Non-U.S. firms making their marks in sizzling Gulf of Mexico plays

Sept. 1, 1997
Once the domain of U.S. oil and gas companies, non-U.S. companies are swelling the ranks of players in the sizzling Gulf of Mexico exploration and development plays. Lured by the potential for finding significant reserves in a conducive operating environment-and finding an abundance of willing E&D project and deal participants-non-U.S. entrants to the gulf are leveraging specific lease, well, and prospect positions to generate new opportunities and prospects.
Diamond Offshore's Ocean Saratoga semi flares gas during production testing of Elf's Virgo discovery in the Gulf of Mexico. Photo courtesy Elf Exploration Inc.
Once the domain of U.S. oil and gas companies, non-U.S. companies are swelling the ranks of players in the sizzling Gulf of Mexico exploration and development plays.

Lured by the potential for finding significant reserves in a conducive operating environment-and finding an abundance of willing E&D project and deal participants-non-U.S. entrants to the gulf are leveraging specific lease, well, and prospect positions to generate new opportunities and prospects.

Expertise amassed in producing basins around the world is being applied to Gulf of Mexico deepwater and ultradeepwater exploration and development, and successes are mounting.

As a result, the gulf has become a principal focus area in many non-U.S. companies' worldwide operating portfolios.

Refocused program

Paris-based Elf Aquitaine has had, through Elf Exploration Inc. and earlier oil and gas subsidiaries, a U.S. presence for more than 30 years.

But, after lackluster results chasing opportunities in the Lower 48 and Alaska, it refocused its program, turning its attention to the Gulf of Mexico early in the 1990s-specifically to deep water.

"The deepwater pursuit in the gulf is a natural extension and a complement to Elf's worldwide deepwater activities and provides this small affiliate the potential for significant growth," said Harry D. Martin, senior vice-president, exploration and production.

"We have long known that the potential that is now being exploited in the deep water could be huge," Martin said. "As it became more and more obvious to us that our parent company was willing to make these same plays-and develop similar expertise in other parts of the world-it just made sense that we take the big step to complement and extend Elf's efforts into what I call the 'laboratory.'

"This is the laboratory for deepwater in every sense, from exploration to drilling and through development."

Elf's deepwater program in the gulf started with a handful of blocks less than 2 years ago; its deepwater inventory currently totals 41 blocks out of a total of 116 gulf blocks. Water depths over Elf's acreage are from 700-800 ft to as deep as about 5,000 ft.

Elf follows what the company calls a dual-track approach to acquiring opportunities: selective leasing of high-quality prospects in OCS sales and aggressively pursuing partnership and alliance opportunities when there is strategic fit.

"We're not impressed by big acreage (positions)-we're impressed by good prospects," said Guy Feneyrou, Elf Exploration's president and chief executive officer.

Virgo strike

Elf is drilling an appraisal to its first major operated discovery in the gulf in 1,132 ft of water on its Virgo prospect.

The 2 Viosca Knoll 823 discovery encountered a total of 376 ft of net hydrocarbon-bearing sands. An extended drill stem test of a selected lower zone flowed on test 22.7 MMcfd of gas and 1,816 b/d of oil through a 38/64-in. choke with 3,826 psi flowing tubing pressure.

Virgo is a Miocene multi-reservoir, combination structural/stratigraphic prospect.

No decision has been made on development or the production system that might be used. Answers to those questions could come after the 3 Viosca Knoll 823 appraisal is tested. It's being drilled by Diamond Offshore Drilling Inc.'s Ocean Ambassador semi.

Using the results of the discovery well, Elf obtained a unit approval at Virgo to secure its two expiring leases and is hopeful that its current well location will prove ideal for a quick development decision.

The area is in the middle of a hotbed of current activity. Offsetting the Elf group's location is production operated by BP Exploration Inc., part of the Pompano development (OGJ, Jan. 20, 1997, p. 37); the recently installed Shell Deepwater Production Inc. Ram-Powell tension-leg platform (TLP) is to the south; and the Oryx Energy Co./CNG Producing Co. Neptune spar is installed to the east and producing.

The Virgo prospect involves Viosca Knoll Area Blocks 821, 822, 823, and 779. Elf has a 64% working interest. Other interests are Coastal Oil & Gas Corp. 16.2%, Pogo Producing Co. 10.8%, and Nippon Oil Exploration U.S.A. Ltd. 9%.

Strategic deals

Following its dual-track approach, Elf acquired Viosca Knoll Blocks 823 and 779 via a prospect swap with BP last year, as part of a much larger alliance.

