More gulf drilling needed to offset decline

Anne Rhodes
Associate Managing
Editor-News

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An acceleration of Gulf of Mexico shelf drilling is needed in order to offset gas production declines resulting from high well-depletion rates.

This is the conclusion of Simmons & Co. International in a group of reports on depletion rates for Gulf of Mexico (GOM) gas wells and their implications for the service/supply sector (OGJ, Nov. 30, 1998, News-letter).

The Houston-based investment analyst for the energy service sector says that shelf drilling must increase or demand will have to be met with supplies from other producing regions, such as Western Canada or the deepwater gulf.

"In 1999, 4.1 bcfd of deliverability must be replaced to simply keep GOM gas production flat," said the firm. "This will require almost 1,000 successful oil and gas completions.

"To put this in perspective, the average number of successful well completions in the GOM has been 940/year during the 1990s.

"In the intermediate term (next 2 years), Canadian gas imports and the deepwater GOM cannot offset this depletion. This means that GOM shelf drilling must remain relatively robust to maintain supply."

Depletion studies

Simmons began examining well-depletion rates to more accurately predict future oil and gas supply. Understanding depletion trends is key to quantifying the effects of variations in drilling activity on the hydrocarbon supply base, says the firm.

Simmons intends to release a series of studies on oil and gas well depletion rates in various petroleum provinces around the world. It began with the Gulf of Mexico shelf because of the abundance of data on wells there. And it chose gas, because North America is a captive market for Gulf of Mexico gas, which facilitates supply/demand predictions.

"Oil is more of a global phenomenon," said Scott Gill, director and co-head of research for Simmons. "As we get more data points, we'll analyze the oil part of it, too."

Simmons will likely study Western Canada gas next, after which they hope to tackle oil provinces such as the North Sea and Alaska North Slope.

"Decline curves 15 years ago (in the Gulf of Mexico) were 12%," said Dan Pickering, managing director and head of research for Simmons. "And today, they're 40%. Directionally, that has to be happening everywhere else in the world.

"Everything that has happened in the gulf is happening (in the North Sea), too. The numbers are different, I'm sure, but the trend has got to be the same."

Gulf gas wells

The composite depletion rate for Gulf of Mexico gas wells has risen from less than 20%/year in the early 1970s to 38%/year today, says Simmons. In the next 3 years, the firm expects a further increase in depletion rates to 49%/year.

An important aspect of the depletion analysis results is that, as a general rule, the more recently a well was drilled, the higher its depletion rate (see graph, p. 33).

For wells drilled in 1996-the last year for which there is enough production history to forecast the decline curve-well depletion rates are in the upper 40 percentile, says David Pursell, vice-president of upstream research for Simmons.

"That tells you that the shelf is very mature as a productive basin," he said.

The gulf supplies roughly 25% of U.S. gas production.

"If you have a significant portion of your supply base with a high decline rate, you've got to get the gas from somewhere," said Pursell. "You've got to step up activity levels on the shelf to maintainellipsesupplyellipseor you have to go elsewhere-to the deep water, Western Canada, subsalt."

But those regions will not solve the supply problem in the near term.

"When we look at those alternatives," said Gill, "Western Canada has been operating at about 50% less rigs this year than they were a year ago, and they're already calling for a shortage of natural gas to fill the new pipelines (expected to come on stream in the coming months).

"And the deep water, quite frankly, is still very immature, although not unproven.

"There are a lot of technologies that are yet to be developed to produce natural gas in big quantities from the deepwater basin," said Gill. "Hydrates continue to be a major problem."

Volatility

Another important facet of the decline is price volatility, says Pursell.

Activity on the shelf is very much tied to commodity prices, says Simmons. If a well's decline rate is expected to be 50%/year, as Simmons predicts it will be early next century, operators will base their drilling decisions on near-term (6-12 month) commodity prices.

Simmons says it is this short-term view that spawns swings in activity levels. If prices rebound, says Pursell, activity will pick up pretty quickly, but it quickly drops off again when new production causes prices to go soft.

Pickering said the recent downturn in oil and gas prices will accelerate the shift away from the Gulf of Mexico shelf as the focus area for a lot of companies. Chevron Corp. and Amoco Corp. have sold their shelf properties, and now the smaller firms are following suit, he noted.

"Burlington Resources announced that they are cutting back on shelf capital significantly next year, said Pursell. "So we're already starting to see a change in the players."

