REGIONAL FOCUS: U.S. GULF OF MEXICO

Cautious optimism characterizes Gulf of Mexico activity

Healthy E&P activity in GOM will probably remain active through 2001. Rig utilization increases steadily, but some analysts warn of jackup rig reduction due to decline in shelf reserves

Jerry Greenberg, Houston, Texas

ulf of Mexico E&P activity appears healthy, with strong indications that it will remain active at least during the next year. U.S. Gulf rig utilization is increasing steadily along with dayrates. The market is strong enough to attract rigs from other areas and still sustain increased rates and utilization. The industry could experience a shortage of ultra-deepwater rigs in the near future, based on the number of leases to be explored. On the other hand, some analysts suggest there could be a decline in jackup rig activity as the U.S. Gulf continues to mature and shelf reserves decline.

Development activity, while not as strong this year as in previous years, is expected to increase in 2001 and is already beginning to see some of that increase in the form of $1.5 billion of developments announced recently by Shell. But year 2000 saw fewer subsea completions and no floating production systems (through November). For the future, operators are studying the possibility of as many as 17 floating production facilities to develop various fields. Subsea completions are expected to rise also, indicating increased development activity. More than 40 subsea completions are planned for 2001 compared with perhaps 25 eventually for 2000, Tables 1 and 2.

Competitive jackup demand vs. average gas price.

Healthy Rig Activity Increase

Gulf of Mexico drilling contractors saw the number of contracted rigs increase by 26 from the beginning of 2000 to early November, from 149 to 175. This translates into increased utilization rates of 85.4%, an 8-point increase since the beginning of the year, Table 3. During the same time, a dozen rigs mobilized to the U.S. Gulf, lured by rising activity levels and increasing dayrates.

Most of the increase has been in the jackup fleet, driven primarily by high natural gas prices this summer and into the fall, see accompanying figure. Jackup utilization in early November was just under 90%, with 136 of 152 jackups contracted. Not only were 18 more jackups contracted in November compared with the beginning of the year, but also the jackup fleet during that time increased by nine units.

Several oil and gas companies are entering the Gulf of Mexico for the first time, or drilling again following a period of absence. This move to the U.S. Gulf is partly due to high natural gas prices and because independents are obtaining potentially good acreage left behind by majors moving to deeper waters or exiting the Gulf. Additionally, high natural gas prices also attracted some of these companies to recent OCS lease sales. Some of these independents are not well known as U.S. Gulf operators and include companies such as White Petroleum, Juniper, Fairways Offshore, Matrix Offshore and Magnum Hunter.

Many of these small independents working in the U.S. Gulf use turnkey drilling contractors because the oil companies generally lack the staff or offshore experience / expertise to drill for their own account. Consequently, this year has been quite active for the turnkey driller. Global Marine subsidiary Applied Drilling Technology Inc. (ADTI) is on track to drill 100 wells. R&B Falcon subsidiary Cliffs Drilling beefed up its turnkey operations with the addition of several former ADTI employees, and the company expects to drill as many as 60 wells in 2000, and in 2001. This compares with 23 wells drilled from March to the end of December 1999. Triton Engineering is de-emphasizing its turnkey drilling in favor of more project-management type contracts. The company historically has been the second largest U.S. Gulf turnkey driller in terms of number of wells drilled.

As jackup utilization increased, so did dayrates. Drilling contractors saw rates for typical 250 – 300-ft, independent-leg cantilevered Gulf of Mexico jackups nearly double since the beginning of the year, Table 4. Last January, dayrates ranged between $19,000 and $32,000 for this class of jackup, averaging just above $23,000 per day, according to One Offshore, Inc. Rates rose steadily to an average of $44,873 in November, ranging from $40,000 to $55,000.

