A. D. Koen
Senior Editor-News
Independent companies are driving rebounding drilling and development activity in the Gulf of Mexico.
A window of opportunity for independents--cracked open in the late 1980s when major integrated companies began to pursue larger prospects outside the U.S.--is opening wider because of stronger U.S. natural gas prices.
At the same time, evolving geophysical technology and savvy logistical tactics are reducing the upfront investment dollars needed to bring offshore wells on line and shortening project development timetables. In addition, the Gulf of Mexico's vast infrastructure of pipelines and production installations, developed on the Outer Continental Shelf the past three decades, is buttressing the growth of independent activity.
Growing know-how and better economics are giving more independents confidence to operate offshore and have spawned a flurry of acquisitions by a few larger independent companies.
Evolving technical capabilities are broadening the range of prospects independents are willing to undertake. For example, more independents than ever are developing or plan to develop deepwater prospects--in the past high dollar projects reserved for deep pocketed majors. Also, some independents are applying horizontal drilling techniques at selected locations.
Group definitions differ according to source, but independents by many statistical measures are dominating Gulf of Mexico upstream oil and gas activity as never before. The weight of E&D activity in the gulf has swung so heavily toward the independent side of the scale that some are claiming the offshore region as an independents' province.
STATISTICAL INDICATORS
Drilling activity in the Gulf of Mexico this year has sustained a resurgence that began in summer 1992. Mobile offshore rig activity since the end of June has averaged more than 120 units, nearly double rig utilization a year earlier, according to Gulf of Mexico rig locator reports compiled by Offshore Data Services Inc. (ODS), Houston. Most of the increased drilling has been by independents.
Data collected by Oceandril Inc., Houston, show that 70% of all rigs working in the gulf since first quarter 1991 have been hired by independents. Independents in first quarter 1993 hired 73 of 103 active rigs and 77 of 114 units in the second quarter. In August 1993, 86 of the gulf's 120 active offshore rigs--71.7%--worked for independents.
Independent drilling activity in the gulf is up because independent companies have sought and acquired more acreage in the region. Minerals Management Service data on recent federal lease sales show independents in most years since federal areawide leasing began in 1983 have spent more money and acquired more acreage than major companies. Independents have spent more money at federal lease sales in the gulf since 1986 and acquired more acreage since 1989, "regardless of the size of the sale," said Chris C. Oynes, MMS acting director for the Gulf of Mexico region.
He noted major companies' enthusiasm for prospects outside the U.S. has expanded along with the growing perception that large oil and gas discoveries in the U.S. are unlikely. However, the size of gulf discoveries is for many independent newcomers larger than in their traditional onshore areas of activity.
Major companies also are less willing to work in the U.S. because changes in U.S. regulation have raised the ante needed to drill offshore and thrown other stumbling blocks in front of companies trying to develop oil and gas on public land, Oynes said.
ACTIVITY INDICATORS
According to MMS data, independents offered 83% of bonuses at federal lease sales this year in the gulf, up from 46.5% in 1986. Similarly, independents in 1992 federal offshore lease sales won 76% of all acreage acquired, up from 44.8% in 1988 sales.
J. Connor Consulting Inc., Houston, calculates independents have won 51.5% of 3,551 offshore federal leases issued in the Gulf of Mexico from 1988 through the March 1993 federal sale for the central OCS. But perhaps more telling is data Connor compiled showing how independent companies have used gulf acreage since acquiring, it.
Connor found that independents have drilled 85.1% of all wells on tracts leased since 1986, recorded 120 of 129 discoveries, and installed 48 of 52 offshore structures. Of the 70 recently leased tracts with production, independents operate 66. Independents hold more active leases in the gulf, as well as more leases with production, in primary term, and with at least one well drilled or completed.
This year in the gulf through August independent operators filed 141 of 205 plans of exploration, 71 of 125 development plans, and 241 of 397 drilling permits, Connor's statistics show. The rush of independents to expand activity in the gulf is being led by longtime offshore producers and newcomers alike. Strategies of expansion are as varied as the profiles of the companies themselves.
