SPECIAL REPORT: Strategies: How two busy operators approach the gulf

June 11, 2007
Petrobras America Inc. and a segment of Anadarko Petroleum Corp., both of Houston, were among the top five companies with the highest number of accepted high bids of leases in Outer Continental Shelf Sale 200 in the Western Gulf of Mexico in August 2006.

Petrobras America Inc. and a segment of Anadarko Petroleum Corp., both of Houston, were among the top five companies with the highest number of accepted high bids of leases in Outer Continental Shelf Sale 200 in the Western Gulf of Mexico in August 2006. Petrobras America was at the top of that list with 34 accepted high bids for a total of $45,483,774. Kerr-McGee Oil & Gas Corp., since merged into Anadarko, was fifth and the only independent producer in the top five, with 25 accepted high bids totaling $15,390,478. MMS awarded 371 leases to the successful high bidders for a total $331,950,865 in Sale 200.

It was the biggest federal lease sale in the Western Gulf “in terms of number of bids submitted in the past 9 years and the best in 8 years for the amount of money bid,” said Chris Oynes, Gulf of Mexico regional director, at the time of the sale. “The level of activity underscores the Gulf of Mexico’s importance to domestic energy production and the oil and gas industry’s interest in expanding their deepwater operations.”

This article examines the focus and strategies of the two firms-one a subsidiary of a national oil company and the other one of the largest independents in the US-in the Gulf of Mexico.

Anadarko

Anadarko budgeted $4 billion for its 2007 capital program and plans to spend 25% of it in the deepwater Gulf of Mexico.

Darrell Hollek
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In recent years, Anadarko and Kerr-McGee Corp. were frequently among the top firms with the highest number of accepted high bids in lease sales for the central and western gulf. Often one or the other was the only independent producer listed with various majors among the top five winning bidders in such sales. With the merger of Kerr-McGee into Anadarko last year and recent installation of Independence Hub, operated by Anadarko, the deep Gulf of Mexico is a major focal area for the firm.

“There’s a lot of interest in the gulf. We’ve had a lot of success there,” said Darrell Hollek, Anadarko’s vice-president of Gulf of Mexico operations and development. The company’s large holdings in the deepwater gulf make it “easy to continue” with the prospects of added success.

Anadarko’s other major areas of operation include onshore US, particularly the Rocky Mountains, which will get 30% of this year’s budget, and Algeria. The company also has production in China, a development project in Brazil, and exploration programs in several other countries. It has divested some noncore properties in the Gulf of Mexico and onshore US for a combined total of $10.5 billion after income taxes.

“The sale of our offshore assets is an example of how discoveries can add significant value quickly,” said Hollek. “Looking at the business as a whole, it sometimes makes sense to monetize some assets earlier rather than later. We remain extremely flexible as to how to best monetize various assets.”

At the end of 2006, the deepwater Gulf of Mexico accounted for 13% of Anadarko’s US reserves, which made up 88% of its total proved reserves of 10.5 tcf of gas and 1.3 billion bbl of crude, condensate, and NGL. In the deep gulf, Anadarko owns an average 63% working interest in 777 blocks and has access to an additional 27 blocks through participation agreements.

Anadarko’s exploration program in the Central and Western Gulf of Mexico focuses on the extensive Middle-to-Lower Miocene play in the foldbelt area and the developing Lower Tertiary play near the 2006 Kaskida discovery.

During 2006, Anadarko delineated the Tonga, Big Foot, and Knotty Head discoveries and had five additional discoveries: Kaskida, Power Play, Claymore, Caesar, and Mission Deep. The company expects to participate in four to six exploration wells and three to five delineation wells in the region in 2007.

Independence Hub

Development plans for the gas-processing Independence Hub semisubmersible production platform and a gas export pipeline in the eastern Gulf of Mexico were approved in 2004. Anadarko is operator of the facility, which can process 1 bcfd of gas from several ultradeepwater gas fields, including eight Anadarko field discoveries. Initial production will be from 15 wells; Anadarko has an interest in 14 of those wells. First production is expected in the second half of this year.

The Independence Hub water depth exceeds 8,000 ft, deepest of any offshore platform. The facility’s gas- processing capacity is the largest in the gulf. The 20-in. steel catenary riser connecting the production platform to the Independence Trail gas pipeline ranks as the largest and deepest such riser ever installed. Beginning at Independence Hub on Mississippi Canyon Block 920, Independence Trail is also the deepest export pipeline installed to date. The 134-mile, 24-in. pipeline connects with Tennessee Gas Pipeline on West Delta Block 68.

Enterprise Field Services LLC announced Mar. 8 that the Independence Hub semi had been successfully installed. Independence Hub LLC, a venture of Enterprise (80%) and Helix Energy Solutions Group Inc. (20%), owns the facility. Besides Anadarko, the producers group includes Dominion Exploration & Production, Devon Energy Corp., Hydro Gulf of Mexico, and Murphy Oil Corp. The Independence Trail Natural Gas Pipeline is a wholly owned affiliate of Enterprise Products Partners LP.

