SPECIAL REPORT: Deep water, deep drilling stimulate Gulf of Mexico

June 11, 2007
The US Gulf of Mexico is one of three regions-including the North Sea and South China Sea-that together are expected to receive half of total offshore spending through 2011.

The US Gulf of Mexico is one of three regions-including the North Sea and South China Sea-that together are expected to receive half of total offshore spending through 2011.

Total offshore expenditures will make up “the lion’s share of spending on the upstream sector” that analysts at Douglas-Westwood Ltd. forecast will top $275 billion by 2011, up from $216 billion in 2006. Industry observers agree that expensive deepwater projects are “disproportionately increasing spending shares” in the Gulf of Mexico as well as other hot spots.

Exploration and production capital expenditures are “on the rise across the board” despite prospective volatility in natural gas prices, said analysts in the Houston office of Raymond James & Associates Inc. in mid-May.

Production rising

Oil production from the Gulf of Mexico is expected to increase to “a possible high” of 2.1 million b/d over the next 10 years, according to a report May 1 at the Offshore Technology Conference in Houston by the US Department of the Interior’s Minerals Management Service (MMS). Natural gas production from the gulf is expected to recover from recent declines to a possible high of 8.3 bcfd over the next 3 years.

“The Gulf of Mexico is one of the largest single sources of oil and gas supply to the US market,” said Lars Herbst, acting director of the MMS gulf regional office. “With the continued interest and activity in the deepwater area of the gulf, we anticipate that oil and gas production will continue to be strong with a large portion of the production coming from the projects in deeper water depths.”

Oil production in the gulf increased steadily during 1991-2001, leveled off in 2003, and declined in 2004-05, partly due to damage to offshore and coastal facilities by Hurricane Ivan in 2004 and Hurricanes Katrina and Rita in 2005. Shallow-water production declined steadily after 1997 but was offset by increasing deepwater oil production during most of that time.

Gas production has followed a similar trend, but increased deepwater output didn’t prevent an overall decline in 2006. MMS officials see gulf production being boosted by 16 new deepwater projects coming on stream by the end of this year. A major contributor to the increased gas production will be the start-up of the Independence Hub facility, through which gas is expected to start flowing in the second half of 2007 (OGJ, Apr. 23, 2007, pp. 57, 94).

Technology incubator

Deep water and deep reservoirs on the shelf have made the Gulf of Mexico an incubator of drilling and production technology.

“It all starts here,” said Darrell Hollek, vice-president of Gulf of Mexico operations and development at Anadarko Petroleum Corp. “Technology is absolutely critical in getting into deeper water-seismic imaging, drilling deeper wells of 30,000-plus ft. Technology has advanced as much in the last 10 years as it did in the previous 30 years, and we continue to be dependent on advancements in technology to move our industry forward.”

The MMS granted 30 new technology approvals in 2006. “This set a record for the number of approvals for first-time use of technology in deep water,” said Herbst. Examples of technology advancements that MMS approved for use on federal leases during 2006 include:

  • A high-integrity pressure-protection system (HIPPS) that allows use of pipelines not rated for the well’s full shut-in tubing pressure. Although not proposed for a specific development, MMS approved the general HIPPS concept last July.
  • Use of preset polyester moorings for deepwater drilling rigs. One stipulation for allowing the use of polyester moorings traditionally has been that the polyester moorings may not come in contact with the sea floor. After studying the polyester moorings, MMS granted approval for preset moorings if inspected and tested every 6 months.
  • Various forms of subsea boosting such as a subsea pump allowing enhanced oil recovery.
  • The first ever use in the Gulf of Mexico of floating production, storage, and offloading (FPSO) vessels on deepwater development projects.

Two pending deepwater projects in the gulf have been approved for FPSOs. One is part of Petrobras America Inc.’s fast-track development plan for the Cascade-Chinook project. “Petrobras sees it as almost an early-production system,” said Georgie MacFarlan, editor of Douglas-Westwood’s world floating production vessels database. “Petrobras is considering ultimately replacing the proposed FPSO vessel for its Cascade and Chinook oil fields with a semisubmersible, spar, or TLP.”

The Kelly Candies, one of three tugs, moves the Neptune TLP hull from Signal International LLC’s dry dock in Port Arthur, Tex., for installation on Green Canyon Block 613 in the Gulf of Mexico. Photo from BHP Billiton Petroleum (Americas) Inc.
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The other unit is the former “ice-class, roll-on, roll-off German ferry MV Karl Carstensk,” which “has been stripped of its previous equipment and is now taking shape as a production vessel,” MacFarlan said. The vessel’s hull is undergoing conversion at the Viktor Lenac shipyard in Croatia. Integration aboard the floating production unit, to be named Helix Producer I, will take place when the vessel arrives at Ingleside, Tex., from Europe in March 2008. The vessel is scheduled to move to Phoenix field (renamed from Typhoon field) on Green Canyon Block 237 in May 2008, where it will start production in the third quarter.