OPERATING BOOSTS
Despite increasing availability of good acreage, higher gas prices and technological advances proved to be the final boosts needed for many companies to begin ramping up activity.
PG&E Resources Co., Dallas, in December 1990 began trying to ramp up its gulf activity by buying established gulf operator Corpus Christi Oil & Gas. With the arrival of higher gas prices in fourth quarter 1992, the company started a workover and recompletion program that continued into this year. That activity this year has been' augmented with a modest increase in drilling.
"Our drilling program will continue growing now that gas prices have firmed up a bit," said Kent Johnson, PG&E vice president of exploration & land.
Before being acquired by PG&E, Corpus Christi O&G operated several properties with nonindustry partners but typically retained minority interests of 15-25%.
"As we've gone forward, everything we've done so far has been with us as operator. On the blocks we're acquiring, we're taking larger interests," he said. "Gas prices obviously are an important driver."
For PG&E, better, cheaper geophysical data also has been an important building block.
"Improved 3-D data and coverage offers a lot of attractive opportunities missed in the past because of inferior data quality in the past," Johnson said. "Several seismic contractors are shooting speculative surveys, and the cost of 3-D seismic has come down a lot. With all that, we think we can evaluate offshore blocks much better than just a few years ago."
FRONT LINE TECHNOLOGY
Jim Watkins, manager of commercial and business development for Aran Energy Corp., Houston, said the use of front line technology by independents is increasing because costs have decreased and availability has increased.
"A lot of former major company employees are working for independents as consultants," Watkins said. "An independent can have 3D work done by some real experts in the field. Geophysical workstations can be leased, and there are a lot of little boutique geophysical evaluation groups in business."
Aran Pres. Archie Thompson said subcontracting out geophysical work is reducing overhead until the company's assets meet its organizational needs.
"We can have a small core team, farm out a lot of the work to highly qualified, skilled people, and simply supervise the running of their evaluations," Thompson said.
John F. Schwarz, president and chief executive officer of Energy Development Corp., Houston, said independents in the gulf in many ways are the technological equals of majors.
EDC is participating in a 5 year 3D seismic shoot on 600 blocks in the central gulf. Schwarz expects 3D coverage by yearend of 52 blocks.
"We decided if a company wants to compete in the gulf, it'd better be in that shoot," Schwarz said. "We'll share the data with two other companies, share drilling of prospects, and hopefully have a reward to share."
Enron Oil & Gas Co., Houston, expects to base about 75% of its offshore drilling this year on 3D seismic data.
"We are very heavily involved in that particular technology," said Enron's Mark Papa. "It used to be unusual when a well was drilled on the basis of 3D seismic. Now it's unusual when an exploratory well does not have 3D seismic."
OPERATE OR GET OUT
Louisiana Land & Exploration Co. (LL&E), New Orleans, was among the companies that 3-5 years ago saw a window of opportunity beginning to open in the Gulf of Mexico.
"We saw the majors leaving and relinquishing a lot of acreage, including some blocks they deemed uneconomical but some of which were targets we wanted to be involved in," said John F. Greene, LL&E executive' vice president of exploration and production.
At the time, a few larger gulf operators were collecting 3D seismic data with mixed results. LL&E believed the use of 3D would spread across the gulf and that results would improve. So LL&E in 3 years acquired 54 gulf blocks at an average cost of less than $90/acre so it could ramp up activity quickly.
Also, LL&E in July 1993 announced plans to acquire some assets of Nerco Oil & Gas Inc., Houston. That $354 million deal closed Sept. 17.
By assuming Nerco's operatorships, LL&E became a significant Gulf of Mexico operator.
"With major companies leaving the playing field, a nonoperating independent like ourself either had to leave the gulf or get an operating capability," Greene said. "By participating in 3D shoots on the shelf, we had seen some economic opportunities, and we really needed an operating capability to participate."
Nor has LL&E been the only U.S. independent operating in the gulf to acquire recently a large package of offshore properties.
"At the time we started that play about 10-15% of the seismic data being acquired in the gulf was 3D," Greene said. "Today it's virtually 100%.
"Today, we've collected enough 3D data, we're getting it interpreted, and we're about to start some exploratory drilling based on it."