Elf's BP alliance initially involved about 15 blocks that had only short primary lease terms remaining and needed upgrading with 3D seismic. Elf will carry out a seismic and mapping program to bring the prospects up to drilling status, if possible; BP and Elf will then share evaluation.

The first well from this alliance will be operated by Elf and is expected to spud late in 1997.

BP subsequently asked Elf to participate in spring 1996 Sale 157. The combine bid on nine tracts and was awarded three.

Elf's Martin said, "We worked a swap with BP for an interest that we acquired with them in Sale 157 in a tract in 4,000 ft of water, in exchange for several tracts that BP had in shallower water, which included the two Virgo blocks, Viosca Knoll 823 and 779."

Coastal, Pogo, and Nippon acquired Viosca Knoll Block 822 in Sale 157, and Viosca Knoll Block 821 was acquired by the Elf/Coastal/ Pogo/Nippon group in Sale 166 in March 1997 (OGJ, Mar. 17, 1997, p. 34).

Other area work The lease covering Mississippi Canyon Block 940 was the tract Elf swapped with BP.

It is a direct offset to the $11.1 million, 100%-owned Mississippi Canyon Block 941 Vastar Resources Inc. bought in the sale; Vastar's Mirage prospect lies in 3,862 ft of water (OGJ, May 6, 1996, p. 40).

Vastar expects to spud a well on the prospect late in 1997 or early in 1998 with Diamond Offshore's Ocean Victory semi, scheduled to come out of the yard at Sabine Pass in September, where it's being upgraded.

The company will first drill its King prospect on Mississippi Canyon Block 764 with partners BP Exploration and Shell Offshore Inc.

Alliances, swaps

Elf, like many other companies, saw the deepwater rig crunch looming in the Gulf of Mexico and made a deal with Houston's Global Marine Inc. to convert a former North Sea accommodation vessel into a premium deepwater drilling rig.

The commitment for the rig was a deliberate move by Elf to attract other companies into potential deals, as Elf played catch-up beginning in 1996 to build its gulf inventory after a 5-6 year hiatus from offshore U.S. leasing.

"We started late. Some of the major companies had gotten in and tied up large expanses of deepwater acreage. We realized that that was a significant problem," Martin said.

"We needed something to be able to bargain with, something to put on the table; we didn't have an adequate inventory of deepwater prospects to swap, so we acquired a rig."

Elf has a 3-year, $145,000/day commitment covering the 5,000-ft water-depth-rated semisubmersible, the Glomar Celtic Sea-formerly the Polycastle. It was towed to Brownsville last year for refurbishment, and Elf anticipates delivery in fourth quarter 1997 (OGJ, Nov. 25, 1996, p. 24).

The unit will be capable of both anchoring and dynamic-positioning, and Elf has committed to the construction of a large anchor-handling vessel, scheduled for delivery about the same time as this rig. Under an alliance, Vastar is building a sister anchor-handling vessel to be used on a shared basis and as back-up. Elf did a one-well swap with Shell on the use of the Celtic Sea, once it's available, in exchange for Elf obtaining Diamond Offshore's Ocean Saratoga semi early in 1997.

"That allowed us to drill our Virgo discovery well before the lease expired. We swapped Shell for a future slot in exchange for a current slot on a rig available today," Martin said.

The company has also traded rig slots for entry into opportunities, he noted: "We still have some flexibility in our rig's schedule and have the ability to swap slots with other companies if they have an opportunity that we like that we can participate in. It's a way to get in the door."

Extra leverage

Elf's Houston office, totaling about 100 employees, utilizes technical assistance as needed from its headquarters and technical center in France, and it has been able to build its gulf program on a combination of in-house Gulf of Mexico expertise and worldwide experience in deepwater ventures elsewhere. Feneyrou said, "We are benefiting from our technical culture and the back-up of our parent company, which has always been oriented toward high technology."

Elf has a strong presence off the Republic of Congo, Angola, Gabon, and Nigeria and was recently awarded 12 deepwater blocks off Ireland and six off the U.K. in the Rockall Trough, all in about 1,500 m of water.

"There are many similarities to the expertise and knowledge necessary for operations in the deepwater Gulf of Mexico and the deepwater off Gabon, Angola, and Nigeria," said Feneyrou.

"They're very similar geologic provinces: With rocks of the same age and depositional environment, the geologic problems and conditions are very similar, so you can cross-pollinate technically between the two.

"The development technology that we are envisioning (for the gulf) is more oriented toward subsea, associated with tension-leg platforms; however, a project like Virgo may merit a large conventional platform."

Elf plans to take part in at least two deepwater exploration projects per year in the gulf, and will seek a significant interest position. It plans six exploratory wells in 1997 and will operate four.

