Undrilled leases await ‘ignition’
James Dodson and Ted Dodson, James K. Dodson Co.Victor Schmidt, Exploration Editor
All the elements are in place for a “liftoff” in Gulf of Mexico drilling, according to James K. Dodson Co. Equipment (drilling rigs) is on the launch pad, fuel (undrilled leases) is in place, pressurization (higher oil and gas prices) is complete, and the countdown (lease expirations) is underway. All that remains is ignition - the spark that will propel the industry forward in the exploration and development of new GoM fields.
The company forecasts that the GoM will experience a 7% drilling increase in 2005 compared to 2004. Operators will drill 840 wells in 2005 compared to 783 wells drilled last year. The bulk of this new activity will be on the shelf in shallow water (<1,500 ft water depth), projected at 694 wells from 695 well permits, while the company forecasts 145 wells from 160 projected well permits for deepwater (=>1,500 ft water depth).
Based on well permit activity from Oct. 1, 2004, through March 31, 2005, the company projects 855 well permits for 2005. In earlier years, 97% of wells permitted were spudded within six months of the approval date, which yields 840 wells forecast for 2005.
Well plans show continued interest in the GoM. Plans for exploration (POE) and plans for development (POD) filed in 1Q 2005 report more exploration wells planned than development wells, irrespective of water depth. In shallow water 40 POE, representing 82 wells, compare to 24 POD (32 wells). For deepwater 17 POE, representing 51 wells, compare to three POD (eight wells).
The Minerals Management Service’s well-permits-to-drill demonstrate a split personality. In shallow water, development wells exceed exploration well permits, while more exploration than development well permits are filed for deepwater. For all water depths, the 1Q 2005 numbers (114 development, 87 exploration) show an annual drilling pace similar to the past two years.
Contrary to the growing number of well plans filed for exploration versus development, actual wells drilled for development amounted to 58% of total wells drilled in 2003-2004 versus 48% in 1Q 2005. Wells permitted for development amounted to 56% of total permits, showing the industry’s continued development focus.
Independent companies dominate GoM shelf drilling. In shallow water, the top 10 operators permitted 153 wells, 47% of 174 wells permitted from October 2004 through March 2005. Development wells permitted exceeded exploration well permits 175 to 152. Chevron Corp. is the lone major oil company in the top-ten shelf players.
Independent companies also dominate GoM deepwater drilling. In =>1,500-ft water depths, 11 operators permitted 42 of 52 wells, 81%, from October 2004 through March 2005. The bulk of these permits are for exploration wells - 34 exploration versus eight development. Three majors - Shell, Chevron, and BP - permitted 17 deepwater exploration and 10 development wells. Large independents permitted the remaining 35 exploration wells and two development wells.
There were 327 well permits issued in the six-month period, of which 259 (79%) were accounted for in the top ten areas. Development permits amount to 175 (54%) of the total 327, versus 46% (152 permits) for exploration. Of the 54 deepwater wells permitted, 40 wells will be exploration tests. On the shelf, the majority of these permitted wells will test development targets. West Cameron and Eugene Island areas will see the most activity with 48 and 38 wells permitted, respectively. In deepwater, Green Canyon has 21 wells permitted, while Mississippi Canyon has 13 wells permitted.
There were 5,321 undrilled leases held in their primary term on April 1, 2004. Independent operators hold 84% of undrilled leases in water depths <351 ft; 86% in water depths >350 ft to <1,000 ft; and 80% in water depths >999 ft to <3,000 ft.
In water depths >2,999 ft, major operators account for 60% of the undrilled leases. The lease expirations in this water depth range peak in 2007, with 863 leases expiring in that year. Of the 5,321 undrilled leases, 3,083 (58%) are deepwater leases in >2,999 ft water depth.
Prices are strong at over $50/bbl and over $6/Mcf. We have price ignition at $60 oil and $10 gas. The US is getting close to gas price rationing at usage rates of 378 million gal/d of gasoline (9 MMbbl). There is a finite supply of oil and refining capacity to produce the gasoline the US needs.
The GoM must compete for rigs with other world areas that have opened new potential for drilling. What is holding back the industry from fully testing the GoM’s potential? In part, it is the globalization of rig demand and the global auction market for rigs. The rig supply is not there to meet current demand.
Rig dayrates are rising explosively across the globe and are putting pressure on project economics. High dayrates can only be supported by the projects with the largest potential return.
Term contracts and global demand are tying up the rig fleet. To keep rigs in the Gulf, operators have got to be willing to pay what people are willing to pay for rigs in West Africa and elsewhere.
A project’s economics fluctuate with the market, and with rig availability becoming short, companies that don’t have rigs under contract will have to wait for open slots to develop in individual rigs’ schedules. These spot-market slots will trade at a premium over the next two years, as rig time is in high demand but committed to long-term contracts.
These issues are delaying the GoM’s takeoff in drilling, but its potential and familiarity are part of its strength. Independent oil company activity will grow in the coming year and could rocket to new heights as the oil market strengthens.
