NEWS Gulf of Mexico operations bolster U.S. oil and gas production

A.D. Koen
Senior Editor-News

Exploration and development in mature parts of the Gulf of Mexico have boosted the region's contribution to U.S. oil and gas output and laid the foundation for continuing growth.

Oil and gas trends in the gulf-as well as the region's outlook-stand in stark contrast to activity and expectations in other U.S. producing regions.

Offshore wells based on better technology in Louisiana, Texas, and Alabama state waters and in less than 600 ft of water on the federal Outer Continental Shelf (OCS) have accounted for most of the production gains during the 1990s.

Activity on the OCS and in state water is expected to remain strong through 2000. But during the remainder of the 1990s, a growing share of production in the gulf will come from projects in 1,500 ft of water or more. And after the turn of the century, commercial subsalt developments promise to add substantial production.

Strong levels of conventional activity in relatively shallow water, plus the gulf's growing deepwater and subsalt plays, have been especially promising because they occurred amid relatively weak oil and gas prices.

Cambridge Energy Research Associates (CERA) and Arthur Andersen & Co. in a gas trends study released this month said large capacity additions in key U.S. gas producing regions-including offshore Louisiana, Mobile Bay, and the deepwater gulf-indicate long term growth is likely for offshore oil and gas production and reserves.

In that scenario, affirmed with minor variations by many other observers, shallow water production and reserves decline modestly, holding their own for at least the next decade. Production from deepwater projects and reserves assigned to deepwater fields, meantime, will more than offset declines near shore and on the OCS.

Joe B. Foster, chairman and chief executive officer of Newfield Exploration Co., Houston, says one proprietary study predicts gas production in the gulf could increase more than 20% in the next 5 years, with most of the increase occurring in deep water.

Robert Esser, New York, a CERA senior consultant, says deepwater productive capacity from known discoveries by the end of the century likely will exceed 1 million b/d of oil.

"New discoveries could add to that total around 2000," Esser said.

In assessing deepwater exploration and development in the gulf in late 1995, Shell Offshore Inc. counted 35 confirmed discoveries in 1,500 ft of water or more, including 18 with announced development plans. Shell, the gulf's preeminent deepwater player, estimated recoverable reserves of industry's confirmed discoveries at 3-4 billion BOE and potential reserves of 8-15 billion BOE.

Other sources place the gulf's deepwater potential as high as 20 billion BOE.

The numbers

There are many indicators of strong activity in the gulf in the 1990s.

The American Petroleum Institute in mid-1995 said U.S. offshore oil production in 1994 was 17% greater than in 1991 and gas nearly 7% more. Combined U.S. offshore oil and gas production during the year was the greatest ever, and API predicted offshore production would be still greater in 1995.

U.S. offshore wells in 1994 produced 1.37 million b/d of oil and 15.53 bcfd of gas, more than one fifth of domestic oil volumes and about one fourth of domestic gas production.

Projects on the Alaskan North Slope and in Cook Inlet accounted for much of the production gain. Regulatory clearances off California allowed sizable production increases at Santa Ynez and off Point Arguello.

In the Gulf of Mexico, more oil came from deepwater projects such as Shell's Auger development in 2,860 ft of water on Garden Banks Block 426.

Minerals Management Service last August said Gulf of Mexico operators by January 1995 had drilled about 800 wells in more than 1,000 ft of water. By MMS estimates, deepwater wells in the gulf in January 1995 accounted for 15% of the region's oil output and 3% of gas production. By comparison, deepwater oil production in January 1990 made up less than 5% of gulf output and deepwater gas less than 1%.

Also in 1995, the U.S. Department of Energy's Energy Information Administration released data showing the Gulf of Mexico in 1994 contributed disproportionately to U.S. oil and gas reserve replacement (OGJ, Sept. 4, 1995, p. 112).

At a time when total U.S. oil reserves have declined for 7 straight years, including a decline of 500 million bbl in 1994 to 22.46 billion bbl at yearend, oil reserves in the gulf at yearend 1994 stood at 125 million more than a year earlier, EIA said.

