OTC: Deepwater Gulf of Mexico still an industry draw

Burton

"The oil industry continues to announce significant numerous deepwater discoveries," said MMS Director Johnnie Burton. "When these announcements are included in our analysis, the data show that there is no decline in exploration rewards. In other words, there does not appear to be a scientific reason for the decline in drilling—the average volume discovered on a newly tested lease remains high," she said.

MMS held a press conference at OTC to release its latest biannual report on deepwater drilling in the gulf. The data in the study represent an industry snapshot as of yearend 2002. She acknowledged that drilling rates represent a "key hurdle." According to the new report, the average number of operating rigs fell 29% and the number of wells drilled is down 37% from when the agency issued a report in 2002, using 2000 data.

Many possible factors

There could be several factors for the decline, Burton suggested. These include worldwide competition for limited exploration and development budgets along with a limited deepwater rig fleet.

Moreover, some long-term deepwater rig contracts may have expired, allowing new companies to move those rigs to other "hot exploration basins around the globe." Another reason for declines may be that many operators are focusing their drilling on even deeper water locations where it takes much longer to drill an individual well.

Meanwhile some analysts predict that US offshore drilling patterns will further evolve; they foresee a time when majors increasingly cede Gulf of Mexico exploration to independents in favor of less risky LNG.

LNG is attractive because majors are becoming increasingly risk adverse, said Tom Kellock, an analyst with ODS-Petrodata at an OTC briefing. "They are more susceptible to the financial community," he said. With the exception of France's Total SA, most multinational companies will no longer commit to reserve and production growth targets for fear of Wall Street reprisals to their stock price, he noted.

"The Gulf of Mexico is losing its charm for the majors," Kellock said. By comparison LNG has none of the exploration or technological risk the gulf does. He further offered that since the offshore rig count has not reacted to increased gas prices, increasing supplies of "cheap" LNG from 2007 onward might supplant some future Gulf of Mexico production.

MMS officials disputed the assertion that majors would abandon the gulf completely in favor of building LNG infrastructure. Officials cited the National Petroleum Council's September 2003 study which makes the case US demand will be robust enough to require expanded LNG imports in the US along with increased domestic production from the gulf and Alaska.

Drilling constraints

Instead, the agency hinted that part of the problem might be that too much of the US offshore is off limits to drill- ing. In an oblique reference to Wall Street, Burton blamed "money lenders" for viewing the US deepwater with "a lack of enthusiasm" because "we are not opening up new areas." She also noted that some industry players might see the US deepwater as fairly limited, and that "is most unfortunate, since there are areas still to discover," she said.

The White House officially continues to support existing drilling bans off most of the Outer Continental Shelf although some House Republicans are working on a plan to entice some coastal states to open their borders in exchange for more royalty income. Currently only the central and western Gulf of Mexico and a portion of Alaska's offshore are accessible.

Nevertheless drilling rates might still turn around sooner than later, according to MMS. That's because beginning in 2006, MMS expects to see a large amount of acreage open up as old leases expire and get reissued. Of about 3,200 deepwater leases issued from 1996 through 2000, only 6.5% have been drilled to date, MMS said. "When the leases issued during the record-setting sales of the mid-1990s reach the end of their primary tested, the vast majority will become available without a single well testing their potential," MMS said.

But it remains unclear exactly how many leases will actually become available. Existing leaseholders are pressuring MMS to extend lease terms beyond the usual 5-year period, citing changing market conditions and regulatory red tape.

Independents that drill in the gulf for example, are concerned that regulators looking to site LNG shipping lanes may create unwelcome delays to their own development plans. Burton said the White House is "very much" aware of the issue and is taking steps to streamline the process through an interagency working group (OGJ, Apr. 5, 2004, p. 32).

Industry group concerns

At an OTC briefing May 4, the Independent Petroleum Association of America released an Apr. 30 letter it sent to Sec. of the Interior Gale Norton asking her help to resolve concerns. Another producer group, the Domestic Petroleum Council, has also called on regulators to address the issue.

"Although we certainly understand that our nation needs a variety of sources for natural gas, including LNG, the possibility of withdrawing OCS lease sale blocks in the Gulf of Mexico to accommodate LNG facilities is troubling," IPAA said in its letter.

"We encourage MMS to work with the Department of Homeland Security to ensure that any proposal to withdraw lease sale tracts in the Gulf of Mexico is fully disclosed and the existing leaseholders and the public be given the opportunity to comment on such a request. We will continue to work with your agency to find the right policy and process balance involving LNG imports and domestic oil and natural gas production from the Gulf of Mexico," IPAA said.