LEASING TOO SLOW
Apache Corp., Houston, in July closed a $125.5 million, two step acquisition of most of Hall-Houston Oil Co.'s developed properties in the gulf (OGJ, June 14, p. 20).
The deal, which included proven and probable reserves of about 142 bcf of gas equivalent (bcfe), increased Apache's Gulf of Mexico reserves to 275 bcfe. Apache estimated it acquired 50-55 MMcfd of gas production-increasing its second half 1993 gulf gas output to about 124 MMcfd-plus more than another 30 MMcfd of gas output in 1994 when it finishes developing 12 discoveries included in the deal.
Bill Johnson, Apache president and chief operating officer, said the acquisition about doubled Apache's presence in the gulf much faster than would have been possible by acquiring OCS leases at federal sales and at a comparable cost. Also, Apache got a better idea of what it was acquiring and could see upside potential in developing nonproducing properties and in reducing operating costs on wells already on line, all without accruing upfront evaluation, leasing, exploration, and development costs.
"I can remember when the $125.5 million we paid for what we think is about 140 bcf of gas would have been paid for one block at an OCS lease sale," Johnson said. "At first glance, an acquisition might look like a higher cost way to expand gulf activity than just going to lease sales and exploring, but I think before these things play out, this is the low cost way to do it.
"Also, we like the instant gratification of cash flow now."
REDEVELOPING FIELDS
Redeveloping active fields by working over or recompleting old wells is favored by independents as a good way for independents to generate early cash flow, so important for funding their activities in the gulf. By contrast, major companies tend to book reserves for later development and spend years planning and engineering development schemes.
Tatham Offshore Inc., Houston, a unit of Deeptech International Inc., Houston, uses cash flow from redeveloped properties in shallow water on the OCS to fund activities on the gulf's Flex trend and in deep water.
Tatham Pres. and Chief Operating Officer Harry Briscoe said Tatham by the end of September expects to start production from a well with oil and gas potential recompleted from an old platform on West Delta Block 35. Walter Oil & Gas Corp., Houston, drilled the well in February 1993 on a farmout from Tatham at a site in 60 ft of water. Walter operates the well with 60% interest, and Tatham and affiliates retained 40%. The well began producing in early July, and output presently is about 12-12.5 MMcfd.
Briscoe said production achieved on West Delta 35 from fault block in an old, abandoned field "was a classic case of the first operator overlooking something."
Tatham expects in fourth quarter 1993 to spud the first of several wells in about 350 ft of water on Ship Shoal Block 331 from a platform built from recycled components. Block 331's previous operator drilled two wells on the tract and found oil and gas but dropped the block. Tatham shot a 3D seismic survey of the tract and based on that data leased the block in the spring 1992 MMS offshore lease sale.
To speed redevelopment, the company bought the jacket from a used platform being salvaged from another block, found a compatible refurbished deck, and presently is modifying both for installation on Block 331 in November or early December.
"As soon as the platform's ready, we plan to mount a platform rig and begin drilling the first well," Briscoe said.
He said finding a used platform at a bargain price for Ship Shoal 331 not only saved money, it moved up the start of production by at least a year. But without 3D seismic data, Tatham might never have acquired the block.
"The 3D data increased our confidence enough to acquire the block and go directly to a platform decision, in this case a much cheaper, much quicker, used platform, and we expect to have cash flow from this block by the end of second quarter 1994," Briscoe said.
FAST TRACK DEVELOPMENT
Independents must be ready to handle different sets of risks with fast track development projects. But Briscoe said the monetary savings from installing used equipment, using a platform rig instead of a semisubmersible, and accelerating production timetables, outweigh the risks.
Aran's Thompson said the gulf's relatively short lead times between exploration and start-up of production is attractive to independents. In the North Sea, for example, it is not uncommon for projects to require a decade or more of exploration and development before start-up of production.
PG&E's Kent Johnson said that by using stock supplies and equipment and with the extensive OCS infrastructure, the time independents need to start production from many offshore prospects "is not that much difference from onshore in South Louisiana."
