Sam Fletcher
Senior Writer
HOUSTON, Apr. 24 -- The US Minerals Management Service's proposal to expand royalty relief to natural gas wells drilled deeper than 15,000 ft on existing federal leases in the Gulf of Mexico drew mixed reactions from industry participants at an annual offshore industry outlook conference Thursday in Houston.
"We detect a lot of excitement about this. The response among independent producers has been very positive," said Paul L. Kelly, senior vice-president of Rowan Cos. Inc., a Houston-based drilling contractor. He said some independents are already talking to major integrated companies about possible farmins and other arrangements to drill the large lease acreage held by the majors in the Gulf of Mexico.
The proposed royalty relief probably will spur more deep drilling, but the number of conventional shallow wells drilled likely will decline from previous levels as budgets are shifted to the more expensive deep wells, said Douglas J. Lanier, vice-president of ChevronTexaco Corp.'s Gulf of Mexico Shelf business unit, which is the largest single leaseholder in those waters.
"Deep gas drilling on the shelf below 15,000 ft has become more promising, but the cost of these wells can average $15 million," he said. "That means we won't be drilling some shallower wells if we drill these."
Lanier acknowledged that independents are "trying to get access" to leases held by ChevronTexaco and other major operators. But he cautioned that the MMS proposal is no panacea for the steep production decline among gulf gas wells in recent years. "It won't cause marginal wells to be drilled," said Lanier, "but it may allow us to bring in partners on projects that we wouldn't drill straight up (as the sole investor)."
Royalty relief, access to the Arctic National Wildlife Refuge, and other proposals to encourage exploration for new oil and gas supplies "will help someone somewhere a little bit, but none of them is going to change the game," Lanier said.
The MMS proposal 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 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. A supplemental royalty suspension of 5 bcf is allowed for any dry hole drilled deeper than 18,000 ft, to be applied to future production from any drilling depth on that lease.
Some 2,400 existing leases are targeted for possible relief under the MMS proposal. MMS officials estimate the potential for deep gas resources below 15,000 ft in the gulf at 5-20 tcf.
"Out of 35,000 wells drilled on the federal outer continental shelf as of 2001, only 1,842 were drilled deeper than 15,000 ft," said Kelly. However, he said, those wells discovered 503 reservoirs with recoverable gas reserves estimated at 10 tcf.
Rowan is pegged by analysts as the likely "leading beneficiary" of any drilling recovery in the Gulf of Mexico, with a premium fleet of jack up rigs well suited for deep gas drilling in the shallower waters of the continental shelf (OGJ Online, Apr. 17, 2003).
In an earlier discussion Thursday of the financial overview for the offshore industry, L.E. Simmons, president of SCF Partners, Houston, noted that, although the Lower 48 is a mature area for oil and gas exploration, only 7% of the total wells in that area were drilled deeper than 10,000 ft, with only 1% drilled deeper than 15,000 ft. In the federal offshore, he said, deep drilling accounts for only 0.2% of all wells drilled.
"The (US exploration) opportunity is vertical, not horizontal," Simmons said. "The future is deeper, deeper, deeper in both water and drilling depths." However, Simmons acknowledged, the gathering and interpretation of seismic data are "good to 10,000 ft (below ground level), but more difficult deeper."
And in the Gulf of Mexico, said Lanier, "There's still a big subsalt play out there that we can't see under." Still, he said, "Our success rate on deep shelf drilling below 15,000 ft has been high. Last year, we drilled 20 wells on the west gulf shelf without a single dry hole, and some of them were below 15,000 ft.
Lanier's current budget for gulf shelf operations is "about 60% of what it was prior to the merger" (of Chevron Corp. and Texaco Inc.). "Part of that is the dearth of good projects," he said.
Nonetheless, he said, all major operators are now taking "a more measured approach to drilling." Lanier said, "Three years ago we were chasing (oil and gas reserve) volumes without much success, and we threw a lot of money at it. Now, we're looking at our return on investment, instead of letting volumes drive us."
The deep gas royalty incentive program proposed by MMS is now in a 60-day public comment period. MMS officials expect a final rule to take effect in early fall, with royalty relief available to any qualifying well drilled since Mar. 26, the date of the first notice of the proposed rulemaking.
Contact Sam Fletcher at [email protected]