Anadarko’s leases

With 2.7 million net acres, Anadarko ranks among the gulf’s top leaseholders. Anadarko utilizes a “hub and spoke infrastructure” while maintaining a controlling rig position in the Gulf of Mexico. In the first quarter of this year, it had five deepwater rigs under its operation.

Hollek expects the gulf to maintain its 20-25% share of Anadarko’s total investment. He sees the deepwater gulf as “an area where we can make step changes” in strategy and technology through the development of ideas that eventually can be applied in other areas of the world.

The offshore industry is “not so large anymore,” Hollek said, “so it’s not hard to keep up with the industry and technology.” Although costs are rising, Anadarko “saw some of this coming” and was able to “get nine deepwater rigs under long-term contracts” before day rates started to climb.

Petrobras

Petroleo Brasileiro SA (Petrobras) began a push in the 1970s to reduce Brazil’s dependence on foreign oil and became in the process a leading expert in deepwater exploration and production. Now it is applying that expertise in the Gulf of Mexico and other international areas.

Joao Carlos Araujo Figueira
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In the 1970s, the state-owned company produced a mere 50,000 b/d of oil in Brazil from onshore and shallow-water operations. Output rose to 500,000 b/d in the mid-1980s as Petrobras began exploring deep waters.

“If it were not for deep waters, Petrobras would be just a 500,000-b/d oil company,” said Joao Carlos Araujo Figueira, senior vice-president of upstream operations at Petrobras America Inc. in Houston.

Today, Petrobras is the world’s seventh-largest publicly traded oil company, with global production of 2.3 million b/d of oil equivalent. Because of the company’s pioneering deepwater work, Brazil currently produces enough oil domestically to meet its own demand. Petrobras has proved reserves of 15 billion boe, of which 1.27 billion boe is outside Brazil. Production in 2006 averaged 2.297 million boe/d, of which 2.054 million boe/d was in Brazil and 243,0000 boe/d were produced internationally, including the Gulf of Mexico.

Oil production alone amounted to 1.8 million b/d in 2006 and is expected to grow to 2.3 million b/d by 2011, with 500,000-600,000 b/d expected to come from international operations, Figueira said. In the gulf, Petrobras expects to be producing 20,000 boe/d, up from 16,000 boe/d at present. But gulf output could grow to 130,000 boe/d by 2013.

“These numbers are conservative,” Figueira said. To achieve the production targets, Petrobras America has an investment plan of $4.5 billion for 2007-11.

Gulf experience

Petrobras has been involved in US exploration and production since 1987, when it acquired shares from Texaco Inc. in eight blocks of the Gulf of Mexico. In 2001, Petrobras America changed its strategy in the gulf, “attempting to achieve more focus and materiality while preserving the prudent approach of the past,” the company said in a report. Its main goal was to take advantage of the deepwater expertise it developed off Brazil and to selectively build a portfolio of world-class exploration acreage in deep and ultradeep water and ultradeep drilling in shallower waters to secure meaningful medium-to-long-term production growth in the gulf and elsewhere, primarily off Nigeria and Angola.

Petrobras America’s current holdings off the US total 302 blocks in the Gulf of Mexico, including 121 leases (41 operated) in relatively shallow water of the Outer Continental Shelf, 180 in deep water (120 operated), and 1 onshore lease on the upper Texas Coast, not operated by Petrobras. It has interests in six producing fields.

Since 2002, Petrobras has participated in a series of ultradeep-water discoveries in the US sector of the gulf. The Cascade accumulation was discovered that year. Petrobras acquired other blocks and in 2003 made the Chinook and Saint Malo oil discoveries. By April 2004, it had participated in the discovery of natural gas in Coulomb North field, which went on production and in less than 3 months through adjacent infrastructure. Operated by Shell, Coulomb for a time held the world water-depth record for production, 2,031 m.

In 2004, the company acquired major deepwater exploration prospects through farmins in US waters and also explored for deep gas reservoirs in shallow water. Petrobras America later was successful bidder for 37 blocks off Corpus Christi, Tex., in 500-2,000 m of water. The company has identified at least three major prospects in the region. It operates the blocks with 100% interest.

Alberto Guimaraes
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Although generally regarded a mature area, the gulf is still a frontier in ultradeepwater exploration and drilling for deep gas on the shelf, said Alberto Guimaraes, president of Petrobras America Inc. in Houston. In ultradeep water, he said, drilling so far has been sparse. “We see ourselves as a member of a special and very restrictive club of those companies who can say, ‘I have confidence in the technology I have to explore and to face this kind of risk.’”

