Gulf Has Many Storms to Weather

Insurance Casting Clouds

Verbal write-offs of the Gulf of Mexico are nothing new; it wasn’t all that long ago that the region was derisively referred to as The Dead Sea.

To the surprise of many industry watchers, however, the “dead” region came roaring back to life -- rather quickly -- becoming the locus of an unprecedented level of E&P activity.

This was due in large part to sophisticated advances in technology that enabled exploration to cost-effectively move into the deep and ultra-deep water.

Once again, however, there are rumblings in The Patch that “this is it -- production has peaked, exploration activity is declining and it’s going to be downhill from here.”

It’s a topic that will be analyzed by a group of experts at the Gulf Coast Association of Geological Societies’ (GCAGS) annual meeting in September in Lafayette, La., when they congregate for the energy forum “The Gulf of Mexico Oil and Gas Industry -- The Road Ahead.”

The panel members will discuss their views of what’s ahead and how it relates to their long-term strategies.

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Verbal write-offs of the Gulf of Mexico are nothing new; it wasn’t all that long ago that the region was derisively referred to as The Dead Sea.

To the surprise of many industry watchers, however, the “dead” region came roaring back to life -- rather quickly -- becoming the locus of an unprecedented level of E&P activity.

This was due in large part to sophisticated advances in technology that enabled exploration to cost-effectively move into the deep and ultra-deep water.

Once again, however, there are rumblings in The Patch that “this is it -- production has peaked, exploration activity is declining and it’s going to be downhill from here.”

It’s a topic that will be analyzed by a group of experts at the Gulf Coast Association of Geological Societies’ (GCAGS) annual meeting in September in Lafayette, La., when they congregate for the energy forum “The Gulf of Mexico Oil and Gas Industry -- The Road Ahead.”

The panel members will discuss their views of what’s ahead and how it relates to their long-term strategies.

Forum participant Thomas Ahlbrandt, former U.S. Geological Survey World Energy Project chief and now vice president of geology for GSL Energy Corp. in Denver, will provide a calibration of GOM potential relative to the world.

“I’ll try to put the Gulf of Mexico into a global context as to its oil and gas potential,” Ahlbrandt said, “where it looks to rank relative to other basins of the world.

“The Gulf is an excellent petroleum province -- one of the few really high ranking ones in the U.S.,” he noted. “It’s a young petroleum system, and that’s a good thing for hydrocarbon generation.”

According to the most recent statistics, the GOM represents 3.1 percent of the world’s known petroleum reserves, Ahlbrandt said. It has long been one of the top performing hydrocarbon provinces in the world.

Storm Warnings

Unfortunately, Mother Nature is not impressed.

When hurricanes Katrina and Rita came roaring across the GOM in the third quarter of 2005, E&P activity in the impacted area came to an abrupt halt -- albeit a temporary hiatus in most instances. But the devastation, which was primarily caused by wave action and water damage, resulted in many lengthy production shutdowns and billions of dollars in damage -- some of it insured, some not.

While the super-majors have the deep pockets to continue with business as usual for the most part, the allure of the GOM diminished considerably for some of the smaller producers. In fact, some members of this group decided to sell all their Gulf holdings and concentrate their future drilling programs on terra firma.

Certain other smaller size companies see the wisdom of staying in the GOM, just not on a 100 percent basis.

PetroQuest Energy, for instance, made a decision three years ago to play the Gulf in a methodical manner and combine it with activity elsewhere, which includes Oklahoma, South Louisiana and East Texas.

“We looked at the Gulf of Mexico in ‘02 and saw we could not grow being solely a shelf Gulf player,” said GCAGS energy forum participant Charles Goodson, chairman, CEO and president of PetroQuest. “But we didn’t feel as a company we were big enough to get into deep water.

“We looked for other areas along with the Gulf to smooth out our growth strategy,” he said, “and at the same time continue to grow our Gulf projects at a reasonable rate.

“We recognized we had to high grade the Gulf of Mexico and drill fewer wells there that are most impactual,” Goodson said. “And that’s what we’ve done.

“The Gulf is a great area,” he noted, “and there are plenty of opportunities.”

Squeeze Play

Maybe so, but even if the GOM is only a part of your company’s portfolio, you’re feeling the squeeze from the insurance companies -- more so than usual, following last year’s storm-generated debacle.

“Our insurance tripled this year,” Goodson noted. “That’s for a company that had only one year of any kind of claim; no one knows how to forecast this.

“The MMS must step in and do some type of support for the insurance,” he said. “They could do some second tier type of insurance or something.”

Offshore players seek out varying types of insurance, e.g., offshore property and equipment, well control, liability, business interruption. In some instances the premiums have escalated to as much as 400 percent over those of 2005.

Some operators reportedly are delaying drilling until later in the fall -- even though day rates may be higher -- to avoid the idle time that comes with rig evacuations for most storms that enter the Gulf, often before their ultimate path across the water can be determined with any certainty.

Delayed drilling, in turn, will delay new production until close to the end of the year when prices may -- or may not -- be higher.

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