April 2018

Energy issues

Mixed message on offshore.
William J. Pike / World Oil

Bloomberg Markets said, in late March, that subsea production facilities installed by U.S. oil giant Chevron put the company’s deepwater assets in competition with onshore shale. Specifically, “the idea is to force crude from newly drilled wells, in the deepest parts of the Gulf of Mexico (GOM), to flow through miles and miles of pipe to platforms built a decade or more ago,” said Jay Johnson, Chevron’s executive vice president for upstream, speaking at the Scotia Howard Weil Conference in New Orleans.

“By lopping off the billions it would cost to construct each new platform, offshore exploration begins to make economic sense again.” Johnson noted that new deepwater finds like Anchor, Waterloo, Tiger, Gibson, Whale and Ballymore will benefit from development cost reductions, making deepwater dramatically more competitive with onshore resources. Speaking at the same conference, Transocean Ltd. CEO Jeremy Thigpen told the attendees that all but a handful of the 29 current deepwater Gulf projects had break-even costs in the low $40/bbl range.

Is a deepwater revival underway? Indeed, recent discovery announcements from major operators in the GOM, including those by Chevron mentioned above, seem to offer some reason for optimism in the deepwater arena. Royal Dutch Shell said that its U.S. unit made one of its biggest oil discoveries in the past decade, in the Whale deepwater well in the U.S. GOM. Whale is operated by Shell and co-owned by Chevron. “Evaluation of the discovery is ongoing, and appraisal drilling is underway to further delineate the discovery and define development options,” said Shell Offshore Inc. in a statement, without giving figures. Shell has three GOM deepwater projects under construction—Appomattox, Kaikias and Coulomb Phase 2. It has added more than 1 Bboe of resources in the last decade, in the GOM.

Chevron, with partner Total, made a significant oil discovery at the Ballymore prospect in the deep offshore portion of the U.S. GOM, its largest discovery in the area. “This major discovery gives us access to large oil resources and follow-on potential in the emerging Norphlet play,” Arnaud Breuillac, Total's president for E&P, said in a statement. “While already deemed commercially viable, we will work together on the appraisal of this discovery and a cost-effective scheme to ensure a rapid, low break-even development,” he added. The Ballymore prospect covers four blocks in the Norphlet play of the Mississippi Canyon area, including Block MC 607, where the discovery was made.

Additional, recent deepwater discoveries in the GOM include:

  •   Anadarko Petroleum Corporation’s Constellation discovery in Green Canyon Block 627
  •   Byron Energy Ltd.’s South Marsh Island Block 71 discovery
  •   Anadarko Petroleum Corporation’s Shenandoah field in Walker Ridge Block 52
  •   Deep Gulf Energy Company’s Rampart Deep discovery in Mississippi Canyon Block 117
  •   W&T Offshore’s Mahogany field discovery in Ship Shoal Block 349
  •   Shell’s Fort Sumter discovery in Mississippi Canyon Block 566
  •   Cobalt International Energy’s North Platte discovery in Garden Banks Block 959
  •   W&T Offshore’s Ewing Bank Block 910 discovery

The flip side. Outside these deepwater discoveries, one could argue that little has been done to restart the oil and gas industry in U.S. waters, save for the current administration’s efforts to open previously closed waters, primarily along the East Coast and in Alaska, to exploration and development. These efforts, for the most part, have been unsuccessful, due to continuing bipartisan opposition within certain coastal states to offshore oil and gas development. This represents a shift from years past, when leaders in Virginia, North Carolina and South Carolina all supported offshore drilling. New governors in the three states have each reversed that stand.  Despite President Trump’s plans to open these areas to offshore drilling and production, that activity will, most likely, not occur anytime soon, if at all. The negative impact of shunning East Coast exploration and production is compounded by very poor results in the most recent GOM lease sale.

The March 21 federal lease sale for the GOM, billed as the largest in U.S. history, performed far below auctions earlier this decade. The sale covered some 77.3 million acres, an area twice the size of Florida and included discounted royalty rates on the shallower tracts, according to sources noted by Reuters. But, faced with multi-billion-dollar price tags to develop the acreage and tempted by better terms overseas, companies bid on just 1% of the area up for grabs, winning with bids that averaged just $153/acre—35% below levels last year, and a fraction of those in the region during 2013, when oil prices were higher, according to the data. In all, the auction brought in slightly more than a smaller GOM auction last year, but a only tenth of the amount pulled in during a much smaller lease sale in the Central Gulf in 2013, said Reuters. The poor sales results, and the failure to open additional offshore waters to oil and gas development, has led more than one analyst to conclude that the U.S. offshore sector is not in recovery mode, despite deepwater discoveries. 

Who, or what, to believe? Is the Gulf deepwater revival, such as it is, a result of good economics or compliance with lease performance requirements? It’s hard to tell, but absent more proof of the economic resurgence of the Gulf, I think I will keep my money onshore for a while longer. wo-box_blue.gif

About the Authors
William J. Pike
World Oil
William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.
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