"We'll probably be spending over a 4-5 year period around $200 million for exploration alone," Feneyrou said.

Niche player

The Main Pass/Viosca Knoll area is considered a key area for Elf, anchored by the Virgo strike.

Another prospect acquired through the BP swap that is on Elf's drilling agenda is Osiris, on Viosca Knoll Block 944 in about 750 ft of water. It will spud in October.

Elf also controls a prospect on Viosca Knoll Block 737 and is working up a prospect on Viosca Knoll Block 992, both of which are scheduled to be drilled in 1998.

In the gulf, Elf operates Miocene through Pleistocene production from five platforms on the Outer Continental Shelf: Eugene Island Area Block 184, Main Pass Block 30, South Timbalier Area Block 38, West Cameron Area Block 167, and Eugene Island Block 275, currently shut in for platform work.

It has interests in 26 others, including the Snyder Oil & Gas Corp.-operated Pabst platform on Main Pass Block 259 and Busch on Main Pass Block 255, where Elf's ownership range is 20-30%.

Those two platforms both produce gas, and together with Main Pass 255 operated by CNG, they provide almost 50% of Elf's total gulf gas production.

Elf's gulf output is 5-6 million bbl/ year of oil equivalent, 70% of which is gas. Output totals about 5,500 b/d of oil and 65-70 MMcfd of gas.

A core asset

BHP Petroleum Americas Inc., a unit of Australia's BHP Petroleum Pty. Ltd., sees the Gulf of Mexico as becoming "a very core asset for BHP worldwide," said Ed Blair, unit president.

In terms of exploration spending, Blair said, the Gulf of Mexico represents BHP's "largest single exploration area," or about one-third of BHP's worldwide exploration budget.

The company has spent about $250 million to date for activities in the gulf, acquiring acreage and participating in eight exploration wells.

Blair said BHP started with only a few blocks in 1994, and through the March 1997 sale-and including strategic alliances-its inventory totaled 276 blocks.

BHP formed four strategic alliances, including deals with BP Exploration and Amoco Corp. in the Atwater fold belt, with Marathon Oil Co. on acreage in the Green Canyon area, and with Anadarko Petroleum Corp. in a deal covering subsalt OCS acreage.

Drilling, producing

BHP has operated production from West Cameron Area Block 76, and has about a 20-25% working interest in production from Green Canyon Blocks 18 and 60, operated by Mobil Exploration & Producing U.S. Inc.

BHP's operated program so far has centered on deals and leasing, and it has completed one deepwater well so far, on Mississippi Canyon Block 798, which was plugged and abandoned.

Currently, the company is participating with operator BP in drilling a test in 6,200 ft of water on Atwater Valley Block 574, a straight hole targeted to 20,000 ft TD. BHP holds a 42.5% working interest, BP the remainder.

Other than the well currently being drilled by BP, Blair said BHP is now approaching the drilling stage of its prospect inventory and expects to participate in four to five deepwater and Flex trend wells during the next 12 months. Blair said, "We're beginning to gin out prospects, which should maintain this level of drilling activity for a number of years."

Santos' U.S. growth

Santos USA Corp. (Susac), Houston, began its U.S. growth via a 1989 acquisition by parent Santos Ltd.

The acquisition of Peko Oil from Australian mining concern Peko-Wallsend, included Houston-based Weeks Exploration, which ultimately became Susac.

Susac began ramping up its U.S. program in 1994, and it has onshore operations via partnerships covering acreage in the Arkoma basin in Oklahoma with units of Texaco Inc. and Amoco, as well as with Barrett Resources Corp., Denver.

Other U.S. activity includes operations in South Texas and along the Texas/Louisiana Gulf Coast and offshore in medium-water depths of the Gulf of Mexico.

In addition to 11 leases in federal waters, it operates production from one shallow-water platform on Texas state Lease 60, in about 30 ft of water.

"We've taken a medium-risk approach in the gulf to get a footing," said John Armstrong, president of Santos Americas and Europe.

Santos-Newfield, other work

Susac recently completed a 10-12 well Miocene drilling program off Louisiana in the West Delta area with operator Newfield Exploration Co. and other partners.

The project involved West Delta Area South Addition Block 152 and Mississippi Canyon Block 357, in about 450 ft of water.

Armstrong said Susac had a 15% working interest in the mostly infill/development drilling project, which resulted in a success rate of about 90%. The project, now on production, also included some appraisal drilling.

In September, it plans to begin a project in the gulf with joint-venture partners Murphy Exploration & Production Co. and Callon Petroleum Co.