Gas reserves in the gulf at yearend 1994 amounted to 27.2 tcf, 4.5% more than at yearend 1993. Total U.S. gas reserves, meantime, increased to 163.84 tcf, a scant 0.875% gain year to year.

The need to explore

Harold Cargol, offshore land manager in New Orleans for Texaco Exploration & Production Inc., estimates gulf oil production in 1995 increased by about 100,000 b/d, mostly because of projects in deep water.

For example, Shell estimates combined gross output of Auger and Tahoe deepwater projects in 1995 at 72,000 b/d. Tahoe, in 1,500 ft of water on Viosca Knoll Block 783, began production in early 1994.

While deepwater prospects likely will account for a growing volume of gulf oil and gas in the medium to long term, Cargol says production in the gulf was increasing even before significant deepwater fields began going on stream. He attributes most of the recent upswing in the region's production and reserves to development activity on the OCS.

To marshal statistical support for his view, Cargol points out that the share of development wells drilled in the gulf from platforms more than 5 years old bottomed out in 1989, then increased year to year through 1994. Coincidentally, gulf oil production began increasing in 1990, a trend that was maintained through 1994.

"That production was developed from existing platforms in producing fields," Cargol said.

With stable wellhead pricing, infill and development drilling on the shelf likely won't wane soon. Given adequate equipment and enough trained crews, infrastructure is in place on the shelf to support high levels of activity.

Although he believes most of the production increase in the gulf so far in the 1990s has occurred because of development drilling in relatively shallow water, Cargol says it is unrealistic to expect conventional prospects on the shelf to sustain the region's oil and gas output. Rather, public policy should encourage exploration and development in the gulf's deep water, believed to hold nearly 20% of U.S. undiscovered oil and gas resources.

U.S. political leaders late last year gave significant encouragement to operators seeking to develop deepwater prospects.

Where Undiscovered Resources Are

The House of Representatives approved a bill allowing the Interior Department to grant royalty relief for marginally economic deepwater oil and gas fields in the central and western gulf (OGJ, Nov. 20, 1995, p. 41). Interior under the measure could waive royalties on the first 17.5 million bbl of oil equivalent (BOE) produced by fields in 200-400 m of water, the first 52.5 million BOE from fields in 400-800 m of water, or the first 87.5 million BOE from fields in more than 800 m of water.

MMS at the beginning of 1996 was planning to implement deepwater royalty relief provisions at the Central Gulf of Mexico lease sale in April (OGJ, Jan. 15, p. 20).

Cargol in a November 1995 presentation to an offshore policy group supported deepwater royalty relief and encouraged MMS to include a small sale in the eastern Gulf of Mexico in the new 5 year federal leasing program. Given production and reserves trends in the central and western gulf, access to more acreage in the eastern gulf would enable producers in the region to contribute even more to U.S. oil and gas production.

"With the hydrocarbon needs of the country, the overall production decline, and where future production may come from, the Gulf of Mexico is a region where the government should be facilitating further exploration and development efforts," Cargol said. "And that should include the eastern gulf."

Leasing and drilling

Even without access to the entire gulf, U.S. offshore operators in the 1990s have stepped up their participation in federal offshore lease sales in the gulf.

Strong leasing activity has had a hand in sustaining high levels of rig utilization in the region, especially among semisubmersibles capable of drilling in deep water.

Participation in May 1995 at MMS Sale 152 for the central gulf was one of the biggest on record (OGJ, May 22, 1995, p. 24). In all, bidders made 880 offers for 588 tracts, and apparent winning bids totaled $307.3 million.

At MMS Sale 155 in September 1995 for tracts in the western gulf, combined apparent winning offers topped $100 million for the first time in 5 years (OGJ, Sept. 22, 1995, p. 36).

Bidding at each 1995 gulf sale included a hefty share of offers for deepwater tracts and subsalt prospects, mostly by major companies.

At the Texas offshore lease sale early last October, state officials accepted offers totaling nearly $19.7 million, the heaviest bidding in a decade at a state sale.

Meantime, Offshore Data Services Inc. (ODS), Houston, early this month reported in its Gulf of Mexico rig locator that 145 of 178 mobile offshore rigs available in the gulf were working, including 24 of the gulf's 27 marketed semisubmersible units.