In the gulf, Figueira said, “We have three areas where innovation is the name of the game.” One region is the essentially mature conventional drilling areas in shelf waters where Petrobras is using its deep-drilling expertise to tap into deep gas deposits. “Below a given depth, it’s a brand new province,” Figueira said. With plenty of pipeline already in that area of the gulf, he said, “It’s easy to monetize a gas discovery quickly and have an early cash inflow.”

Then there are Corpus Christi, Padre Island, and Mustang Island quadrants of the western gulf off South Texas, Petrobras is challenging a paradigm, in that Lower Tertiary reservoirs that occur onshore in South Texas and in ultradeep waters have not been found in the transitional shallower to deeper waters (650-2,300 ft) in between.

“We made an evaluation and came to the conclusion that earlier wells that were drilled in this area were not drilled deep enough,” Figueira said. Other producers “drilled down to a given depth and found shale or a very shaley section,” he said. “In general, we intend to drill deeper than 20,000 ft. That’s the basic rationale that has driven the company to invest thereabouts.” Petrobras has drilled one well in that general area. “It was not commercial, but we got some hints that encouraged ourselves to keep this area in our base data,” Figueira said.

Petrobras’ third “innovation area are the ultradeepwater prospects some 180 miles off the Louisiana coast with the Cascade and Chinook fields along the Walker Ridge area and the Coulomb North and St. Malo fields and other prospects where Petrobras can apply its deepwater expertise.

There is a fourth area 138 miles off Texas in the deep central gulf where in February Petrobras America began producing from the first well in the Cottonwood gas-condensate field on Garden Banks Block 244 in 670 m of water. It is the first deepwater field outside of Brazil that Petrobras, as operator, has developed and put into production. Production began at 40 MMcfd but soon increased to 70 MMcfd when a second well came on stream. Figueira describes that as an “area of continuation.” He said, “Everything we have to do here is to improve data quality, particularly seismic, in order to have a better image of the prospect.”

The gulf shelf areas off Texas and Louisiana “still need to be proved up,” Figueira said. But Petrobras has production at Cottonwood and in the ultradeep water at Coulomb, operated by Shell Oil Co. Cascade, operated by Petrobras, and St. Malo, operated by Chevron. Those “are the first flowers we’ve been able to collect in this huge garden” of the Gulf of Mexico, Figueira said.

“We at Petrobras realize we have to look for two or three things in our internationalization process,” Guimaraes said. “One is that we have developed some special technologies in the company that differentiate Petrobras among others. Any big company has some specialties, some special factors. Petrobras is not an exception. So in the process of going abroad we have decided what we have to do is not be like others but apply those things that make us different and special.”

Guimaraes said, “The second factor is to look for areas where we can apply successfully these technologies and specialties, and the Gulf of Mexico is just one of those regions. Right now we are developing a very good project in Nigeria where we are positioning ourselves in a very big scale and applying this same physical syntax.” Moreover, he said, “We have decided from previous experience that our company for the size it has, for the capital it applies, and the type of projects that have been successful” is not a fit for small scale projects. “So we have to look for major projects.”

Petrobras always has been quick to adopt new technology, from flexible pipe to subsea production to floating, production, storage, and offloading (FPSO) vessels. The company now is transferring technology developed in Brazil to the Gulf of Mexico. “It’s not a new concept-it has been tested, fully audited, and proven in Brazil,” Figueira said.

FPSO for the gulf

At the end of 2006, Petrobras’ plan for subsea development of Cascade and Chinook fields was approved by the US Minerals Management Service, the first such plan ever to include an FPSO in the Gulf of Mexico. Petrobras has used FPSOs extensively in deep water off Brazil to reduce infrastructure costs and speed production to markets. There, it has 15 FPSOs in operation and 9 under construction.

In seeking MMS approval for the first FPSO in the Gulf of Mexico, Guimaraes cited another benefit-human and environmental safety. When a hurricane approaches, an FPSO can easily disconnect, move to safety, then return and reconnect once the storm has passed.

For the Cascade-Chinook project, Petrobras plans to start oil production in 2009 with the help of six technologies that are, in addition to the FPSO, new to the US sector of the Gulf of Mexico: a disconnectable turret buoy that allows the FPSO to move offsite during bad weather; crude transportation via shuttle tanker; free-standing hybrid risers; subsea electric submersible pumps; torpedo pile vertical loaded anchors; and polyester mooring systems.

The plan calls for installation of an FPSO in 7,000-9,000 ft of water, with at least two subsea wells in Cascade and one subsea well in Chinook, each drilled to 27,000 ft and tied back to the FPSO. Based on reservoir performance, the development plan could be expanded to include additional wells on each unit. Petrobras is operator with 50% of Cascade and 66.67% of Chinook. Devon Energy Corp. owns the remaining 50% of Cascade, and Total E&P USA Inc. owns 33.33% of Chinook.