Shelf Incentives Reaping Results

Deeper Drilling Finds New Pools

In recent months the Gulf of Mexico shelf has rocketed like a Phoenix rising from the ashes.

The promise of deep gas has revived this mature producing province that only a few years ago suffered a mass exodus by major oil companies and many large independents, and was derisively called "the Dead Sea."

Today, however, companies — including the majors — are coming back to the shelf to hunt for deeply buried large gas deposits that the government hopes can stem the tide of declining gas reserves and production from the Gulf.

While the deep gas play on the shelf is not new — major discoveries were made in the deep sands in the late 1970s and early '80s — the resurgence comes after a decade of dormancy.

Rapidly expanding demand for natural gas and strong prices have made this expensive, technically challenging deep play in the shallow-water Gulf more attractive than it's ever been.

The Minerals Management Service has done its part to boost activity in the shelf deep gas play as well. Beginning with Gulf Sale 178 last March, the MMS provided deep gas royalty relief for blocks in less than 200 meters of water where a new deep gas reservoir 15,000 feet or greater subsea is drilled and begins production within the first five years of the life of the lease. The incentive provides royalty suspension on the first 20 billion cubic feet of deep gas production.

MMS also is considering various options for offering incentives to explore and produce deep gas from OCS blocks already under lease prior to sale 178.

The primary goal of the MMS's deep gas initiative is to increase the volume of gas production from the OCS through 2006. Gas produced from Gulf deepwater fields and in Alaska and Canada is not expected to contribute significant increases in gas production until after 2006, so the MMS granted royalty relief for the Gulf of Mexico shelf deep gas play where reserves can be brought on line faster.

In a 2001 reported titled "The Promise of Deep Gas in the Gulf of Mexico," the MMS noted that deep reservoirs on the Gulf of Mexico shelf are key to adding significant new natural gas reserves to the United States market in the next few years.

According to the report:

  • New discoveries of deep gas on the OCS offer the best short-term opportunity for achieving the large reserve additions and necessary high flow rates to offset declining gas production, which has been falling since 1997.
  • Recent deep gas discoveries on the OCS have shown these new completions can produce as much as 20 to 80 million cubic feet of gas per day. The abundance of platforms, producing facilities and pipelines on the shelf will allow new deep gas production to flow quickly to the market to help meet increasing U.S. demand for gas.
  • Only five percent of all wells drilled on the OCS have penetrated sediments below 15,000 feet — but the MMS estimates there could be five to 20 trillion cubic feet (the most likely value at 10.5 trillion cubic feet) of deep gas recoverable resources below this depth.
  • Production from the GOM's federal waters supplies about 23 percent of domestic gas production; according to forecasts for increased gas demand, the federal waters will have to contribute from 6.5 to 7.5 trillion cubic feet of gas production per year by 2015 compared with the estimated five trillion cubic feet currently produced each year.
  • Of the 10.5 trillion cubic feet of estimated undiscovered resources, the deep gas potential under existing leases in the OCS is estimated at about 6.3 trillion cubic feet, with another 4.2 trillion cubic feet under blocks not currently under lease.

"Potential deep gas resources also exist out to the edge of the continental shelf," the report said, "where some of that potential is located under thick sheets of salt."

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In recent months the Gulf of Mexico shelf has rocketed like a Phoenix rising from the ashes.

The promise of deep gas has revived this mature producing province that only a few years ago suffered a mass exodus by major oil companies and many large independents, and was derisively called "the Dead Sea."

Today, however, companies — including the majors — are coming back to the shelf to hunt for deeply buried large gas deposits that the government hopes can stem the tide of declining gas reserves and production from the Gulf.

While the deep gas play on the shelf is not new — major discoveries were made in the deep sands in the late 1970s and early '80s — the resurgence comes after a decade of dormancy.

Rapidly expanding demand for natural gas and strong prices have made this expensive, technically challenging deep play in the shallow-water Gulf more attractive than it's ever been.

The Minerals Management Service has done its part to boost activity in the shelf deep gas play as well. Beginning with Gulf Sale 178 last March, the MMS provided deep gas royalty relief for blocks in less than 200 meters of water where a new deep gas reservoir 15,000 feet or greater subsea is drilled and begins production within the first five years of the life of the lease. The incentive provides royalty suspension on the first 20 billion cubic feet of deep gas production.