ODS's gulf rig census for May-October 1995 reported 100% utilization of marketed semis in the region, as the number of available floaters increased to 22 from 18.

Jack up utilization in the gulf at yearend also was strong, with 116 of 125 available rigs at work. After slumping to utilization of less than 70% at the end of first quarter 1995, jack up activity peaked in June, with 119 units active out of 134 marketed rigs, ODS said.

In addition to high utilization rates, improved drilling techniques have lowered drilling costs in the gulf, while improving wellbore accuracy and quality. Top drives and other rig floor equipment have added some efficiency.

In addition, operators reported successes with horizontal and extended reach wells at sites ranging from near shore transition zones to deep water. Similarly, operators in the gulf have used horizontal and directional drilling techniques to penetrate reservoirs as shallow as 2,000 ft or as deep as 18,000-19,000 ft.

Offshore Oil and Gas as a Share of U.S. Production

Offshore drilling contactor Global Marine Inc., Houston, in mid-January said cold weather in the U.S. in December buoyed drilling contractors' confidence.

Global Marine made the announcement at a press conference called to release its December 1995 summary of current offshore rig economics (Score). The summary expresses offshore mobile rig day rates as a percentage of the estimated rates contractors would need to justify speculative new construction.

The company said a seasonal rally in the gulf, along with a worldwide surge in deepwater drilling, propelled offshore day rates to the highest point of the year.

Gulf of Mexico day rates last month resulted in a Score of 38.7%, up 0.55 percentage points from November 1995 but 10.2 points less than 5 years ago, Global Marine said. By comparison, day rates in the North Sea last month produced a Score of more than 55%.

Technological gains

In addition to gains from advances in drilling technology, scores of improvements to offshore technologies and procedures are combining to help keep activity strong in the region.

Operators achieved much of the economic edge in the gulf by trimming exploration costs via 3D seismic data to avoid drilling costly dry holes. Better seismic data also helped companies site delineation wells at better locations and anticipate downhole problems.

Geophysical industry officials estimate more than 7,000 tracts in the gulf were covered by 3D seismic data by early 1995. Vendors generated most of the data through nonexclusive 3D surveys conducted in a triple streamer mode, about half on the OCS and half in deep water.

Better 3D seismic data have lowered geologic risks in the gulf. Offshore in the U.S. in 1995, operators announced a new discovery about every 6 days, says Tim Wallace, manager of U.S. offshore exploration for Phillips Petroleum Co. "The opportunity is definitely there," he said.

Operators expect activity to remain strong gulf-wide through the 1990s in part because about half a dozen geophysical contractors are promoting 3D surveys to be conducted in the region in 1996-97.

Deepwater production

Perhaps most important to the gulf's deepwater operators has been the new flexibility allowed by advances in offshore production systems.

In some cases, the region has become a proving ground for offshore technology. Shell pioneered the use of tension leg platforms (TLPs) in deep water with its Auger TLP, which went on stream in mid-1995 on Garden Banks 426.

In addition:

• Shell and partner BP Exploration Inc. advanced the state of TLP design with their Mars TLP, to be installed later this year in 2,933 ft of water on Mississippi Canyon Block 807 (OGJ, Oct. 11, 1993, p. 28).

• Oryx Energy Co., Dallas, and CNG Producing Co., New Orleans, in fourth quarter 1994 announced plans to develop Neptune field in 2,000 ft of water on Viosca Knoll Block 826 with the world's first production spar (OGJ, Nov. 21, 1994, p. 33).

• Amerada Hess Corp. and Oryx in mid-December 1995 said they will use a compliant tower to development a field in 1,650 ft of water on Garden Banks Blocks 259, 260, and 216 and the southern part of Garden Banks Block 215.

Floating production systems (FPSs), production spars, and compliant towers are considered low cost tools to develop smaller fields in deep water. Also, improvements in subsea technology abetted operators in all stages of upstream activity.

Subsea Data Services (SDS), Austin, reports that gulf operators have completed at least 35 subsea wells since 1990.

"The most significant thing is that companies in the gulf are completing subsea wells in ever increasing water depths," said SDS consultant Derrick Booth.

