on larger discoveries, higher oil prices, and lower taxes to offset increases in drilling and development costs. Also, low oil prices were beginning to impact some of the OPEC countries. Iraq, disturbed over continued high production levels by Kuwait and Saudi Arabia, invaded Kuwait. Oil prices immediately soared to $35/bbl, but within months, dropped to the $18-22/bbl range. Operators were not so certain anymore that oil was under-valued or a strategic commodity.

Meanwhile, the independents in the US Gulf, hard at work on marginal gas developments, were already dealing with the reality of low profit margins. In pursuit of cost-cutting measures, the independents found a variety of ways to develop small fields:

Minimal platforms: Lightweight low-cost minimal platforms emerged as the solution to the large number of marginal fields under development. The structures could be fabricated and placed in the field quickly to speed up time-to-production.
Platform refurbishment: The removal of platforms in the US Gulf was scaling up in the face of low oil and gas prices and cradle-to-grave environmental liability costs. In fact, 1989 marked the first year that removals outpaced installations in the US Gulf.

Fabricators along the US Gulf, already troubled by the dwindling rate of platform orders, jumped on the opportunity to build low-profit minimal structures. Also, a few of the large contractors decided to make a full time business out of the removal, refurbishment, and re-installation of unused platforms.

By 1992, it was widely acknowledged that US Gulf operators were living off old discoveries and revisions of existing reserves. Drilling in the US Gulf, especially exploratory drilling, had dropped far below the 1,000-well annual level needed to replace produced reserves.

The exploration budgets for US-based operators were larger for overseas operations than those at home. The only thing to sustain the Gulf of Mexico during this period was infill drilling and workovers. The switch from oil to gas drilling was no panacea either for US Gulf operators, since gas prices were already starting to drop. The year 1992 and early 1993 were terrible for US Gulf producers. Gas prices dropped to $1/MMcf; oil prices dropped below $18/bbl. The reason these prices seemed so formidable then was because cost-cutting technologies enjoyed today were still on the drawing boards.

Stability returns

By the early 1990s, US Gulf producers had already wrung out many of the excesses of the 1980s. The industry had shed 250,000 employees in the US alone, along with countless exploration and development programs. By late 1993, there was some relief as gas prices floated higher and a new subsalt drilling play got underway in the US Gulf. But, there were limits:

Gas prices cap: As long as oil prices remained in the $14-16/bbl range, it served as a cap to higher gas prices, whether the barrier was real or psychological. Gas prices remained in the $2/MMcf range, but price volatility gave no comfort to majors or independents.
Deepwater costs: Despite the growing achievements by cost-lowering programs such as Deepstar's focus on subsea development and minimal tension leg platform designs, deepwater costs were still too high to cope with $13-16/bbl oil prices.

By 1994, technological development finally emerged, and a number of new drilling and development technologies were introduced 1995-1996. These include easier re-entries, multi-lateral completions, longer distances with extended reach drilling, and reliable equipment to support subsea completions and floating production. In addition, competition between tension leg platform technology, spar technology, and then-proven floating systems provided assurance there were few technical limits and improving economic limits to producing in deepwater.

As had happened before in history, where there was sufficient motivation, and low oil and gas prices were certainly motivation enough, industry technology found a way.

Full recovery

The first sign of change for Gulf of Mexico producers, contractors, and the service industry came in the fall of 1995 as a number of factors converged:

1. Electric power was slated for deregulation. Power groups would be looking hard for low-cost fuel. Low-cost, combined-cycle gas turbines were seen as the ultimate solution to replace high-cost conventional coal or oil burning generators.
2. Asian energy usage continued to climb, suggesting that per capita energy consumption for all under-developed nations would also provide support for a 2-3% annual increase in global energy needs.
3. Energy analysts everywhere began to surmise that OPEC surplus production capacity was not what it had appeared earlier, and that further major scale investment would be needed by OPEC or non-OPEC producers to boost capacity.
4. Production on Shell's Auger field in the Gulf of Mexico climbed to much higher rates than expected, and the producer announced high test flows on other deepwater discoveries. There was more to Gulf of Mexico deepwater oil prospects than first thought.

During the winter of 1995-1996, oil and gas commodity brokers sensed a balance in global oil and gas supply and demand, and that oil was once again an investable industry. Beginning in the first quarter of 1996, oil and gas prices began to climb. As the summer months passed, no significant dropoff in prices materialized, and the winter brought renewed support for stable oil prices above $18/bbl and gas prices at or above $2/Mcf.

Deepwater expansion

A number of high-volume test discoveries in the deepwater Gulf of Mexico in 1996 confirmed the emergence of a new oil province and the renewal of the US Gulf as an attractive theater. Major producers revised their budgets to focus more funding on the US Gulf deepwater search and development. Adding to the allure of the US Gulf were the potential of subsalt drilling and strong gas markets supported by aggressive gas marking firms.

The US Gulf deepwater expansion followed just as exploration in the North Sea was beginning to taper off. Some producers penalized international funds to expand leasing in the US Gulf in 1996, but most, aware of long-term balance in oil supply and demand, simply expanded budgets accordingly.

As leasing of tracts expanded in 1996, so did leasing of mobile rigs. The first to be hit was exhaustion of the limited supply of deepwater semisubmersibles. In a cascading fashion, drilling contractors began upgrading rigs to meet higher classifications, robbing the supply of lesser-classed rigs. By the end of 1996, even the number of qualified jackups was insufficient for the market. A number of mobile rigs moved back into the US Gulf from the Asia/Pacific region to take advantage of higher rates, but that number was insufficient for rig needs.

Through the first quarter of 1997, the shortage of mobile rigs has also exposed shortages in fabrication capacity, personnel, and supplies such as pipe, wellheads, and drawworks. The industry was able to order as many as 12 new rigs before the shortage in fabrication capacity drove up new rig building costs. This in turn forced up day rates, as producers realized that the rigs would not be available in the near term.

Today, even though oil prices have come off the $24-25/bbl levels of early 1997, the certainty of oil demand and supply balance will keep prices in a reasonably high range. Years of high productivity with minimum reserve replacement have driven down swing capacities, and greater productivity will only come at the cost of increased investment.

New technology has opened up the deepwater areas in the US Gulf and re-opened older mature areas on the continental shelf. Natural gas fields exhaust quite rapidly in the Gulf of Mexico, so the search for new gas reserves most continue without hesitation.

Deepwater gas and gas associated with oil will provide new supplies, but as oil and gas producers compete for the same mobile rigs, there is some question whether gas productivity can be sustained at a low drilling rate.

Most of the increased global demand for oil has been met by increased offshore production, much of it from the North Sea and to a lesser degree West Africa, Australia, and Southeast Asia. Increasingly, it appears that oil production from the deepwater US Gulf will replace the slippage taking place in the North Sea and other areas. OPEC will have to meet additional demand.

By the second quarter of 1997, it had become apparent that increased reserves and production from both OPEC and non-OPEC producers to meet future demand will come only in direct proportion to increased investment. Past investments have been for maintenance only.

Oil and gas will not be under-valued again any time soon, especially now that both are commodities. In fact, the commodity status of both oil and gas will tend to depress unsupported elevated prices and eliminate large over-capacity swings. The status quo, in terms of oil and gas prices and activity, is likely to last for some time.