Prolific is not too strong a description of the Gulf of Mexico. Even when exploration tailed off during the late 1980s "dead sea" phase, the Gulf of Mexico (GOM) continued to produce crude oil and natural gas. Today, it is the major natural gas theater for the US; 1999 production data shows continuing dominance of shelf-based natural gas. And the water body continues to offer new territory, new horizons, and new trends for oil exploration.
Only the upper one-third to one-half of the GOM sediment column has been tested with the drill bit. Crystalline basement is projected from magnetic data to begin at 30,000 ft, and may reach as deep as 50,000 ft in places. The lower sections of this sediment column offers lots of depth for new trends and frontier thinking as producers search for additional reserves to tie in to existing infrastructure. The only limit is economic. Deep holes require large undiscovered reserves to compensate for heavy drilling expenditures.
To date, there is no seismic evaluation off the shelf below 25,000 ft. No 30,000 ft wells have been drilled. On the shelf, 40% of the wells drilled recently are sidetracks. These significant new gas reserves (and perhaps oil reserves too) lie in deeper sediments mostly on the shelf, inside the water depth range of the more capable jackup drilling units.
Shifting economics
Producers can buy oil from OPEC cheaper than drilling for very deep reserves in the Gulf of Mexico, and the presence of natural gas, until recent months, didn't offer much of a temptation either. But the relationship between the US Gulf and producers is changing.
US natural gas prices continue above $4.00/Mcf and oil hovers near $30.00/bbl. If natural gas rises into the $4.00-4.50/Mcf range for a sustained time, then drilling the deep structures for gas will become economic. In the near future, a growing number of wells will begin to target reserves as deep as 30,000 ft wells, starting with the US Gulf continental shelf.
A drilling Mechanical Risk Indextrademark (MRI) analysis, calculated by James K. Dodson Co., relates production marginality to low MRIs for GOM wells. Difficult wells (deeper targets, more drill strings, more complex wells, deeper water) have a higher MRI because the geological structures being tested have not been produced before. While they are more complex to drill, they also have a better chance of finding new large reserves.
These newfound reserves provide a better return on investment because of higher flow rates, than wells drilled to extract smaller pockets of reserves left in older shelf fields. In 1999, the average MRI for wells in less than 600-ft water depth was 940. For wells in more than 600-ft water depth, the average MRI was 1240. At least one drilling contractor, Chiles, is preparing for this new frontier by proposing a new $110 million jackup - strong enough to handle such deep tests.
Shelf still strong
Despite the focus on bringing on new production from deepwater in the Gulf of Mexico, the bulk of offshore oil and gas production comes from the shelf. There are 6,500-7,000 well intervals producing each month, of which 200 intervals are located in deep water. Few intervals are operating during any one reporting period.
The wells with the greatest total depth drilled to date in the GOM are off the shelf. They include EEX's Garden Banks 386 well, to 27,864 ft measured depth (25,119 ft below mudline) in 2,663 ft water depth, drilled in May 1998, and Marathon's Walker Ridge 165 well, drilled to 28,873 ft measured depth in 7,997 ft water depth (19,876 ft below mudline) in March 2000.
Demand for gas
Natural gas still dominates the GOM and will for the foreseeable future. This is due primarily to the continued strong growth in the overall US economy and a public preference for the cleanest of fuels - natural gas - to produce electrical power. To date, only 23 states have deregulated electric power. Thus, the forces of deregulation have yet to fully work their way through the US economy. For example, the Northeast US has electric costs of 15-18 cents/kw-hr, while Texas has 8-10 cents/kw-hr. As electrical deregulation expands across the US, competitive forces will add power generation capability as quickly as possible to meet the growing demand. Efficiencies generated by deregulation will drive electrical costs down and usage up, which will further undergird growth in natural gas demand as clean, "green" gas-fired generators are brought on line.
The permitting process is more difficult for plants fired by oil and coal, thereby favoring gas-fired systems. This has shifted most new systems to natural gas alone or fuel-switchable systems that can burn either gas or oil.