U.S. Gulf shelf activity is presently on the rise, and oil / gas company budgets are expected to increase significantly in 2001, according to two E&P-company spending surveys. But one analyst believes that U.S. Gulf jackup activity will decline in the longer term. Tom Marsh, Associate Publisher at One Offshore, Inc, says the U.S. Gulf is a mature province and there is a trend of lower leasing activity in shallow waters, implying that jackup demand over the longer term will decline. Marsh sees this declining activity rate occurring over the next five to ten years.

Deepwater Exploration

At this writing, there are 46 deepwater rigs in the Gulf of Mexico, including 40 semisubmersibles and six drillships. Another three semis and one drillship under construction are destined for the U.S. Gulf. Additionally, several semis are being converted or upgraded for ultradeepwater use. Yet, despite the number of rigs, some in the industry are predicting a deepwater rig shortage in the U.S. Gulf.

Before oil prices collapsed in 1997, One Offshore (then Offshore Data Services) studied worldwide deepwater rig demand and determined the need for 40 – 50 new deepwater rigs for the U.S. Gulf alone. There were numerous new semisubmersibles and drillships on order then, but the construction cycle was interrupted by the oil price collapse. Since 1997, a total of 22 deepwater rigs were delivered to the Gulf, implying a need for an additional 18 – 28 rigs to meet expected demand.

If the expected demand materializes over the next 12 – 24 months, says Marsh, the problem is that new rigs will not be ordered until it is obvious to drilling contractors that the demand cycle is real. It will be about 24 months following new orders, he says, before any new rigs could be delivered to meet demand, resulting in potentially severe shortages. These shortages could occur within 24 months, possibly quicker if the next demand up-cycle is sooner.

Exacerbating the situation is deepwater exploration in other areas of the world, such as Brazil and West Africa. Demand for deepwater equipment in those markets will likely pull units from the U.S. Gulf.

Meantime, deepwater and ultra-deepwater drilling is proceeding, including a Gulf of Mexico water depth record. BHP spudded a well in Walker Ridge Block 425 in 8,835 ft of water with the recently delivered state-of-the-art Glomar C. R. Luigs drillship. Additionally, two more wells are being drilled in over 7,000 ft of water. Shell is drilling in 7,790 ft of water in Alaminos Canyon Block 557 with R&B Falcon’s semisubmersible Deepwater Nautilus. Spirit Energy 76 is drilling in 7,044 ft of water in Walker Ridge Block 678 with Transocean Sedco Forex’s drillship Discoverer Spirit.

The Walker Ridge area is garnering particular attention recently from the oil industry. In addition to BHP and Spirit Energy 76, Texaco is drilling in 6,725 ft of water in Walker Ridge Block 456 with Global Marine’s Glomar Explorer drillship. Marathon drilled a well in Walker Ridge Block 165 in 7,997 ft of water in 1999.

Slack Development Activity Poised For Increase

Gulf of Mexico development activity was relatively slow in 2000 due primarily to E&P companies’ uneasiness about the stability of oil prices. High natural gas prices resulted in more exploration activity on the shelf, which will result in development activity, but deepwater and ultra-deepwater exploration / production lagged previous years. For example, there were no floating production systems installed in 2000, but at least three are planned for installation in 2001. Another 17 floating production systems are under study, according to One Offshore. Subsea tree installations totaled only 13 through October compared with 33 in 1999. This total may increase slightly by year’s end. As many as 41 subsea installations are planned for 2001.

The number of fixed platform installations could experience a significant increase this year with possibly as many as 100. That would be the highest figure since 1997, when 107 fixed platforms were installed, or 1998 when 88 were installed. There were 49 fixed platforms installed through the first three quarters of 2000, with as many as 54 scheduled to be installed during the fourth quarter. However, scheduling problems and other considerations may result in some installations being pushed into 2001. Most of these fixed platforms are well protectors installed by independents in less than 200 ft of water as they put their gas production onstream in light of high natural gas prices.