Shell in June 1995 said it plans to use subsea technology to develop its Mensa project in 5,400 ft of water on a four tract unit covering Mississippi Canyon Blocks 686, 687, 730, and 731. In addition, Amoco Production Co. reportedly is studying plans to complete wells in 6,800 ft of water at its Kings Peak prospect with subsea components designed to operate properly in more than 7,800 ft of water. The prospect is on Mississippi Canyon Block 217 and De Soto Canyon Block 133.

Also, Phillips in 1995 began producing its first subsea wells in the gulf. The company in January 1995 completed a subsea well at High Island Block A-309. In May, Phillips started producing 35 MMcfd of gas from two subsea wells in its Seastar project in 670 ft of water on Garden Banks Blocks 70 and 71. Seastar is the company's first remotely controlled subsea field in the gulf.

At yearend 1995, Enserch Exploration Inc., Dallas, and Mobil Exploration & Producing U.S. Inc. had the gulf's deepest subsea production. The companies' Cooper field, in 2,200 ft on Garden Banks Block 388, began commercial production in September 1995.

Innovation, costs

Taken together, technological im- provements have helped operators bring deepwater reserves on line faster than was possible at such water depths with projects based on fixed steel platforms.

Operators in some cases have held down upfront spending in deep water because of the more mobile production systems, while retaining the option of moving an FPS to a new site after a deepwater field reached the end of its economic life. Lower deepwater finding, development, and production costs made some larger reservoirs in very deep water competitive with many other offshore prospects-U.S. or non-U.S.-at any water depth.

And deepwater innovations are continuing.

Aker-Omega Inc., Houston, this month is to complete a conceptual study of development options for Texaco's Petronius field in 1,750 ft of water on Viosca Knoll Block 786.

Systems under review include several floating systems, as well as a subsea system tied back to a new shallow water host platform. The floating systems include converted and newbuild semisubmersible units, TLPs, and spars.

Texaco and Marathon Oil Co. each hold a 50% interest in Petronius, one of three deepwater discoveries Texaco disclosed late last year (OGJ, Sept. 25, 1995, p. 40).

Aker last November finished the first phase of a joint industry study of tension raft jacket (TRJ) based production systems for a group of seven operators (OGJ, May 1, 1995, p. 131). With deck load capacity comparable to the Ram-Powell TLP, TRJs offer low cost development options for large fields in very deep water.

In phase one of the study, companies evaluated and estimated costs of nine TRJ applications, including eight for the Gulf of Mexico and one for the Norwegian Sea. The group modeled production capacities as great as 100,000 b/d of oil in 3,000-5,000 ft of water.

This year, in the next phase, companies could study TRJs capable of producing 25,000 b/d of oil and possibly mini-TRJs. Other cases could model TRJ applications in water as deep as 7,000 ft.

Meantime, British-Borneo Petroleum Inc. and Atlantia Corp., both of Houston, last December said they had commercialized SeaStar, a single column TLP capable of producing as much as 50,000 BOE/day in 600-6,000 ft of water.

After developing site specific SeaStar designs last year, the companies this month are testing models of the system in the deepwater model basin operated jointly at the Offshore Technology Research Center, College Station, Tex., by The University of Texas and Texas A&M University.

Atlantia in 1994 installed a SeaHarvester platform for Houston Exploration Co., Houston, in less than 100 ft of water on Mustang Island Block 858.

Atlantia designed SeaHarvester with four surface piercing columns to operate in 300-600 ft of water. In addition to allowing topside installation of a platform rig, the four columns enable SeaHarvester to support as many as 12 wells and production of more than 100 MMcfd of gas or 25,000 b/d of oil.

Mini gas bubble

Improving deepwater capabilities among gulf operators is whittling the cost of operating in extreme water depths.

In late 1995, the energy group at Merrill Lynch, Pierce, Fenner & Smith Inc. reported relatively large reserve volumes and flow rates of deepwater projects in the gulf have changed economics of the deepwater play.

Using the Ram-Powell project in 3,200 ft of water on Viosca Knoll Block 956 as an example, Merrill Lynch estimated unit cash flow of a typical deepwater development in the gulf at $10.72/bbl of oil and $1.11/Mcf of gas.