April 2000 Vol. 221 No. 4  Drilling

Robert E. Snyder,  Editor

Some ideas on where we are headed

The Houston Chronicle has produced some interesting and thought-provoking editorials recently on oil prices and the recovery of the oil industry. A March 5 column, by University of Houston professors Michael J. Economides and Ronald E. Oligney, was particularly timely, starting with the eyecatching headline "Get used to $30 oil – it’s here for a while." I think it’s worth repeating, as summarized here.

They predicted in early March that oil is headed for a $40 per bbl spike over the next few months, and they say this may be the necessary wake-up call for the "next generation of massive investment in the international petroleum industry." They say it is apparent that the public, several governments and Wall Street have yet to believe that $30-plus oil is real, that it is here to stay and, in fact, can go up further.

This disbelief has caused a profound slowdown in investment at both multinational and national oil companies. What caused this situation is obvious, the authors say, adding that: "Last year’s $11 oil was an unmitigated catastrophe in a number of ways."

First, decreased production from producing countries actually rationalized significant reductions or the shutting down of customary reinvestments in drilling and well construction. And depletion took its toll to the point that – with the possible exception of Saudi Arabia – last year’s OPEC quotas have now become difficult-to-achieve targets.

Second, in some major petroleum countries, the 50% reduction in cash flow for more than a year will affect petroleum reinvestments for three to five years. Third, the notion of "excess capacity" in petroleum exporting countries has spawned an international mythology that has affected both public and government officials – the latter ought to know better, the authors say.

The notion of "excess capacity" is naive, but also potentially dangerous, the column notes. It misses a critical point: While Saudi, Iraq and Iran each have the potential resources to produce an extra million barrels per day over current levels, they need $4 to 8 billion of investment in drilling, well construction and advanced techniques for each increment.

The ignorance of how oil is produced is also dangerous, because it may precipitate government over-reaction. Fuel oil costs and escalating gasoline / jet fuel prices have generated calls to use the Strategic Petroleum Reserve to stem the trends. Such a measure, the authors say, would be ineffective and counterproductive, galvanizing OPEC’s resolve and thwarting market forces that, if left alone, will eventually correct the situation.

The authors estimate an equilibrium price of oil around $20 – which will be reached eventually. But this price will require enormous investments over the next two to three years. The jolt of a high price spike may be necessary to generate the investment. Transition to a more-normal energy scene may also reduce the duration of any economic slowdown linked to high and sustained oil prices.

Deepwater drilling activity moving up. Offshore Data Services’ Gulf of Mexico Newsletter of February 28 says the U.S. Gulf is "quietly picking up steam." The special report says operators are filing about the same number of deepwater drilling plans in 2000 that they did in the depressed oil-price environment of early 1999. But they have failed to take any action on most early-1999 plans.

In January / February, operators filed five plans to drill in water depths between 1,500 and 3,000 ft. The first two months of 1999 saw operators file seven plans for this depth range. The decrease from seven to five is "fairly innocuous," but the number of wells proposed on those plans, 23 in 1999 and nine in 2000, lends a different perspective. The low utilization rate of 38% of Gulf semis rated to 1,500 to 3,000 ft is a testament to the sag in actual drilling, ODS says.

Plans filed for water depths beyond 4,500 ft also are slightly down from last year. Through February ‘99, operators filed 10 plans (with 28 wells). Through this February, operators filed only eight plans (15 wells). The analysis says operators are concentrating more this year on 3,000 to 4,500-ft water, for which – so far this year – 12 plans (22 wells) have been filed, compared to seven plans (24 wells) through February 1999.

Filing a drilling plan imparts no commitment to drill. In fact, operators have drilled only six wells to date based on the 24 deepwater plans, encompassing 75 wells, filed through February 1999. One well was spudded this year based on the 25 plans, encompassing 46 wells, filed so far this year.

While deepwater activity may be roughly on the same pace as last year, ODS says ’99 was good, falling only one well shy of matching the record for most wells spudded in 1,500 ft of water and greater in any given year.

The report says the actual number of deepwater wells drilled in the Gulf of Mexico will increase in 2000 if for no other reason than the fact that seven more newbuild deepwater rigs will enter service there this year – six entered service in ’99. This is the year operators and contractors alike have been pointing to since the last wave of new-rig construction began. The report concluded that this is the year the deepwater Gulf may finally begin to live up to its billing.

Disconnect riser technology. Recent news releases highlight several innovations in the drilling business. Among these is Cameron’s near-surface, disconnect riser (NSDR) system, for which it has signed a licensing agreement with Japan National Oil Corp., Japan Drilling Co., Mitsui Engineering and Shipbuilding, and Mitsubishi Heavy Industries for design, manufacture and marketing.

Based on Cameron’s existing design for free-standing production / drilling riser systems, NSDR allows a floating drilling vessel to disconnect from the subsea wellhead and move off location in an emergency. The two-segment system extends from the vessel to the subsea wellhead.

If disconnect is required, the top segment is moved off location with the vessel. The lower riser segment remains attached to the wellhead and buoyantly free-stands on the ocean floor. When the vessel returns, the two segments are reconnected and drilling resumes. The system has passed extensive testing at the Offshore Technology Research Center at Texas A&M University.