Too much emphasis on deep water, says conference chair

A 3-day deepwater technology conference and workshop kicked off Wednesday in Houston with a warning that investors and large offshore producers may be putting too much emphasis on the deepwater frontier to the detriment of more conventional oil and gas operations around the globe.


Sam Fletcher
OGJ Online

HOUSTON�A 3-day deepwater technology conference and workshop kicked off Wednesday in Houston with a warning that investors and large offshore producers may be putting too much emphasis on the deepwater frontier to the detriment of more conventional oil and gas operations around the globe.

The high cost of deepwater exploration and development "can wreck your company�even a big company. And a total focus on deep water is especially dangerous," said Curtis Burton, president of Total Offshore Production Systems and chairman of the 5th Annual Deepwater Technologies & Developments Conference, presented by the Strategic Research Institute.

Technology is crucial in deepwater exploration and development. Yet aside from 3-D seismic, Burton said, "there has not been a single technology that has produced a step-change in offshore operations. I'm not saying we're not improving our products, but there hasn't been a step-change in new technology development for deepwater operations. We need to refocus efforts on research and development of gas-to-liquids and other new technology."

The opportunity for big discoveries in deepwater areas around the world has captured the attention of investors and helped push many oil and gas companies into a frontier for which few are adequately prepared, said Burton.

As a result, the oil and gas industry has targeted more than half of its total upstream budget on deepwater activity around the globe. Meanwhile, Burton said, "There was a 50% reduction in shallow-water activity last year alone.

"An exclusive focus on deepwater operations is bad for everyone," he said. "Shallow-water operations in the Gulf of Mexico might not be as sexy, but it has provided 27% of total US gas supplies in the past."

Risk vs. reward
While the success rate for deepwater exploration remains high, Burton said, "there still exists a question in many quarters concerning the commercial viability of deepwater discoveries."

He said, "Statistically, only 30-35% of the reserves discovered in deep water achieve the size targets [of 200 million boe or greater] set by the supermajors and majors."

Large reserves are necessary to offset the high costs of exploration and development in deep waters. And certainly the majors should have a key role in deepwater exploration and development because of the opportunity to find bigger reserves there than are available onshore in the United States or in shallower continental shelf waters that have already been well developed.

However, Burton claims that even the majors are running a risk by concentrating so much of their effort in the deepwater frontier to the detriment of former core areas like the shallower waters of the Gulf of Mexico.

"Texaco paid off its loss [to Pennzoil Corp.] over Getty Oil with money it made from the shallow waters of the gulf. But now it has abandoned that area for the deep water," he said.

Burton claims even supermajors like BP are running a risk with their emphasis on deepwater operations while at the same time slashing employment to the point where they may have too few in-house experts to handle so many jobs. Deep water is even riskier for the smaller independents, with some essentially gambling the whole company on one deepwater project, he said.

Development of deepwater oil and gas reserves in the most efficient and economic manner will require offshore operators to abandon their former "master-slave relationship" with offshore service companies in favor of "true partnerships" that produce a team effort for deepwater operations, Burton said.

Government also must recognize its true role in offshore operations. That means not embracing market conditions only when oil and gas prices are low and then stepping in to curb high prices, said Burton. "Price volatility is here to stay�something Wall Street gave us as a gift," he said.

Chris Oynes, regional director for the US Minerals Management Service, endorsed some of Burton's points. "Deep water is only part of the solution," he said.

"We [at the MMS] are also concerned about [the lack of] research and development. That has long-term implications, especially in areas like safety," Oynes said. Lack of experienced personnel also could affect offshore safety, he said.

Since 1996, there has been "an explosion in OCS [Outer Continental Shelf] leasing" in the Gulf of Mexico, "especially in deep water." Oynes said, "More than 100 discoveries have been made in deep water. About 35 fields are now in production, including 9 [that started up] in 1999."

About half of the 7,530 federal leases now active are in water depths of 1,000 ft or more. For the first time last November, more oil was produced from the gulf's deep waters than from conventional shallow-water operations, Oynes said.

Meanwhile, MMS officials are proceeding with plans to offer oil and gas leases in the eastern Gulf of Mexico off Alabama and Florida in December 2001�the first in those waters since 1988. The proposed offering includes about 5.9 million acres, with 62% of that area in deep waters out to 7,400 ft.

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