Deepwater Production Set To Rise

Deepwater oil and gas production rose significantly in 1999 and will post another increase in 2000. The Minerals Management Service (MMS) estimates that production from the deepwater areas jumped 41% in 1999 over 1998. Natural gas production increased an estimated 51% in 1999. A major milestone was reached in November 1999 when the volume of oil from the deepwater Gulf surpassed that from the shallow water portion. Although only 30 (4%) of the 747 producing fields are in deep water, they provide over half of the Gulf’s daily production.

Floating production facilities planned for installation in 2001 include a spar for Chevron’s development in Green Canyon Block 237 in about 2,100 ft of water, a tension-leg platform for El Paso Production’s Prince prospect in 1,490 ft of water in Ewing Bank Block 1003, and Shell’s Brutus TLP in 2,985 ft of water in Green Canyon Block 158.

Recent developments by Shell Exploration and Production Company (SEPCo) indicate the type of deepwater development projects to expect and are reasons why the industry could see such a high number of subsea completions in 2001. Shell’s Na Kika and Oregano and Serrano projects are estimated to cost more than $1.5 billion to develop. These development projects include a floating production facility (FPS) as well as numerous subsea completions to tie in several fields to the FPS.

The Na Kika project represents a first for the U.S. Gulf deep water, consisting of six subsea production systems servicing satellite fields that will be tied back to the central FPS. The Ariel, East Ansley, Fourier, Herschel, Kepler, and Coulomb fields are in water depths ranging from 5,800 to 7,600 ft. Production will initially be from the first five fields. Production from Coulomb field will be tied back to the FPS as production capacity becomes available.

The Na Kika project will cost about $1.3 billion and is expected to come onstream with the first five wells in mid-2003. Peak production rates are expected to reach 325 MMcfd of gas and 100,000 bpd of oil. Estimated total recoverable reserves amount to more than 300 million boe.

Development of the Oregano and Serrano discoveries will use subsea completions tied back to Shell’s Auger TLP, eight and six miles away, respectively. The discoveries are in about 3,400 ft of water. Each development will consist of two wells, flowline sleds and 6-in. by 10-in. pipe-in-pipe insulated flowlines tied back to Auger.

The Oregano and Serrano field developments are estimated to cost about $130 million and $120 million, respectively. Each development is estimated to recover about 50 million Boe. Serrano is expected to start up in September 2001, with Oregano following in December 2001. Peak production rates are expected to reach 150 MMcfgd and 20,000 bopd.

FPSOS Still Far In The Future

One floating production scheme awaiting its first use in the U.S. Gulf is the FPSO (floating production storage and offloading system). A draft environmental impact statement (EIS) has been prepared and public hearings were held in September.

Mostly favorable comments were received during the public hearings and, in fact, the draft EIS was favorable to FPSOs. Deep water in the draft EIS is defined as over 200 meters. The EIS said that potential, site-specific impacts are essentially the same as with other deepwater development and production systems. The draft EIS also stated that most of the risks of oil spills are associated with the shuttle tankers and not the FPSO itself, and that the risk is comparable to risks from other deepwater production systems and from pipelines. Additionally, the draft EIS stated that excluding the use of FPSOs would not reduce the cumulative environmental impacts because other production systems would be used in its place.

Preparation of a final EIS was expected to begin by the end of November and be finalized by early 2001. But while a final EIS is to be completed, an MMS spokesman says he does not expect to see an application for use of an FPSO in the Gulf "for a few years."

The spokesman said deepwater royalty relief spurred deepwater leasing but has done little to increase deepwater development. The MMS has received only three development plans based on deepwater royalty relief and believes development plans for the foreseeable future are going to be based on existing production systems. Also, completion of an EIS does not automatically mean an application for use of an FPSO will be approved. MMS has stated that, although an EIS has been completed, site-specific environmental assessments may take time to complete and eventually be approved by the MMS.

The author
	Jerry Greenberg is a Houston-based journalist with more than 20 years’ experience reporting, analyzing and forecasting activity in the worldwide offshore drilling rig market, including ten years as editor of a monthly newsletter about the offshore drilling rig market. He also has seven years’ experience working for offshore drilling contractors in marketing, public relations and corporate communications.