Deepwater gulf gas onrush to flatten decline from shelf

May 12, 2003
With almost no fanfare, gas production from the deepwater areas of the Gulf of Mexico has risen significantly during the past 6 months and will continue to rise as new projects are brought to their full forecast potential.

Bob Lydecker
IHS Energy, Houston

With almost no fanfare, gas production from the deepwater areas of the Gulf of Mexico has risen significantly during the past 6 months and will continue to rise as new projects are brought to their full forecast potential.

This dramatic growth has taken place to date in relative obscurity due to normal industry information reporting delays and the diversity of operators involved in the projects. Expected gas production volumes from these gulf fields are also likely to exceed recent industry forecasts, something new in the North American gas business today.

During the past several years, operators in the gulf and across North America have become increasingly aware of the steep decline rates in new gas production (Fig. 1). Perhaps driven by smaller reservoir targets, or improved completion technology and extensive pipeline infrastructure, companies exploring in the gulf have been able to produce new discoveries faster than ever, resulting in new well-decline rates that are also steeper than before.

Meanwhile, development operations in the deeper water areas of the gulf have steadily been building momentum. Since the millennium, almost two dozen deepwater projects have come on stream, with about half starting production during 2002 (Table 1). Even more surprising is the fact that half of those in 2002 are designated as gas projects rather than oil-associated gas type projects.

Deepwater gas flow

Consider the total volume of natural gas production that is anticipated to flow from named projects in the near term (Fig. 2). This forecast is based upon a combination of historical data, available industry announcements, engineering design estimates of production levels, and timing using known oil and gas reserve sizes.

IHS Energy curently provides the industry with a number of these forecasting tools and the essential data and training to support them.

Many of the newer projects have only recently begun production at lower rates, while both new infield and outpost wells are completed and brought on-line. And the trend should continue throughout 2003 as defined development projects are successfully concluded.

Obviously, the projects beyond the 2000 to 2003 time frame are less well defined, leaving forecasters to speculate just how much additional production may come on stream in 2004 and beyond. Additional drilling and continued high gas prices may facilitate even more deepwater GOM gas development in the years to come.

Actual production volumes from the gulf have been hard to obtain during the past several years due to increased national security, tighter staff budgets, and typical operator reluctance to divulge what may be considered proprietary. Even the recent release of suspended or unedited industry data provides only a glimpse of the blossoming level of this new gas production.

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Operators in the deepwater gulf may currently be producing as much as 2 bcfd above production levels reported in July 2001, which was the last information reporting date available until very recently. When added to the volumes from prior developments in deepwater areas, the total production from all deepwater developments may be significantly higher than recent forecasts.

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Quite often, new deepwater gas production finds both an extensive transportation system available and a ready market in either the Gulf Coast industrial region or the Northeastern US.

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Pipeline networks from the Gulf of Mexico to inland locations have grown substantially during the years to the point where capacity and route alternatives provide a huge amount of marketing flexibility for the operators. Gas produced along the Gulf Coast could also be considered for growing energy markets in Mexico, although it is more likely to satisfy US demand.

During the next 3 years, production from deepwater blocks could add as much as 3 bcfd or about 5% to the overall current North American natural gas supply equation, in part, counteracting the steep-decline trends experienced along the shelf (Fig. 3).

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Existing shallow-water offshore gas production has already begun to decline in recent years, while gas production from projects in deeper water has become more robust. Total gas production from new deepwater development projects completed in 2002 is still hidden by the time lag in data reporting, and those project volumes will continue to increase in the first half of 2003 as additional wells are added to each system.

The large temporary drops in the production volumes shown in Fig. 3 reflect the impact of hurricanes and tropical storms that occur during the fall in the gulf. These storms are almost impossible to predict year to year and should continue to make the gulf an interesting place to work. Nevertheless, new exploration and development in the deepwater gulf is expected to continue through 2003 and beyond at a steady pace.

Shelf prospects

Drilling on the shelf in the gulf should continue well into the next decade.

Based on an analysis of the existing field-size distributions for known discoveries across North America, the yet-to-find (YTF) resources for the gulf shelf stand at 153 tcf and are concentrated into a fairly narrow size range that is highly sensitive to exploration, development, and operating costs. With another 43 tcf in deepwater YTF gas resources, the gulf region comprises about one-third of the estimated total undiscovered gas potential in North America.

To date, however, drilling on the gulf shelf has been lackluster. Rig utilization levels were high during 2001 and then fell to more traditional levels when gas prices declined in early 2002. Current operators are reluctant to launch extensive (and expensive) drilling campaigns without some assurance of gas price stability.

Many companies have also been severely hammered by precipitous drops in stock prices, investment-credit ratings, and shareholder confidence. Other companies are holding off major investments while they rebuild in-house gas marketing capability. Nevertheless, the potential for offshore gas production remains strong with gas prices of $3.50/Mcf and above.

Deepwater outlook

Yet deepwater operations and development activities are usually approached with a longer-term view of the business in mind.

Quality drilling rigs, equipment, and personnel are difficult to find and harder to keep in a market that has become quite competitive. Many companies are committed to deepwater GOM exploration programs that have evolved in recent years and are aimed at large oil targets. New advances in deepwater development technology are now becoming routine, which allows marginal discoveries and peripheral accumulations to be economically exploited.

One by-product of competition in the deepwater arena is that many operators can join in the activity to almost any participation level they feel is comfortable. In past decades, companies needed very deep pockets and large technical staffs for exploration and research into deepwater operations.

This has changed dramatically, such that the current deepwater gulf gas boom is shared by dozens of different operating companies and partners. The flexibility and responsiveness found in smaller companies seem to have given them sufficient leverage to use commercially available technology to their advantage in the struggle for deepwater oil and gas resources.

Natural gas production from the deepwater gulf may very well offset the overall declining production from fields on the shelf. Although this gas is and will be key to the balance of supply and demand during the next decade, it is critical that operators and others involved in the natural gas trade become aware of the total picture for natural gas.

Current, detailed information is essential. It allows accurate short-term and long-term forecasting. Otherwise, significant changes in the direction of our industry, such as the quiet boom in deepwater gulf gas production, could go unnoticed until market forces cause a shift in the business environment.

The author

Robert B. Lydecker ([email protected]) is project manager for IHS Energy's consulting organization in Houston. He leads the development of the company's North American Gas Business Model and recently participated in the creation of its comprehensive study detailing Mexico's natural gas supply and demand issues. Following 27 years of experience with both major and independent oil and gas companies, he joined IHS Energy in 2001, where he focuses on natural gas planning, fiscal systems, and new-venture development. He graduated with honors from the University of Texas at Austin in 1973, where he received a degree in architectural engineering.