Financial Times: A sea change down Gulf of Mexico way

By Sheila McNulty in Houston
Published: February 22 2007 02:00 | Last updated: February 22 2007 02:00

Back in the 1980s, the Gulf of Mexico was viewed as the “Dead Sea”, according to Larry Nichols, the chief executive of Devon Energy.

The area close to shore already had been picked over and limitations with technology made it impossible to move further out and drill in the 6,000-10,000-foot depths known as the “Deepwater”.

Yet, since 2000, Mr Nichols says, technological advances have enabled the energy industry to not only see below salt formations that had once left oil companies with blind spots below the ocean floor, but also explore in water depths of 10,000ft and drill 30,000-foot wells in those depths.

“The combination of those two has led to a whole revolution of ideas people had about the Gulf,” Mr Nichols said. “Here is a new geological area that 10 years ago we did not have the technological ability to process.”

That sea change has broadened the field of interest far beyond traditional Gulf interests such as Shell, BP, Chevron and Exxon. This past year, Maersk of Denmark moved into the area with the acquisition of a 33.33 per cent interest in 93 exploration leases in the Gulf of Mexico. In 2005, Statoil bought Encana’s deepwater portfolio, making the Gulf a core area for the Norwegian company.

In 2006, the Spanish-Argentine energy company Repsol boosted its holdings in the Gulf with a 28 per cent stake in the Campo Shenzi oil field, noting: “The Gulf of Mexico is one of the deep water areas with the highest exploration potential in the world.” The list of investors – and accolades – goes on and on.

Devon is the second largest leaseholder in a deep water geological formation known as the lower Tertiary, which some estimate could contain as much as 15bn barrels of potential reserves, making it the largest North American discovery since Prudhoe Bay in Alaska – the largest oilfield in the US.

“2006 has been an exceptional year for exploration in the Deepwater Gulf of Mexico, indicating a return to form for the region, which has seen disappointing reserve additions in recent years,” says Wood Mackenzie, a consultancy.

Two potentially world-class discoveries were announced during the first half of last year, boosting the volume of reserves found to 1.5bn barrels of oil equivalent, well above the 1.2bn barrel annual average in the Deepwater Gulf over the past 10 years.

Oivind Reinertsen, Statoil’s Gulf of Mexico president, says the company began hunting for prospects in the Gulf after a review of worldwide prospects. The amount of reserves estimated to remain in the Deepwater, he said, is 56bn barrels – double what remains to be found on the whole Norway shelf. “We aim to be a key player in this area.”

So does Chevron, which is the largest leaseholder in the Deepwater Gulf and had three big finds a year ago in those waters.

A recent report said there were 25 finds in the Deepwater Gulf in 2006 that companies deemed worthy of moving ahead with, says Brian Smith, Chevron’s general manager for Deepwater projects in the Gulf. “Within Chevron, we have a few prime areas and the Gulf of Mexico is right at the top,” he says.

Certainly the costs are high and Mr Smith says they show “no sign of peaking out”. Intense demand for drill ships, for example, has put them at $1m a day, inclusive of equipment, and experienced staff are hard to come by. Nonetheless, Chevron considers the benefits worth paying for.

At a time when a growing number of governments are reneging – or hinting at reneging – on contracts with the energy industry, Mr Driver notes, the US’ Gulf “is probably one of the most stable places to operate in the world”.

That said, the US government’s push to renegotiate royalty arrangements in the Gulf has rankled operators. Renato Bertani, Petrobras’ outgoing US president, said the company began in the exploration and production sector in the US in 1986 but in 2001 began to focus on the Deepwater Gulf. Petrobras only has a few leases that would be potentially affected by the royalty issue but, nonetheless, notes the percentage of royalties required by the US government will become important in future.

“I think this has to be considered very carefully by the industry and the US government itself,” Mr Bertani says. “The ultra deep water is very costly, very risky. Eventually some projects don’t go as well as some would expect.”

Copyright The Financial Times Limited 2007

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