PROSPECT VARIETY LURES NEWCOMERS, HEATS COMPETITION IN GULF OF MEXICO

July 2, 1990
Bob Tippee Managing Editor-Economics and Exploration By offering oil and gas producers a full menu of opportunities, the Gulf of Mexico has moved beyond its role as mainstay of U.S. offshore drilling. In the past 3-4 years the gulf has become a unique offshore play accessible to once-landlocked U.S. independents. More recently, it has attracted a growing number of non-U.S. producers.
Bob Tippee
Managing Editor-Economics and Exploration

By offering oil and gas producers a full menu of opportunities, the Gulf of Mexico has moved beyond its role as mainstay of U.S. offshore drilling.

In the past 3-4 years the gulf has become a unique offshore play accessible to once-landlocked U.S. independents. More recently, it has attracted a growing number of non-U.S. producers.

So especially in shelf waters less than 600 ft deep, small operators and non-U.S. companies are joining major companies and large independents that have worked the gulf for years. The population increase means new competition for leases, rigs, and services at a time when operators must pay more attention than ever to safety and the environment.

A dual character gives the gulf much of its allure.

At one extreme the region offers world class Pliocene-Pleistocene oil prospects in water depths of 1,000 ft and more-along with world class risks and technological challenges. At the other extreme, it presents quick return, shallow water Miocene gas targets that independents find hospitable to their budgets.

"There are two different industries at work out there," observes Bill Krips, Union Texas Petroleum senior vice-president and general manager for U.S. exploration.

Between the water depth extremes lies an array of prospect types and risks, available under the Department of Interior's area-wide leasing system. The mix fits a wide variety of strategies.

The influx of players has been more evident in Outer Continental Shelf lease sales than in drilling figures. The weekly Baker Hughes Inc. count of active rigs off Texas, Louisiana, Alabama, and Florida averaged 106 through June, up nine units from the 1989 average but down the same number from 1988.

Completions through May totaled 211 oil wells and 277 gas wells. Totals for all of last year were 265 oil and 475 gas wells, and for 1988, 155 oil and 183 gas.

And the outlook has clouds. Producers had hoped for sustained gas price strength by now. They've been disappointed.

They also worry about Interior Department hints that area-wide leasing might be replaced by a more restrictive scheme, a move that would ,.alter the entire profile of the gulf from a strategy standpoint," says Bob Barker, Apache Corp. exploration manager for the Gulf Coast off shore.

Interior Sec. Manuel Lujan may have eased those fears somewhat recently while discussing Minerals Management Service plans to cut OCS acreage available for leasing nationwide. "The gulf is different," Lujan declared, saying area-wide leasing there will continue (OGJ, June 25, Newsletter).

MOVEMENT SOUTH AND EAST

With drilling historically concentrated in the western and central regions off Louisiana, Texas, Mississippi, and western Alabama, gulf exploration recently has moved in the only directions available: south toward the ultradeep water and east.

In the 2 years ending last May 1, operators drilled 138 wells in water deeper than 1,200 ft, 51 of them since last July 16, according to MMS. Shell Offshore Inc. drilled in the deepest water during the period, 7,467 ft on Mississippi Canyon Block 786. It drilled the hole in 1988.

One ultradeepwater development project folded in April: the Green Canyon Block 29 floating/subsea drilling and production system of Placid Oil Co. and partners. A project satellite well holds the gulf production water depth record-2,243 ft.

That landmark will fall in 1993, when Shell Offshore starts flow from its 32 slot Auger tension leg platform in 2,860 ft of water on Garden Banks Block 426. Shell also is drilling and producing from Platform Bullwinkle in 1,353 ft of water on Green Canyon Block 65 and has a redevelopment program under way at Platform Cognac in 1,024 ft of water on Mississippi Canyon Block 194.

In other ultradeepwater development work, Conoco Inc. is developing a multipay field in 1,760 ft of water on Green Canyon Block 184 with its Jolliet tension leg well platform, the world's first.

Exxon Co. U.S.A. this spring set in motion delayed plans for two development projects in the Mississippi Canyon area: Zinc, a multiwell subsea system in 1,500 ft of water on Block 354, and Alabaster, a conventional platform in 468 ft of water on Block 397 from which it will drill directionally to develop a reservoir in 1,400 ft of water.

And BP Exploration Western Hemisphere plans the gulf's first platform with a conventional four leg jacket in more than 1,000 ft of water on Mississippi Canyon Block 109. Water depth there is 1,032 ft.

To the east, Jurassic Norphlet trend activity has revived. Mobil Exploration & Producing U.S. Inc. is working to double production from Mary Ann gas field in Mobile Bay to 80 MMcfd and plans to develop five blocks in the area with three platforms.

