Judy R. Clark
Senior Associate Editor
HOUSTON, Nov. 2 -- Record-high oil and natural gas prices, driven in part by a severe tropical storm cycle in the Gulf of Mexico as well as upcoming lease expirations, are pushing vigorous exploration and production in the gulf, said Jim Handschy, general manager of ConocoPhillips's Gulf Coast upstream business unit. Handschy spoke Oct. 28 in Houston at an RMI Oilfield Breakfast Forum, which focused on opportunities for oil service companies and operators.
Crude oil prices during 2004-05, which increased by 40%—30% since May of this year—and natural gas prices that experienced a 100% increase—60% since May—are proving strong incentives for gulf exploration, he said.
Handschy said he expects robust E&P in the gulf to continue for years despite rig damage and production disruptions of the last 2 years from the extreme tropical weather cycle, which is predicted to continue for the next few years.
In addition, upcoming lease expirations are driving "a strong sense of urgency for leaseholders to get them drilled," he added, and they are creating optimism about future lease sale opportunities.
"About half of the current first-term leases are going to fall in the next 3 years," he said. Blocks held for 10 years are coming available, with 44% of currently held first-term leases slated to expire by the end of 2008.
Challenges, opportunity
Challenges to gulf E&P include the vulnerability of platforms and rigs to storms and the fact that 2005 hurricane damage repairs will continue into 2006 or later, creating some service sector shortages. Six fields scheduled to come online this year have been deferred until 2006 because of damages and the time required for repairs.
In addition, rigs currently are fully utilized and under additional stress, and oil field goods, services, and people are in high demand and short supply. Some sectors are exhibiting hyperinflation of costs—as much as 30% in one sector, Handschy said.
"It's understandable, given the high commodity prices and the people shortage, but it still hurts," he said.
Nevertheless, the gulf continues to be a "dynamic and competitive E&P area," with many opportunities Handschy said. Mergers and acquisitions are increasing, and more companies, including international oil companies, are bidding on gulf leases.
Most of the upcoming exploration will be in deeper water, he added.
"There are about five times more companies qualified to bid in the deep water today than in 1995," Handschy said. Traditional deepwater exploration plays such as Plio-Pleistocene minibasins are mature, and emerging exploration plays "present huge needs for new technology in seismic imaging, drilling, well completions, and reservoir performance prediction." He said partnerships among operators and the service industry is necessary in developing requisite technology.
Inflation, technology
"Whether we like it or not, inflation is increasing in our business," concurred Mark Corrigan, president of the well services division of Schlumberger Oilfield Services. "Price increases aren't finished."
Currently, fracturing services are in tight supply because of increased drilling, bottlenecks in equipment component supply, and requirements for multiple stimulation treatments in the wells of unconventional reservoirs, Corrigan said.
As US natural gas depletion rates accelerate, the industry is drilling twice as many wells as it did 5 years ago, and seeking to produce gas from plentiful unconventional reservoirs: coals, shales, and tight sands, all of which require more stimulation technology, said Corrigan.
In the western US as recent as 2 years ago, for example, Corrigan said his company generally performed only one treatment per well in 60% of the wells stimulated, with only a small portion receiving more than five treatment stages. However by 2004, service companies were performing multiple stages in 60% of the wells treated, and more than 25% of the wells received more than five treatments. These necessary multiple fracture treatments added to well costs and to the time required for well completions.
The demand for stimulation services is expected to continue, given such accelerated exploration activity, which has contributed to a 37% global rig count increase and a pressure pumping market growth of 79%.
While this increased drilling activity has resulted in a tight supply of fracturing services in North America, it has failed to make a material difference in total gas production capacity, Corrigan said.
New technology is emerging that could change that, he said. Well completion technology that accelerates natural gas to sales and gets more out of the ground can enable operators to monetize assets that until now were uneconomic.
"New completion techniques are rapidly emerging that will reduce these weeks to days and allow the investment to be made in increasing the contact area rather than just running wire and pipe in and out of the hole."
Corrigan said his company has already begun to deploy a new generation of equipment that incorporates advances in process control, wireless systems, real-time communications, and remote control. However, he said bottlenecks exist in the supply chain of some key equipment components, specialty chemicals, and sand due to record demand in the Asian economies. This is contributing to the inflation spiral. One way to mitigate this is the application of smart chemistry, he said.
"If we deliver superior returns, we will be able to continue to develop the technology and invest in the people and equipment that operators are counting on to increase the value of their assets," he said.
Contact Judy R. Clark at [email protected].