Jerry Box, senior %,ice president of exploration and production for Oryx Energy Co., Dallas, said the basic advantage in fast tracking for independents comes from bringing cash flow as far forward as possible.
"Most of us operate on our cash flows, and if we have to wait several years to get it, we're harmed severely," he said.
INDEPENDENTS IN DEEP WATER
Nowhere is the potential greater for severe financial harm for independents than in the gulf's deep water. But a handful of independents are working there, too, in one of the few areas in the gulf still known to hold large oil and gas reserves.
One of the companies leading independent deepwater development is Enserch Exploration Partners Ltd., a unit of Enserch Corp., Dallas.
Enserch in two stages earlier this year started producing gas from two subsea templates in 1,410-1,520 ft of water on Mississippi Canyon Block 441. Gas is transported 6 miles through subsea flow lines to a fixed platform in 380 ft of water on adjacent Ewing Bank Block 482. Block 441 subsea wells in mid-September were producing about 72 MMcfd of gas. Dick Kincheloe, Enserch vice president of offshore and international operations, said the facility was performing well.
Enserch also has drilled and cased four wells in 2,100 ft of water on Garden Banks Block 388 unit. That project is to include a floating production system (FPS) and 24 slot deepwater drilling and production template that will allow simultaneous drilling and production. The company plans to convert the former Glomar Biscay 1 semisubmersible drilling rig--now berthed at Pascagoula, Miss.--to an FPS named Enserch Garden Banks.
Enserch plans to position the FPS in 2,190 ft of water above 388 unit's subsea template to complete and start production from each existing well before beginning to drill as many as eight more wells through the template.
Production on 388 unit is to start in mid-1995. Enserch will transport the flow to a processing platform in about 250 ft of water on Eugene Island Block 315. The unit's production system is being designed with capacity of 40,000 b/d of oil or condensate and 120 MMcfd of gas.
TATHAM FPS PROSPECTS
Deepwater Production Systems Inc, also a unit of Deeptech International, is converting the former Penrod 75 semisubmersible rig to the Lafitt Pincay FPS, also at Pascagoula.
tatham plans to use the vessel either at Seattle Slew on Ewing Bank Block 915 unit, a six block unit in 980 ft of water about 50 miles off Louisiana, or Sunday Silence, a four block unit in 1,400-1,500 ft of water on Ewing Bank blocks 958, 959, 1002, and 1003.
Tatham, which holds 16 deepwater blocks, believes reserves of many gulf Flex trend and deepwater prospects could be developed economically with an FPS. However, there is a dearth of such vessels in the gulf.
"If things don't pan out just right on our prospects, we think there's going to a good market for an FPS when the Lafitt Pincay is ready about 1 year from now," Tatham's Briscoe said.
In a late August test, Tatham's 2 Ewing Bank Block 914 well flowed 12.5 MMcfd of gas and 2,300 b/d of condensate through a 25/64 in. choke with 4,400 psi flowing tubing pressure. The condensate flow volume surprised even Tatham.
Tatham completed the Block 914 wells with essentially off the shelf technology. The company used a refurbished tree, fabricated a guide base to set over the template, and laid and tied back two 7 mile pipelines to a platform on Ewing Bank Block 826. Engineering and prefabrication took about 9 months before installation.
Tatham estimates both Seattle Slew and Sunday Silence reserves at more than 100 million bbl of oil equivalent. An early 1994 exploratory well is being planned for Sunday Silence.
ORYX DEEPWATER PRODUCTION
By developing a prospect on Mississippi Canyon Block 400 unit in parallel rather than in series, Oryx in late July began starting production from three wells in 1,700-2,200 ft of water more than a year sooner than would have been possible with a traditional development scheme.
To trim time and upfront costs, Oryx rented space on a platform on West Delta Block 152 to use as a production base for the three wells. With space reserved for production equipment on the Block 152 platform, On,x decided to complete the three wells with subsea wellheads.
"Originally we estimated it would take 2 years to start production on this unit, and we thought that was pretty fast," Oryx's Box said. "We now have two of those wells on line and will have the third one on line by the end of September."
Box said the subsea completion in 2,200 ft of water on the unit's Mississippi Canyon Block 445 well might be the deepest water subsea completion in the gulf.