Adding to the demand growth for gas is an unusual response: many power consuming companies are now building electrical generation capacity on site to assure that their plants have sufficient power to meet needs. Gas-fired turbines are a major driver in increasing natural gas demand. General Electric has a three-year backlog to produce the efficient HD1 turbine. Power producers are looking at 2-4 cents/kw-hr rates using the new gas turbines. This sets up very strong growth in natural gas demand.
A significant expansion of the US population, now estimated at 350 million people, has taken place since the last census. Emigration and migration have added on average an increase of around five million new people each year. Demand for gas is growing quickly again and there are limited supplies that can be brought to market in time to meet the expanding demand. There is relatively little new gas coming into the system. Wells still have to be drilled and connecting pipelines installed.
Transport limitation
Canada and Mexican gas will help, but pipelines are not in place. Even with Mexico's associated offshore gas production, the new and growing industries along the Texas-Mexico border are buying their gas supplies from South Texas, not Mexico.
As much as 20-25% of the US pipeline capacity is being used to transport Canadian gas to Mexican purchasers (effectively, US pipeline proration), which limits the delivery of gas from newly developed fields. What is needed is a gas pipeline from the Bay of Campeche to the northern Mexican border, but Pemex has announced no such gas pipeline plans.
A pipeline has been proposed that would connect both South America and Mexico to the US pipeline system. Building that will take years even if financing and permits can be arranged.
Gas production
In terms of natural gas production for 1999, the top 40 producers contain a large number of smaller companies. The major oil companies retain the top slots, with Vastar Resources as the lone exception. Vastar has put together a strong gas and oil portfolio, which will likely be folded into the BP Amoco portfolio in the future.
Shelf production (less than 600 ft water depth) continues to dominate the total picture. To date, Shell Deepwater is the only producer to date to bring significant gas reserves to market from below 1,500-ft water depths. More gas reserves in deepwater await pipeline projects to connect them to the North American market.
Shelf production of oil is still strong, but significant new reserves continue to be found in deepwater. Shell Deepwater, BP Amoco, and Marathon lead in deepwater oil production.
Competition
Frequent lease sales, regular asset sales, partnering opportunities for smaller players, established infrastructure, abundant available equipment and services, and reasonable prices make the Gulf of Mexico the most competitive oil region on the globe. The press of competition keeps companies searching for the "edge" that will separate them from challengers and provide the new reserves to take them to the next fiscal level. It is this search for advantage that keeps the GOM churning with activity. The search also keeps it effective as a testing ground for new technology and new exploration ideas.
Of all the majors, only Chevron has 500,000 acres under lease or production on the shelf. Most of the shelf has been turned to independent companies over the past few years, as the majors moved into deepwater. The majors have largely shifted to a "harvesting" mode for their shelf acreage, which makes the prospect of going after very deep reserves on the shelf all the more interesting.
Shelf acreage under lease amounts to 17.4 million acres, of which 8.7 million acres (50%) or 1,763 leases are held in primary term that have expiring dates over the next five years. Over the next three years, over 1,200 leases will expire and many will be tested. Over 300 leases will need evaluation this year, with over 500 leases in 2001 reaching the end of their primary term. Almost 450 leases expire in 2002. Thus, the stage is set for a great deal of jackup and small semisubmersible drilling and testing activity in the near term.
Shelf wells permitted show the strength of development drilling in 1999. Of the 707 wells permitted last year, 444 development wells (62%) were drilled. Through April, 145 development wells (57%) have been drilled in the current year.
The demand for natural gas is stimulating drilling. GRI, among others, projects that US gas demand will increase 50%, from 21.3 tcf in 1998 to 32.8 tcf in 2015. The race is on between the GOM and Canada to supply the new gas to meet the bulk of this new demand. In the past, Canadian gas has backed out GOM gas from major markets, but a growing market will absorb gas from all sources.
Prices remain strong for both natural gas and oil, so there is plenty of incentive to bring new volumes to market. Toward the end of this year, and certainly by next year, producers will begin testing many new geological ideas and drilling some of the challenging deeper wells.