Helix as operator plans to redevelop the old Typhoon field, formerly operated by Chevron, which ceased production after Hurricane Rita wiped out the tension-leg platform and left it upended with just the keel poking above the waterline in 2005.

Shallow vs. deep

Not all of the Gulf of Mexico is equally blessed with oil and gas prospects, of course. The relatively shallow waters of the Outer Continental Shelf in the western and central gulf, where the offshore industry was born in 1947, are a mature province where conventional discoveries are smaller and more quickly depleted.

The jack up rig count in the gulf declined from 155 in 2001 to 88 in April, with “78 marketed, 58 contracted, and more leaving,” said James K. Wicklund, partner and chief investment officer for Spinnerhawk Capital Management, Dallas, at an offshore outlook conference in Houston. “Operators are shrinking in size,” he said.

“The problem is that individual shelf wells are averaging about 4.5 bcf today, and we can get that from prolific Barnett shale wells [onshore in Texas] at a much lower cost,” Wicklund said. “That has been the problem in the shallow gulf-the discovery size has continued shrinking at such a rate that with natural gas at about $7/Mcf, no well’s economics can stand a very high rig cost before dooming the economics of the well. And it then doesn’t matter if there is only one rig left in the gulf, if the well isn’t economic due to size and gas prices, with the rig’s day rate above a certain level, the well won’t be drilled.”

Wicklund told OGJ on May 29, “Some of the companies, such as Apache, bought fields and integrated operations in the gulf over the past few years and are continuing to drill up those fields. But the one or two-well discoveries don’t have much of an impact on an E&P company’s value like a big land position in a shale play would.”

The deepwater gulf E&P market, on the other hand, “is fine and will continue to be so. It’s not an issue; it’s strong as dirt,” Wicklund said. “There are 18 operators currently active in the deep Gulf of Mexico with some 118 deepwater projects on production and wells drilled in 10,000 ft of water and to 30,000 ft TD.”

At MMS, Herbst said, “There’s solid evidence in both leasing and exploration activities to confirm the oil and gas industry’s continued interest and motivation to explore and develop the deepwater frontier in the Gulf of Mexico.” The number of gulf tracts in 1,500-4,999 ft of water receiving bids during federal lease sales increased by 32% from 2005 to 2006. The number of tracts in 5,000-7,499 ft of water receiving bids grew by 29%.

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Deepwater leases last year accounted for 70% of the oil and 40% of the natural gas produced in the Gulf of Mexico, said MMS officials. Oil and gas operators announced 12 deepwater discoveries in 2006, with the deepest in 7,600 ft of water. More than half of the active oil and gas leases in the gulf are in more than 1,000 ft of water, which MMS defines as deep water.

Last year, Chevron Corp. set a drilling depth record for the US gulf-34,189 ft-at Knotty Head, the deepest oil well drilled in the gulf in 3,500 ft of water. Partners include Anadarko, BHP Billiton, and Nexen Inc., each with 25% interest. The Big Foot and Knotty Head discoveries confirmed the extensive Middle to Lower Miocene play in the Mississippi fan foldbelt area. Chevron successfully completed a record-setting production test on the Jack No. 2 well at Walker Ridge Block 758 in the Gulf of Mexico. The Jack well was completed and tested in 7,000 ft of water at more than 20,000 ft under the sea floor, breaking Chevron’s 2004 Tahiti well test record. The Jack No. 2 well was drilled to a TD of 28,175 ft.

The scarcity of urgently needed equipment is tied to short-term drivers that will normalize over time, Wicklund said.

Douglas-Westwood analysts warned, “Up to 2011 most sectors of the [global] offshore industry will continue to be equipment and people resource-constrained. Consequently, day rates will remain high, especially for capital assets such as high specification drilling rigs and other vessels. The experienced personnel needed to design, build, and operate drilling and production equipment will also command a growing premium.”

Spotty rig market

As a drilling market, the Gulf of Mexico is spotty.

Of 128 offshore rigs-jack ups, semisubmersibles, and drillships-scheduled for delivery worldwide in 2006-10, Wicklund told OGJ, “virtually none, with the possible exception of a deepwater rig or two, are slated for the Gulf of Mexico.”

In keeping with the weakened market for conventional drilling on the OCS, day rates for shallow-water rigs in the Gulf of Mexico “continue to bounce along the bottom,” Raymond James analysts said. “Overall, we continue to believe the Gulf of Mexico shallow-water jack up market is to remain weak through the end of the first half of 2007, with firming forward natural gas prices and incremental second-half rig migration acting to support rate improvement into 2008.”

Angeline M. Sedita, contract drilling analyst at Lehman Bros., said, “The Gulf of Mexico jack up market remains the weak link. We believe that three to five jack ups could leave the region in 2007.” As jack ups move from the gulf to other markets, “a pickup in jack up rates later in the year is definitely a possibility (although not a foregone conclusion),” she said.