"We used to spend a lot of time trying to develop plans that would recover every drop of oil or gas we could see," Box said. "Today, our focus is recovering most of the reserves but still designing commercial projects. A lot of times, a company can't make a project commercial if it tries to get all the reserves it knows are there."
MCMORAN HORIZONTAL DRILLING
Horizontal drilling is in its infancy in the gulf, and independents are among the companies helping nurture it.
McMoRan Oil & Gas Inc., New Orleans, drilled three horizontal wells in about 250 ft of water at Freeport McMoRan Inc.'s sulfur and oil development on Main Pass Block 299, on the heels of a redrilling and workover project in late 1992 and early 1993.
Horizontal sections of the new wells were 500-1,000 ft, and displacement from surface location averaged about 2,000 ft. Block 299's reservoir produces from depths of 1,400-1,500 ft subsea.
James Lee, McMoRan's manager of finance and business development, said the company is injecting more than 238,000 b/d of hot water into the flanks of the field to maintain reservoir pressure and drive oil and sulfur to producing wells.
McMoRan in early September was producing oil from 11 wells on Main Pass, including eight horizontal and three at 70 angles. All told, the company has drilled about 24 wells at Main Pass, including horizontal and deviated wellbores. Some of the wells are injectors and some producers. McMoRan's cumulative Main Pass oil production at the end of August had surpassed 15 million bbl.
Reservoir engineers who studied the formation prior to development agreed to an estimate of about 100 million bbl of oil in place, "But there were real questions about what rate of production decline we could expect," McMoRan O&G Pres. Richard Adkerson said.
Main Pass flush oil production in earl), 1992 was almost 50,000 b/d. Since the end of the first quarter after the remediation program, output has been holding at about 25,000 b/d.
"But real future decline still is a big question," Adkerson said.
Lee said drilling additional wells and recompleting some existing wells from lower to higher parts of the reservoir could maintain current production. But no definite plans have been made other than to maintain production.
ARAN'S HORIZONTAL WELLS
Aran Energy's first horizontal well in the gulf, spudded in March on South Pass 37, led to a three well horizontal drilling program.
Aran drilled all three wells on South Pass 37 from A platform on the southern half of the block. Horizontal sections in the wells averaged 1,100 ft, and the targeted reservoir was about 2,600 ft vertical depth. Because Aran wasn't drilling into an established reservoir and had little well control and only over the counter 2D seismic data to go on, the company first drilled pilot holes "toward the point where the seismic lines intersected," Aran's Thompson said.
Aran gained a foothold on South Pass 37 in 1990 by taking a small nonoperating interest from a major company that had identified more than 30 reservoirs at 2,600-16,000 ft. At the time Aran became operator of the tract, the original development was producing 5-6 MMcfd of gas into a sales pipeline. The company expects combined production from the three new horizontal wells of 17-20 MMcfd.
Drilling has been suspended. But Aran plans to remobilize in November on the platform in the northern half of the field and begin another horizontal drilling program at the same depth. Horizontal wells on the northern half of the block are expected to add another 15-20 MMcfd of gas output, lifting total tract production by the end of first quarter 1994 to 40-30 MMcfd.
During horizontal completion operations last spring, Aran had trouble inserting a 7 in. slotted liner with a prepacked screen assembly into one of the holes, so two of the wells were completed with 7 in. liners and the third with a 5 in. liner. Also, in the last well, A-16, Aran had to cut a window to sidetrack out of the horizontal section to assure it would pass through the heart of the reservoir.
"To our knowledge that's never been done before at a horizontal angle," Thompson said.
For its wells on South Pass, Aran used most of the same companies--including many of the same individuals-Texaco Inc. used on other more celebrated gulf horizontal wells. Thompson has little doubt that previous operators of the tract were aware of the 2,600 ft sand but lacked the technology to drill and develop horizontally.
"What's really exciting now about the gulf is there's a lot of technology available for companies our size that in the past we wouldn't have had access to," he said. "That's important for independents, particularly when we're talking about leading edge technologies. Five or 10 years ago, this horizontal project wouldn't have been tried by anyone."
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