Exxon U.S.A. is developing Bon Secour Bay, Northwest Gulf, and North Central Gulf gas fields in the trend and is building a gas treatment plant in Mobile County, Ala. And Shell Offshore is developing Fairway gas field and building an onshore gas processing and treatment facility.

A Miocene gas play has flared closer to shore in the same area, with independents drilling most of the wells. Operators say expectations of a gas price increase and plans for the Jubilee pipeline triggered the activity (see map, OGJ, Jan. 11, 1988, p. 26).

They expect pipeline construction to start this year.

Interest remains high in Norphlet prospects off Florida. Chevron Corp. has reported a gas discovery on Destin Dome Block 56 but says further drilling is needed. Lack of infrastructure and environmental questions would hamper development.

Last year, operators spudded four wells in the Destin Dome area and one in the Pensacola area.

COMPETITION ON THE SHELF

While the ultradeepwater and eastern gulf frontiers receive much of the attention and investment dollars, the shelf continues to host most of the gulf's drilling.

The Miocene gas play is mature but far from drilled up, operators agree.

"We think it will be active for some years to come," says Earl Ritchie, Maxus Energy Corp. vice-president, exploration.

The increase in shelf competition became especially evident in OCS Sale 123 last March covering leases in the central gulf. MMS says 96 companies participated, compared with 81 companies in last year's central gulf sale and 84 the year before that.

Krips of Union Texas calls Sale 123 "quite an international event" and notes that his company participated in bidding with units of three non-U.S. firms. International companies are "knocking on doors, building staffs. They're giving signals that they're going to be players."

With the international firms come independent gulf newcomers that have found shallow water leases affordable since the crude oil price collapse of 1986.

"It's making things on the shelf a lot more competitive," says Apache's Barker. "That goes from acquisition of property to rigs and everything else."

Krips says costs have increased "pretty much over the board." Like most operators, he sees rig costs rising faster than service prices. Increases overall have been moderate so far.

Jack Schanck, Unocal Corp. manager of exploration, estimates the day rate for a moderate depth jack up has climbed to $15,00018,000 from $12,000-13,000 6 months ago.

Louisiana Land & Exploration Co. has debated whether to put a rig on long term contract, says John F. Greene, executive vice-president, exploration and production. But it still receives bids for turnkey contracts.

LL&E has increased its gulf activity in recent years. The company bid aggressively in the past three lease sales in a variable interest joint venture with Northern Michigan Exploration Co., Nerco Oil & Gas Inc., and Equitable Resources Energy Co. Formerly a nonoperating interest holder, it operates all 45 blocks the joint venture has acquired so far.

ADJUSTING STRATEGIES

Partly in response to increased competition, some companies are shifting strategies in their gulf operations.

Unocal is moving toward "higher risk, higher potential exploration plays" as the shallower water shelf becomes more crowded, says Schanck. And rising costs are changing the timing of Unocal's drilling.

"Last year if we got something lined up we'd go get a rig and drill it." Now the company often waits until it has three or four prospects planned before signing a drilling contract.

Unocal is reorganizing its gulf operations. The company now has two operating units for the region, one for Louisiana onshore and offshore and the other for Southeast Texas and the rest of the gulf. Each has its own vice-president. "We've been able to move much quicker," Schanck says.

Amoco Corp., active on the shelf and in ultradeep water, is another major reorganizing to decentralize.

"We're a smaller organization than we used to be," says Ed Medley, manager of operations for the New Orleans offshore business unit. "A lot of decisions are being made at the level of people doing the business."

Reorganizing isn't the only way Amoco is acting like the independents alongside which it increasingly works on the shelf. The company is sharing facilities, a practice until recently more common among independents.

Medley says helicopter costs have increased more than others, rising 10% in the past 6 months. So Amoco is trying to share weekly charters and costs with companies needing aircraft on days it does not.

It also is sharing surplus processing capacity on some of its gulf facilities. The company's efforts to "find ways to do it more efficiently," Medley says, have held operating expenses per barrel of oil equivalent flat during the past year.

Craig Clark, Apache production manager for the Gulf Coast offshore, says facilities sharing has been most common in state waters but is now spreading on the OCS. In shallow water, sharing can make low risk, low return ventures economic and offset riskier investments.

Apache also is employing more used equipment than before and seeking bids and volume discounts for everything possible. In addition, the company tries to improve well utility-reducing the drilling of expendable holes-by planning early for possible development. "That all starts when we first generate an idea," Barker says.

TECHNOLOGY'S ROLE

Technology is steering activity on the shelf as much as it is in the ultradeep water, albeit with fewer world class engineering feats.

Three dimensional seismic technology has become a vital tool for identifying subtle drilling targets. It has yielded a spate of 25-100 bcf gas discoveries that LL&E's Greene characterizes as ,.nice developments around what were considered mature areas."

A related technological trend is integration, via computers, of previously segregated activities such as geophysics, geology, and reservoir engineering.