Wicklund acknowledged general speculation that day rates for jack up rigs will increase in the second half of 2007. “But it is a hope as much as anything,” he said, “as they have been much softer than had been expected, but the feeling is fortified by the number of rigs leaving to work in other regions.”

Pride International Inc. said Gulf of Mexico day rates for jack up rigs “appear to be stabilizing and may even increase modestly by late 2007-early 2008 as natural gas prices stabilize and more jack ups move out of those waters to other markets.” Pride is also examining potential opportunities for its midwater semisubmersible fleet and was reported recently in contract negotiations for its Pride Mexico (2,650-ft, second generation), which recently completed a commitment with Petroleos Mexicanos (Pemex) off Mexico at a day rate in the high $40,000s.

Drilling companies and financial analysts report Mexico’s jack up rig market has remained strong despite the weak market in the US gulf.

Pride International Inc. recently secured 1-year contracts for three jack ups to work for Pemex offshore Mexico at day rates of $97,500 each. That is “a compelling alternative to working in the [US sector of the gulf] at day rates of $60,000-70,000,” Lehman Bros. said. “We believe that Mexico will continue to be a promising target market for gulf jack up rigs and possibly deepwater rigs as well.”

Pride also is examining future deepwater opportunities with Pemex, which is tendering for three deepwater rigs-one unit with a water depth capability of 10,000 ft and two with water depth capability of 7,000 ft. Contracts would be for 5 years each, but only the first 2 years would be fixed-rate, with rates during the final 3 years to be indexed.

For the first time, GlobalSantaFe recently indicated a willingness to bid on potential assignments in Mexico for jack ups currently in the US gulf, Sedita reported recently. She said, “Pemex has proven to be a better client than many had feared, and the ongoing weakness in the gulf has likely made opportunities in Mexico more attractive.” She added, “Hurricanes and insurance issues are not concerns in the Mexican portion of the gulf.”

Hurricane season

Weather forecasters are again calling for an active hurricane season in the gulf this year. The 2007 hurricane season could produce as many as 17 storms, 5 of which could be major hurricanes. Meteorologists estimate a 74% chance of a major hurricane hitting the US this year. Meteorologists also warned of a possibly active hurricane season in 2006, but severe storms never materialized to threaten offshore production.

Still, the double jolt suffered by offshore producers and coastal refineries and other facilities when Hurricanes Katrina and Rita slammed into the central Gulf of Mexico just 35 days apart in 2005 left its mark on the industry. At a panel discussion during OTC, Allen J. Verret, executive director of the Offshore Operators Committee, urged companies to identify at-risk assets, assign priorities to the risks, and evaluate ways to reduce exposure to storms, such as installing facilities subsea. But even subsea operations are not totally safe, as was demonstrated by damage to pipelines in the gulf in 2005.

Allen S. Brown, associate editor of American Society of Mechanical Engineers Mechanical Engineer magazine, said in early May that 2-3% of gulf pipeline capacity was still down as a result of the 2005 storms. There were 655 pipelines reported damaged, including 142 with diameters of 10 in. or greater. Of the damaged pipelines, 216 were associated with platform damage, 13 were associated with third-party impact, 12 were displaced by currents, 72 were exposed, 142 were related to riser damage, 26 had crossing damage, and 173 were the result of other or unknown damage.

Frank Puskar, president of Energo Engineering Inc., Houston, said companies may need to increase deck elevation on new platforms and should be concerned about deck elevation of existing platforms. Of 120 platforms destroyed during Hurricanes Ivan in 2004 and Katrina and Rita in 2005, “60% had wave in the deck,” he said. Platforms designed with modern American Petroleum Institute RP 2A guidelines with new design deck elevations had a “good chance of not being destroyed,” he said.

In 2006, none of the 10 gulf storms, including five hurricanes, made landfall on the US Gulf Coast, and the offshore industry took advantage of that respite to make improvements to its operations and procedures, said API Pres. and Chief Executive Red Cavaney on May 30.

“Our industry’s upstream sector continued to analyze and apply updated environmental data on how powerful storms affect conditions in the gulf,” Cavaney said. “During the 2004 and 2005 hurricanes, waves were higher and winds were stronger than anticipated in deeper parts of the gulf.” The revised wind and wave data prompted API to reassess its recommended practices (RPs) for gulf operations. It published three interim documents covering the operation and construction of both mobile offshore drilling units and fixed and floating production platforms.

A second edition of the RP for the mooring of mobile offshore drilling units was issued in 2007, incorporating updated data analysis. On May 30, API published three new interim documents, with final RPs expected next year. “API is hosting workshops on these new publications in New Orleans and Houston this July,” Cavaney said.

To prepare for future severe storms, pipeline companies have installed on-site backup electric power generation capability, improved communications systems to support continued operations, and cooperated with vendors to preposition food, water, and transportation, as well as plan for other emergencies.