NORTH AMERICA REPORT Gulf of Mexico producers increasing leasehold acreage, escalating drilling and heavy May sale bidding indicators of second half expansion
James Dodson
James K. Dodson Co.
Leonard LeBlanc
Editor
Major and independent producers in the US Gulf of Mexico are poised to expand acreage inventory and escalate drilling. The large number of unexpired drilling plans on file and heavy bidding in the May Central Gulf of Mexico lease sale are strong indicators of that expansion.
Plans for exploration, development, and re-development drilling are being driven largely by the results of recent 3D seismic surveys. In addition to re-drilling existing wells to pursue behind-the-pipe and adjacent reserves, a process that has dominated drilling in recent years, producers are focusing on three other opportunities:
Sub-commercial acreage: Previously leased blocks in state and federal waters with strong oil shows in the past are being re-surveyed by new operators to better define reservoirs. Several new oil discoveries on very mature acreage are a testimony to the effectiveness of 3D evaluation. Leasing is approaching record levels in state waters.
Shelf-edge subsalt: The edge of the US Gulf continental shelf marks the confluence of several major geological trends, including salt structures. The May sale was the first in which operators had sufficient time to acquire and evaluate 3D seismic on these complex trends.
Deepwater, at last: The pace is picking up in leasing and drilling in deepwater, supported by deepwater bidding in the May lease sale. Producers are encouraged by the success of Shell's deepwater programs, a low dry hole rate, and confidence that the Deepstar research program is knocking down development costs. Shell and Texaco are planning exploration efforts in over 7,000 ft of water in the next 6-12 months.
Stretching maturity
The activity generated by these three opportunities, assisted by such technologies as 3D seismic, extended reach drilling, well re-entry systems, and low cost fast track production systems, is to push back the maturity decline curve for the US Gulf of Mexico.
Increasingly, producers are less likely to give up on prospective acreage until a 3D seismic survey has been run. The volume of speculative 3D seismic is growing as well as the demand for it. Dropping prices for 3D, driven by competition and by growing computer power, have made the technology available to the smallest independent operators.
Technology isn't the only factor laying the ground for increased activity in the US Gulf of Mexico:
- The US Congress, friendlier toward business now, is successfully modifying the environmental requirements for US offshore producers. Most important to operators is the reduction of OPA-90 spill liability from $150 million to $35 million.
- Many operators with international experience are realizing the value of a vast under-utilized platform and pipeline network. High facilities costs are becoming more visible as other costs yield to the budget knife. Without existing facilities in the US Gulf, the threshold reserves level for oil and gas must be much higher to justify development, or even consider exploration.
Acreage trends
The selling and transfer of offshore acreage and early surrender of tracts have slowed in recent months. Producers don't want to give up marginal acreage to a new operator with better 3D information.
Major operators continue to shuffle their portfolios to bring more focus to certain plays and farm out marginal prospects. Some independents have been forced to sell or surrender more acreage than they wanted to during the first quarter when stock prices weakened.
Stock price, the factor that determines whether an independent can build an acreage portfolio, is driving much of gas drilling activity in the US Gulf. The perception of market and price for natural gas hasn't been very positive because of the large volumes left in storage at the end of the heating season.
However, low gas drilling numbers mean that pipeline throughput will begin dropping by the end of this year, if not before. This could impact gas prices in the middle of the 1995-1996 winter heating season, a factor that has resulted in more positive forecasts for gas prices later this year.
Drilling activity
Drilling slowed during the first four months of this year, compared with most of last year, as a result of two factors:
Pre-sale lull:The approach of the May Central Gulf of Mexico Lease Sale and the prospect of obtaining better acreage encouraged producers to suspend drilling until they could evaluate lease sale winnings.
Weak prices: Abnormally high mid-winter temperatures and weaker-than-expected gas demand drove down gas prices, forcing many independents to conserve drilling budgets until cash flow and investor attitudes improved.
However, the pace is likely to pick up in the second half of 1995, as a result of many factors:
A much larger number of drilling plans than previous years are now on file, meaning that operators have been under-spending drilling budgets.
The Central Gulf lease sale was three times larger than expected, providing more drillable acreage. Producers have reduced the time span between bid award and first exploration well, so many new tracts will see a drill bit before the last quarter.
Oil prices are strong, and the close parity between supply and demand provides a good deal of upside for price movement. Gas prices, while not as high as producers would like, are firming.
Price frustrations
Will the price of natural gas affect the pace of drilling this year?
Yes, because a large number of independents, driven by stock investor perceptions of gas markets and prices, will be affected by weak prices.
No, because 3D is re-creating modest oil opportunities in the shallow US Gulf that may rival that in deepwater. These two oil plays provide additional drillable prospects.
Having investments in both oil and gas exploration and development provides balance for operators. Often, oil and gas prices move in opposite directions from one another.
There is developing evidence that equilibrium (supply-demand balance) natural gas prices are within the $1.60-1.80/Mcf range. Price spikes over $1.80/Mcf push up gas drilling, while price weakness below $1.60/Mcf results in a drilling slowdown. Technology and falling costs have combined to push the equilibrium price down from the $2/Mcf threshold it occupied in the early 1990s.
The constancy of natural gas supplies from the US Gulf of Mexico is a vital component in US consumption. Hurricane Andrew in 1992 was evidence of how curtailment will immediately impact markets and prices.
Will oil production in the US Gulf, which has been slowly declining, turn around? Could it top one million b/d again, as it once did?
Some operators have calculated that a gain of 200,000-300,000 bbl of production from deepwater by the year 2000, combined with some new production on the shelf and in state waters, could push oil production back near that mark.
US Gulf activity driven by investors
Major and large independent oil companies in the US Gulf of Mexico are becoming as much investors as operators in drilling and development programs. This shift appears to be due to four factors:
Abundant data: Many operators have a great deal of prospect data, with little opportunity to use it in-house. The next best position is to use it for investment purposes - to share it with operating partners.
Drilling fund shortage: At the same time, larger operators are unwilling to part with large portfolios of prospects and cannot raise drilling capital internally. To keep from surrendering undrilled prospects, they must bring partners in and share leaseholdership.
Outside investment shortage: Wall St. investors have pulled back from volatile oil and gas stocks this year. With good knowledge of developable prospects held by cash-starved independents, producers are filling that investment need.
Independent investors: Driven to protect company stock prices, some independents are now using staff operations people to evaluate external prospects and invest accordingly. Thus far, the strategy is working.
The availability of 3D technology, both collection and interpretation, is leveling the playing field for large and small producers. Investors who know how to evaluate the seismic data are benefiting too.
An indication of the shift of US Gulf producers from operator to producing status is the following table. The table below shows leaseholder status for operators in less than 601 ft water depths, ranked by primary term acreage. Of the 25 million acres leased in the US Gulf, 17 million acres lie in water depths less than 601 ft. Two independents lead the list.
An interesting aspect of the table is the difference in ranking between acreage held in primary term versus that of producible acres. Wide disparities in rank indicate large holdings of undrilled acreage.
A ranking of the companies holding the greatest amount of gross leaseholding acreage in water depths greater than 601 ft, not shown, would indicate mostly major operators. A top ten list for acreage leaseholding in all water depths shows all majors and one independent - Samedan.
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