MMS ups estimate of Gulf of Mexico OCS deep gas reserves

Sam Fletcher
Senior Writer

HOUSTON, Nov. 25 -- The US Minerals Management Service increased its estimate of "technically recoverable" deep natural gas reserves on the outer continental shelf of the Gulf of Mexico to 15-55 tcf, up from previous estimates of 5-20 tcf, based on new data from wells drilled below 15,000 ft in the last 2-3 years and reinterpretation of previous data.

"When you look at the two top (comparable estimate) numbers, we're talking about a 175% increase in resource. We think that is very, very significant," said MMS director Johnnie Burton at a Nov. 19 press conference in Houston.

Deep shelf gas production has increased "by an estimated 137 bcf in the last 2 years alone," while the production decline among shallower zones on the shelf remains "rather precipitous," Burton said.

Deepwater drilling beyond the shelf also has brought "sizeable" new gas production online in the Gulf of Mexico. "But because the decline (among historically shallower wells) on the shelf is also sizeable, we're sort of staying flat (in Gulf of Mexico gas production) overall," said Burton.

MMS earlier announced Transocean Inc., Houston, and ChevronTexaco Corp. set a new world record for water depth in drilling in the Gulf of Mexico at 10,011 ft of water (OGJ Online, Nov. 18, 2003). The well spudded Nov. 16 by Transocean drillship Discoverer Deep Seas in Alaminos Canyon Block 951 on ChevronTexaco's Toledo prospect, is the first exploration well to be drilled in more than 10,000 ft of water.

The previous world water-depth drilling record was set in October 2001 in 9,727 ft of water on Alaminos Canyon Block 903 by another Transocean drillship, the Discoverer Spirit, working for Unocal Corp.

"We're grateful for the deep drilling on the shelf that is bringing up new production, grateful for deepwater (drilling) that is bringing new gas, because without that, (gulf gas production) would be in 25%, maybe 30%, decline," Burton said. "If we didn't have these new discoveries and all the deep drilling, we would be in a world of hurt."

High depletion rates
Unfortunately, the new deeper gas wells being drilled on the shelf and those in deep waters are depleting just as quickly as previous offshore wells, Burton said. "Their initial potential, if they are drilled below 15,000-16,000 ft, can be 3-4 times higher than shallower wells, but they also decline faster. We see almost a 40% decline in the first 18 months. They come on very strong, they decline faster, so we need more," she said.

The revised MMS estimate of deep shelf gas reserves excludes gas production in the Norphlet trend in the eastern Gulf of Mexico, which MMS treats "as another area of focus," although "technically it is on the shelf," officials said.

The OCS accounts for 30% of all US oil production and 25% of US gas production. "Over 98% of that (offshore production) comes from the Gulf of Mexico," said Burton.

"The shallow-water shelf, under 600 ft., is where most of US offshore natural gas comes from. This is the premier gas province in the US."

However, she said, "In the last 3-4 years, we have seen some very, very disturbing trends." Over the past 2 years, the number of new gas wells completed in that shallow-water area has been "the lowest we've ever seen," Burton said. "In 2000, we had 1,245 new gas well completions on the shelf; this year, we think it will be only 893, a 28% decline in 2 years."

She said, "Coupled with that, the wells that are producing are declining substantially. So we have fewer new wells being brought on line, and the existing wells producing less and less."

Royalty incentives
MMS has been "studying this particular area closely." As a result, Burton said, "About 3 years ago, the MMS started issuing leases on the shelf with a (royalty) incentive to get people back to what we call 'the new shelf,' which is the same area but to drill much deeper. Our scientists, after getting a little bit of data from some wells being drilled deep on the shelf, are convinced that there is a substantial resource in the deep shelf and we are trying to attract companies to that area."

Since 2001, MMS has offered an incentive that suspends royalty payments on the first 20 bcf of gas produced from a well drilled below 15,000 ft on the shelf, on leases with no prior history of deep drilling. "We think the incentive has been working because today we have 66 new wells being drilled on the shelf and a lot of them below 15,000 ft. We've had 4-5 major discoveries in those areas in the last couple of years," said Burton.

After analyzing new and existing data, MMS officials "came up with a new estimate of what the resource truly is, as of today," she said.

Some major international oil companies, such as BP PLC and the Royal Dutch/Shell Group, apparently have reached the same conclusion of increased potential for deep drilling in the gulf's outer continental shelf, said Burton, "because in the last lease sale for the central gulf, some of the majors that had left the shelf came back and leased quite a few leases on the shelf. We assume that's because they want to drill for deep (gas) prospects."

Meanwhile, there is pending another proposed MMS rule "that we've been talking about for some time but don't have out yet," would suspend royalty payments for the first 15 bcf of gas produced from a well drilled and completed at 15,000-18,000 ft. on an existing offshore lease—"pre-2000 leases"—in 200 m of water or less.

The royalty suspension would increase to 25 bcf for wells drilled and completed at more than 18,000 ft on an existing shelf lease (OGJ Online, Apr. 24, 2003). Industry sources report that, of the 35,000 wells drilled on the federal outer continental shelf as of 2001, only 1,842 were drilled deeper than 15,000 ft.

"In other words, we're going retroactive, which is seldom done in the rules," Burton said. "We'd like (leaseholders) to go back and drill deeper on existing leases because this (additional production) is what happens when they drill deeper."

The proposed rule to provide royalty incentives for deep drilling on existing shelf leases "came out last March; we were hoping to have the final rule out this month. We're still hoping it will be out before the end of this year, but right now it's being reviewed by the Office of Management and Budget, and they're not as enthused about giving up revenue," said Burton. "We think it's worth trading some revenue for production that is very much in demand today."

She said, "Following the (US) president's policies, we're trying to do what we can as a federal agency to increase production of natural gas. The only thing we can do is give an incentive to people who will invest and drill for it."

The existing and proposed MMS incentives apply only to shelf leases on which there has been no previous drilling below 15,000 ft. As "an added bonus" to the proposed rule, Burton said, "if they drill below 15,000 ft on a lease that hasn't (previously) been drilled below that and get a dry hole, we will give them 5 bcf of (production royalty) credit against shallow production."

"We're trying to redo all of our numbers (on resources estimates for offshore leases), but we have to wait for companies to release some of the data to us," said Burton. MMS officials also are looking reserve estimates in Canadian waters in the Atlantic and off the coast of West Africa to correlate with US estimates.

"We're getting uncomfortable in giving (out) numbers that date back 12-15 years," Burton said.

She credited President George W. Bush's administration for providing the push to update MMS estimates of recoverable reserves on federal leases. "This administration in particular has been so anxious to see if there was any way to have better production and get a little less dependent on imports. The first question is, 'Do we have it?'" Burton asked.

"Our numbers are so woefully obsolete that we thought we ought to do the best we can to update them, although to tell you the truth, I don't think anything has been done with them—moratoria after moratoria, and we respect them," she said. "But I still think policymakers, Congress, ought to have as accurate a picture as we can give them."

Contact Sam Fletcher at samf@ogjonline.com

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