Deepwater Drilling Provides Good Long Term Prospects

According to the U.S. Department of the Interior's Minerals Management Service (MMS), deepwater drilling (1,000 ft. and deeper) shows the greatest potential of development, and certainly has garnered the attention (as well as the E&P dollars) of offshore oil production industry leaders. By yearend 2003, the MMS estimates as much as 63 percent of the oil production and 29 percent of the daily gas production will come from deepwater reserves. In August of 1998 there were 30 (temporary and permanent) deepwater rigs drilling simultaneously in the Gulf of Mexico's Outer Continental Shelf (OCS), at depths greater than this. The proliferation of deepwater development projects will likely continue to grow, as long as the technology and financial incentives make the ventures increasingly profitable. To date, most of the Gulf's production has come from fields located in relatively shallow water, but a revolutionary idea about the potential for oil and gas in deepwater areas has started a new trend. One factor contributing to the change, is the development of the three-dimensional (3-D) and subsalt geophysical technologies. Another contributor, the Deep Water Royalty Relief Act of 1995, was specifically designed to support the development and production of deepwater tracts, enabling companies the opportunity to lease new Gulf of Mexico deepwater areas while enjoying significant tax advantages. In order to support deepwater projects and further developments the MMS has revised two of its guidelines in the face of low oil prices. The MMS, will suspend royalty payments to fields in water deeper than 650 ft. in the Central and Western Gulf of Mexico that demonstrate economic need in this low oil-price environment. In addition, a lessee who has made a commitment of capital, and meets additional criteria, would be able to apply immediately during the period of low oil prices, abolishing the old rule that required a lessee to wait a year before applying. Recently, the MMS held a sale of offshore oil and natural gas leases in the Central Gulf of Mexico, and attracted $171.8 million in high bids. The highest bid received was $16.6 million from Marathon Oil Company and Kerr-McGee Oil and Gas Corporation for Walker Ridge, Block 121. Approximately 43 percent of the tracts receiving bids are in ultra-deeepwater (more than 2,624 ft.). The deepest tract was in 8,740 ft.of water. Although these numbers are considered low, compared to past standards, the MMS feels it's a reflection of low oil prices. However, it also indicates the players in the oil industry still recognize the potential of the Gulf's deepwater properties. Deepwater operations vary significantly compared to conventional operations in shallow waters, drillers obviously encounter different environmental conditions, challenging drilling and exploration processes as well, but once successful the results can be very lucrative, particularly in the long-run. The opportunity to produce hydrocarbons at much higher rates exists, which is where all the interest lies in these operations. As a result of all the prospects, there are major agreements being signed among large corporations hoping combined resources will enable them to reach new heights, or "depths" in the Gulf. Earlier this year, Conoco announced an agreement with Exxon Corp. to exchange interests in 59 deepwater blocks in the Gulf. Conoco acquired a 50 percent interest in 29 of Exxon's blocks, while Exxon acquired a 50 percent interest in 30 of Conoco's blocks. Conoco was the sole lessee of its 30 blocks and will retain a 50 percent interest in each. Also this year, R& B Falcon Corp., along with Conoco, debuted its ultra-deepwater drill ship, Deepwater Pathfinder. The ship began a five-year work program in February in the Gulf. The ship is capable of drilling in 10,000 ft. of water, a drilling depth considered impossible just a few years back. The vessel is expected to drill three or four wells in its first year of operation. It is built to an exceptionally high design standard, able to withstand the equivalent of a 10-year storm, outfitted with six high-powered thrusters that will counter the force of currents, wind and waves. The ship has a dynamic positioning systems wherein a specialized combination of seabed and satellite systems send signals to on-board computers. It is reported to be the only drillship wordwide incorporating triple redundant power and operating functions. Both Conoco and R & B Falcon are building a second deepwater drillship with the same specifications as Deepwater Pathfinder, which will be delivered this year. Along with these high-powered vessels, alliances and projects comes the hope production expectations will be fulfilled. This year, the Genesis Project, a $750 million operation located on Green Canyon blocks 205, 160, and 161 celebrated first flow of oil. The Genesis Project was developed jointly by Chevron U.S.A. Production Co. (56.67 percent), Exxon Co., U.S.A. (38.38 percent), and PetroFina Delaware Inc. (4.95 percent). Genesis utilizes a floating spar platform, the first to accommodate both drilling and production facilities, for oil and natural gas drilling in 2,600 ft. of water in the Gulf. Approximately 30,000 barrels of oil and more than 20 million standard cu. ft. of natural gas per day is expected to be produced by Genesis throughout 1999. By the new millenium, Genesis, is expected to increase its pace and reach its peak production capacity of 55,000 bpd of oil and 72 million cu. ft. per day of natural gas. Aside from these developments, new records are being broken, Chevron U.S.A. set a new record for drilling an exploratory well last August on Atwater Valley Block 188 in 7,718 ft. of water. This surpassed the previous record drilled back in 1996 in Alaminos Canyon Block 600 in 7,620-ft. waters in the BAHA prospect, a joint venture owned by Shell, Amoco, Exxon, and Texaco. Deepwater development is, of course, not limited to the Gulf of Mexico, as explorers are now touting offshore Brazil and offshore Africa as the new deepwater "hot spots" for decades to come. For example, Texaco and Statoil recently announced a widcat discovery on Offshore Prospecting Lease (OPL) Block 218, which is located in the deep waters approximately 70 miles offshore Nigeria in the central Nigerian Delta. According to preliminary data, the reservoirs could contain up to several hundred million barrels of recoverable oil. This is the second discovery announced by Texaco in less than two months. Prior to this discovery, Texaco and Famfa Oil Ltd. of Nigeria announced the Agbami-1 wildcat discovery on OPL Block 216.-Maria Medina