"There's an advantage in letting some of those folks work hand in hand in a team approach," Greene says.

Horizontal drilling also is drawing attention in the gulf, where highly deviated holes are common. Texaco U.S.A. last month claimed the gulf's first documented horizontal well-B-12 OCS G-0974 on East Cameron Block 265. It drilled the hole, which flowed 11 MMcfd of gas, to TVD of 1,700 ft with a horizontal displacement of 670 ft within a vertical variation of 15 ft.

Unocal is considering horizontal wells to improve drainage of old fields, Schanck says. And the company is looking at low resistivity sands as a source of "pretty substantial reserves."

It has experienced primary recovery 2-21/2 times expectations in low resistivity pays in old fields and has recompleted some wells on that basis.

The potential of low resistivity sands is "making us go back and take another look" at discoveries that initially appeared marginal or uneconomic, Schanck says. "A lot of guesswork's still involved."

SAFETY EMPHASIS GROWS

As it is elsewhere in the petroleum industry, safety in the gulf is receiving new attention from government inspectors and operators alike.

MMS is experimenting with a new system aimed at increasing the frequency of its inspections and adjusting their focus.

Current policy calls for annual, announced inspections of each platform and rig in the gulf. In these visits, inspectors are supposed to check all applicable items on comprehensive checklists of what MMS calls potential incidents of noncompliance (PINC).

MMS also tries to conduct unannounced, or spot, inspections of 10% of all platforms and 50% of all drilling rigs each year. In these visits, inspectors try to cover 25% of applicable PINC items.

In practice, says a National Research Council (NRC) study, MMS neither visits gulf facilities as frequently as policies require nor checks all PINC items specified. The reasons: manpower and money limits.

Another problem identified by NRC is the equipment orientation of PINC lists. Accident causes tend not to match specific PINC items.

Enforcement of current PINC lists may indeed be averting accidents, NRC said. But the hardware oriented lists may overlook other potential hazards, such as performance lapses.

An MMS task force has responded with a list of proposals, among them two that address those NRC findings and would especially affect gulf operators.

One proposal would require operators to develop safety and environmental management programs subject to MMS approval and audit. The proposal tries to focus operator safety efforts on day to day performance, not just on inspections.

The other proposal calls for review of a sampling of PINC items during announced annual inspections rather than of complete lists. Inspectors would examine selected items in each of several groups defined by the highest enforcement action specified in current policy.

Each group would have a number of tolerable PINC failures. When failures exceeded that number, the whole group would be deemed to have failed.

The program would reduce the time MMS inspectors devote to annual visits, freeing them to make more spot inspections. The agency is testing the new program with six operators.

Since the beginning of the year it has been conducting spot visits more frequently, concentrating on operators with poor performance records, locations where there have been serious accidents or spills, recently inspected locations with failures, and platforms with simultaneous drilling, production, or workover operations.

Operators say they don't resist the increased scrutiny. "They (MMS) have knowledgeable people out there," says Amoco's Medley. "They've been very effective."

Many companies have beefed up safety programs on their own.

Union Texas, for example, is updating and testing its spill response plans and conducts surprise drills, "to the point of putting equipment in the water," says Krips.

He calls the extra expense "a pretty good investment" and welcomes new emphasis on procedures.

"What about the people?" Krips asks. "Do they know where to go, what to do, who to call upon? There are aspects you just don't get into unless you drill it."

WHERE IT'S HEADED

Trends in the gulf are fairly clear. Majors will continue to work the ultradeep water, especially as development and production techniques are perfected and demonstrated.

A variety of companies from a variety of countries will operate on the shelf, relying on seismic techniques to identify prospects increasingly stratigraphic in nature and, as gas prices recover, at increasing depths.

Operators expect horizontal drilling to increase. And some expect more independents to track the majors onto the slope. "Independents will follow, just as we have on the shelf," says LL&E's Greene.

Some operators predict trouble for the shelf's newcomers. "There's going to be a lot of people who are going to be disappointed," says Apache's Barker. "Just throwing money at the problem is not the way you want to do it."

So how does the gulf rank as a worldwide business opportunity? Some distance from the top, says Etienne Deffarges, principal, Booz, Allen & Hamilton Inc., San Francisco.

Deffarges notes that the number of rigs under contract in the gulf has climbed to as many as 160 recently from about 140 last year and attributes the increase to gas drilling. The region's rig utilization rate might climb to 75% from 70% this year.

But that compares with 80% worldwide and 90% in the North Sea, one of the regions he sees as more attractive. Others are Southeast Asia and Latin America.

Deffarges acknowledges positive developments" in the gulf. "But when you take them in a global context the gulf is going to stay behind some of these other regions."

Copyright 1990 Oil & Gas Journal. All Rights Reserved.