It plans to take part in drilling about three wells before yearend, and five are now planned in 1998.

Susac has a 20% interest. Other interests are Murphy 60% and Callon 20%. The group took part in Sale 166 in March, bidding on 22 blocks and was high bidder on 9.

Susac, for now, is not interested in becoming a deepwater or subsalt player. It's pursuing what Armstrong characterizes as an orthodox approach that's driven by the application of developing technology and operations close to existing infrastructure.

"From this point forward, we will be putting our attention on the Texas/Louisiana Gulf Coast and the Gulf of Mexico in looking for new business, by way of either drilling projects or the occasional acquisition.

"We see ourselves as a small player, developing a good, sound knowledge base...and building on that."

According to Armstrong, the niche U.S. program is being built "in a systematic and careful way."

Susac's production in the gulf is from the West Delta/Mississippi Can- yon project and from its state lease.

Susac's net total U.S. production is now at about 4,000 b/d of oil equivalent (boed), but it's aiming for the 10,000 boed level in the longer term.

Enterprise's gulf alliances

London-based Enterprise Oil plc's entrance into the Gulf of Mexico came by way of a strategic alliance with Pennzoil Exploration & Production Co. in 1996.

The deal covers 102 leases in federal waters to about the 650-ft water depth. The Enterprise-Pennzoil alliance is moving a rig to Garden Banks Area Block 161, where the partners will soon spud a second well to delineate a feature discovered late in 1996 (OGJ, Feb. 3, 1997, p. 32).

Other opportunities are under evaluation for the remainder of 1997 and for 1998.

In July 1997, Enterprise formed another alliance with Enserch Exploration Inc. covering about 80 deepwater blocks in the Garden Banks, Green Canyon, and Mississippi Canyon areas (OGJ, July 7, 1997, p. 30).

The partners are drilling their first well to test the Llano prospect on Garden Banks Area Block 386 in about 2,200 ft of water.

Other operations

Other non-U.S. companies active in the gulf include London's British-Borneo Exploration Inc., Canada's Chieftain International Inc., and Norway's Den norske stats oljeselskap AS (Stat- oil).

British-Borneo is advancing subsea development plans for its Morpeth discovery. Development will cover Ewing Bank Blocks 921, 964, and 965 using a SeaStar TLP (OGJ, Jan. 20, 1997, p. 42).

The company's federal acreage position in the gulf includes interests in 69 leases. British-Borneo operates 27, and it has an average working interest of about 55%.

The company recently disclosed it will buy Conoco Inc.'s 50% interest in the King Kong discovery on Green Canyon Blocks 472, 473, and 517 (OGJ, July 28, 1997, p. 42).

Shell Deepwater Development Inc., New Orleans, owns the remainder of the King Kong discovery, whose reserves have been pegged at 250 bcf of gas. Shell recently assumed operatorship.

Chieftain, based in Edmonton, recently disclosed a discovery on South Marsh Island Block 39. The well, 1 OCS G-16320, operated by Equitable Resources Energy Co., had 107 ft of net pay, based on electric logs and cores, and the 50-50 partners plan more drilling during the third quarter to delineate the discovery section, test a lower section, and evaluate production options.

Statoil's growing presence

At the beginning of 1997, Statoil Exploration (US) Inc. acquired a 35% interest in the Fuji prospect on Green Canyon Blocks 505 and 506, operated by Texaco Exploration & Production Inc.

The prospect is in almost 4,300 ft of water.

Texaco drilled the discovery on Block 506 in 1995, and a second well was drilled subsequently on Block 505. Results have not been disclosed.

Statoil also has been awarded leases on 40 deepwater blocks, and it will operate 16. The acreage is in more than 6,500 ft of water, and 3D seismic surveys are planned.

Statoil has reported that it and Smedvig signed a letter of intent with Shell for a drillship to work in the gulf under a 5-year contract beginning in 1999. Statoil will own the vessel, which has been ordered from Spain's Astilleros Espanoles yard.

What's ahead

A number of non-U.S. companies now view the Gulf of Mexico as a core area, with growing potential because of the continued application of developing technology and an abundance of partnership/alliance opportunities.

Small U.S. operations of larger, non-U.S. companies see the gulf as a high-potential area that, over time, will constitute a major part of their worldwide programs.

In keeping with the overall objectives of its parent, Santos' Armstrong says Susac plans to grow selectively, both geographically and operationally, and the gulf will play a significant role.

"Santos sees the future as being not only Australian growth, but also development of an international position. And it wants to be in these places for the long haul."

Copyright 1997 Oil & Gas Journal. All Rights Reserved.