MMS also is considering various options for offering incentives to explore and produce deep gas from OCS blocks already under lease prior to sale 178.

The primary goal of the MMS's deep gas initiative is to increase the volume of gas production from the OCS through 2006. Gas produced from Gulf deepwater fields and in Alaska and Canada is not expected to contribute significant increases in gas production until after 2006, so the MMS granted royalty relief for the Gulf of Mexico shelf deep gas play where reserves can be brought on line faster.

In a 2001 reported titled "The Promise of Deep Gas in the Gulf of Mexico," the MMS noted that deep reservoirs on the Gulf of Mexico shelf are key to adding significant new natural gas reserves to the United States market in the next few years.

According to the report:

  • New discoveries of deep gas on the OCS offer the best short-term opportunity for achieving the large reserve additions and necessary high flow rates to offset declining gas production, which has been falling since 1997.
  • Recent deep gas discoveries on the OCS have shown these new completions can produce as much as 20 to 80 million cubic feet of gas per day. The abundance of platforms, producing facilities and pipelines on the shelf will allow new deep gas production to flow quickly to the market to help meet increasing U.S. demand for gas.
  • Only five percent of all wells drilled on the OCS have penetrated sediments below 15,000 feet — but the MMS estimates there could be five to 20 trillion cubic feet (the most likely value at 10.5 trillion cubic feet) of deep gas recoverable resources below this depth.
  • Production from the GOM's federal waters supplies about 23 percent of domestic gas production; according to forecasts for increased gas demand, the federal waters will have to contribute from 6.5 to 7.5 trillion cubic feet of gas production per year by 2015 compared with the estimated five trillion cubic feet currently produced each year.
  • Of the 10.5 trillion cubic feet of estimated undiscovered resources, the deep gas potential under existing leases in the OCS is estimated at about 6.3 trillion cubic feet, with another 4.2 trillion cubic feet under blocks not currently under lease.

"Potential deep gas resources also exist out to the edge of the continental shelf," the report said, "where some of that potential is located under thick sheets of salt."

Coming to Play

Oil companies are making prophets of MMS officials. Companies have flocked back to the shelf in search of deep gas, with a growing list of companies reporting success.

In the last three years Pioneer Natural Resources, for example, has quietly built an inventory of deep gas prospects based on regional geologic work it initiated soon after its formation in 1997 via a combining of Mesa Petroleum and Parker & Parsley.

"When we formed the company one of our goals was to retain a strong North American presence as well as build an international program," said Chris Cheatwood, Pioneer's executive vice president of worldwide exploration. "We looked at all the basins in the United States and realized the Gulf of Mexico by far had the most remaining potential."

The company then looked at what plays existed in the Gulf that could provide the kind of reserves it needed.

"The deep shelf was one of those plays," Cheatwood said. "Our geoscientists had worked the deep shelf and understood the play, so we made a commitment."

This is not a new play. Some companies, mainly majors, drilled a few deep wells in the late 1970s and ‘80s, and some large discoveries were made — but when the majors exited the shelf, the play laid dormant for several years.

"The shallower plays on the shelf are very heavily drilled, so it seemed obvious to us back in 1998 that if we were going to play the shelf … we would have to drill deep," said Tom Spalding, Pioneer's exploration manager for the Gulf Coast.

"We have focused our efforts on areas where we feel there may be some hidden opportunities comprised of thick sands with high reservoir quality remaining at depth," he said.

In shallower examples, where reservoir quality is high, bright spots occur on seismic data and those plays are more heavily drilled.

"As reservoir quality diminishes in somewhat older rocks, you begin to lose that obvious amplitude signature, and those are the plays where we think there is remaining potential because they are not as mature," Spalding said. "Of course, you have to apply more technology to these areas."

He added that the obvious amplitude anomalies, or bright spots, are class three anomalies, "but as reservoir quality declines you are dealing with class two and one anomalies, and those take new data, new techniques, more work with analogs and a lot of modeling to unravel.

"But that's where the opportunities are."

The Commitments

Cheatwood agreed that new technology to meet the geologic challenges of these deep gas plays is critical, but perhaps more important is, simply, a commitment to the deep shelf.