"The exodus that those guys started 20 years ago from domestic to international is continuing," said Pickering. This is going to relegate the shelf to the same category as onshore, he says, implying a further increase in volatility.

Wells on the shelf cost $2-4 million, said Pickering. "A little company can afford to do that when things are good, but they can't when things are bad.

"I think the implications are, if you have a higher base level of demand due to depletion, downturns are going to be shorter (due to increased volatility)."

Canadian gas supply

Western Canada is an obvious potential source for the additional natural gas supplies that are going to be needed in the U.S. Therefore, says Pickering, "The implications of what's going on in the Gulf of Mexico reach all the way to Canada."

"Activity levels in Canada simply have to get better," he said. The rig count there is about 200 vs. the 400 typical at this time of year.

Meanwhile, Western Canada is facing the same problems as the Gulf of Mexico, said Gill. "That is, depletion rates are not only high but they're growing, because you've employed a lot of these technologies such as horizontal drilling and underbalanced drilling." With underbalanced drilling, there is little damage done to the reservoir, but it is depleted faster, says Gill.

"Our sense is that, with the pipeline expansions-Northern Border and Foothills-you have about 1.3 bcfd incremental capacity that's coming on before the first quarter of next year," said Pickering.

But Pursell reckons that Canada's producers will be able to fill only 300-400 MMcfd of that incremental capacity initially.

Gas prices in Canada will increase when the new pipelines start up, says Simmons.

Canadian gas supplies have been bottlenecked to some degree. Producers there haven't been able to access the U.S. market, where gas prices are about 40¢/Mcf higher.

"That's going to fix itself with the opening of the pipelines," said Pickering (see related story, p. 46).

"At least for the time being, (the new pipelines) are creating a fairly efficient market in North America. We've got an integrated market that we haven't had for the last 3 years," he said.

"That's going to be an interesting dynamic to watch over the next 2-3 year. Is (incremental U.S.) demand going to be supplied from Canada? From the deep water? From the shelf?

"The winner is where the most gas is, which is probably deep water, over time. But that's a long time," said Pickering.

In the interim, Canada and the shelf are the best options, he says, with the shelf being the better choice for boosting production rapidly.

Deepwater gulf

The deepwater Gulf of Mexico holds much promise for future production increases (see story, p. 27), but Simmons doesn't see it as a quick fix to the gas well depletion problem on the shelf.

Pickering, for one, doesn't believe estimates that say deepwater oil production will reach 1 million b/d by 2000. He thinks that level will more likely be reached in 2001-02.

There are still a number of technical problems to be worked out in the deep water, say the Simmons analysts. The hydrates problem, for example, is about 2 years away from being solved, according to Pursell.

Another example is illustrated by the problems Shell Oil Co. has experienced with its Auger field. Auger has been producing more oil than Shell expected; therefore, associated gas production is higher than Shell expected. This has caused uncontrolled flares that prompted Shell to shut in the platform temporarily.

Another reason the deepwater gulf won't solve the shelf depletion problem is that there aren't enough deepwater rigs to support a rapid increase in drilling there.

In addition to these technical hurdles, exploration and production firms operating in deep water are focusing more on oil than gas.

Yet deep water is where people have to look, says Pickering, because the bigger a company gets, the bigger their finds must be in order for them to have an impact.

"These big mergers that are going on are doing nothing but exacerbating that (see related story, p. 37)."

The service sector

All of these trends have important implications for the oil field service and supply sector.

Simmons expects "modest increases" in rig utilization rates.

In the gulf, utilization is about 75% today, says Gill, who thinks it may reach 85% by the end of 1999. Utilization rates will again exceed 90% in 2001, prompting a significant rise in day rates, says the firm.

In the interim, "We don't see any sort of sustained downturn in the business," said Pickering, "although this doesn't mean that day rates will return to $70,000/day."

"Our conclusion is that shelf drilling will continue," said Gill. "It will be commodity-price-sensitive, but I don't think it will go to 50 rigs working. It will stay at around 100-110 rigs."

Simmons's overall Gulf of Mexico gas outlook is similarly middle-of-the-road.

"We don't expect things to get a whole heck of a lot worse," added Pickering, "but that doesn't necessarily mean they'll get a whole heck of a lot better."

Gas prices are heavily weather-dependent, he said. And Canada will play a major role in setting the price and determining drilling activity levels in the near term.