"No amount of technology changes the fact that we are pursuing a higher risk play," he said. "Typically you have a one in four chance of success on individual wells, so you can't go out and drill a couple of wells and think you are going to figure it out. You have to commit to a sustained program and drill a significant number of wells to get a good meaningful sample and understanding of the play."

The need for a sustained program and the drilling costs — generally more than $10 million per well — means most companies look for partners to mitigate the risk of the deep gas play.

Pioneer is currently talking with potential partners to join their nine prospect program scheduled to begin drilling in late 2002.

Pioneer views the deep shelf as just one piece of its puzzle — diversification is key to the company's exploration program.

"We're in the shelf, the deepwater Gulf of Mexico, Africa and Canada, so we have a lot of diversity in our exploration portfolio," he said.

"We are even diversifying on the shelf, where we will drill some shallower prospects we have identified using new amplitude versus offset technology to complement the deep play," he added. "These are $3 million wells we may drill 100 percent."

Pioneer has drilled eight deep shelf prospects to date and three were geologic successes. Cheatwood said two of those are commercial with one discovery already on production and the second set to come on line by the first quarter of 2003.

"Our numbers look pretty good, but we haven't found a big one yet, and that's the whole point of this play," he said. "You have to find those when you are drilling $10 million wells."

Spinnaker's Success

The Gulf's deep shelf play, from the company's founding in the late 1990s, has been the focus for Spinnaker Exploration. Today the firm has about 600,000 acres in the play and has discovered some significant new fields, including the Alex Deep and Brazos A-19 discoveries that have estimated reserves in the 200 to 300 billion cubic feet of gas range.

The play is technologically challenging, however, and a company must have staying power to see the pay off from the deep shelf, said Roger Jarvis, Spinnaker's president and chief executive officer.

"We've participated in three or four discoveries we think are of the larger variety and some smaller discoveries," Jarvis said. "However, that's not happening every third well we drill. You have to be committed to this play to be successful."

He said the list of challenges is as long as the opportunities. For example:

  • "The challenges of getting these $8 to $13 million wells down through extremely high temperature and pressure transitions is daunting."
  • Getting seismic energy deep enough to illuminate the traps is more difficult than in shallower sections.
    "If you can overcome those obstacles there isn't much difference in the stratigraphy and geology of the deep zones," Jarvis said. "It's typical Gulf of Mexico geology."
  • On one hand you have a less mature play due to the depths and pressures; on the other hand, these pressures squeeze more reserves into the traps so the reserve potential is high.
  • The undrilled structures are there and the stratigraphy is there, but the illumination of all the above is more difficult.

Spinnaker puts a tremendous amount of emphasis on 3-D seismic technology in this play, according to Jarvis.

"There's not a lot of well control at these depths, so velocity assumptions are less sophisticated than they need to be," he said. "As the industry drills wells in the play, which gives us new points of control, it's important to continually factor that new data into our model … It's this methodical approach that we feel yields results."

Plus, he said, the mechanical challenges in the deep shelf are some of the most demanding in the world.

"We partnered with a major oil company to drill a well last year in the deep shelf that went to about 21,000 feet," Jarvis said. "The major's engineers made the comment to us that this was the hottest, highest pressured well they had ever drilled. Just because it's shallow water doesn't mean it's easy. There is significant mechanical risk every time you drill one of these wells."

The long-term success rate in the deep shelf play is 25 to 35 percent, Jarvis said, so statistically a company has to drill $30 to $40 million in dry holes to find a field.

Spinnaker has drilled over 50 wells in the deep shelf play in the last three and a half years. Of note:

  • The company discovered the High Island 202 Field, which achieved a maximum rate of 160 million cubic feet of gas a day.
  • The Resolute Field on High Island 197 is under development, and appears to be comparable to or somewhat bigger than High Island 202. The firm anticipates rates in excess of 100 million cubic feet daily from the field when development is completed.
  • Other sizable fields: North Padre Island 883 and the Stirrup Field at Mustang Island 861.
  • Spinnaker and a major oil company partner have uncovered what appears to be a large field on Grand Isle 52 off Louisiana.

"Our exploratory success has been in excess of 60 percent, but we know it won't always be that way," Jarvis said. "We are prepared to weather the dry spells as well — we believe in this play and plan to be a significant player for years."

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