Financial Times: Gulf of Mexico: Search for prospects taps into deep water

EXTRACT: Shell is considering doubling the size of its Motiva Port Arthur refinery to make it the largest refinery in the US. “We hope to take a final investment decision on it later this year,’’ says David Sexton, vice president of Shell Oil Products for the US.

THE ARTICLE

By Sheila McNulty in Houston

Gulf of Mexico prospects are so valuable these days that the companies exploring and producing them have started offering the rights to name some of them to employees as a special treat.

In the past year, Dawn Marie Yates, who works in information technology for Chevron, won that right by bidding the highest amount of money in an auction to raise money for the United Way charity.

Ms Yates paid $501 to put her name on a prospect for Chevron, one of the largest leaseholders in the deepwater Gulf: “It made me feel a lot closer to the action,’’ she says.

Indeed, that action has been intensifying in recent years, with an influx of foreign companies to try to get in on gains being made by the traditional Gulf players, such as Shell, BP, Chevron and ExxonMobil.

In the past year, Maersk of Denmark has moved into the area, acquiring a 33.33 per cent interest in 93 exploration leases. In 2005, Statoil bought Encana’s deepwater portfolio, making the Gulf a core area for the Norwegian company. And 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.

Wood Mackenzie, the consultancy, called 2006 “an exceptional year for exploration in the deepwater Gulf of Mexico,’’ noting early estimates suggest total reserves discovered could be in the region of 1.5bn barrels of oil equivalent. That compares with the average oil and gas discovered each year over the last 10 years in the deepwater Gulf of 1.2bn barrels of oil equivalent.

Indeed, Brian Smith, Chevron’s general manager for deepwater projects in the Gulf, says a recent report identified 25 new finds in the deepwater Gulf in 2006 that companies deemed worthy enough to move ahead with.

That said, Zoë Sutherland, Gulf of Mexico analyst for Wood Mackenzie, says some of the finds are in such deep water, where pressures are high and the oil is viscous and must travel far to get to shore, that the companies must make a few advances before they can produce such fields.

“It’s all so new, technology just has to catch up,’’ Ms Sutherland says.

The oil majors are intent on ensuring technology does just that, given the growing difficulties in finding new global sources of easily accessible oil and the Gulf’s popularity as a resource pool, at a time of increasing nationalism among state-owned oil companies.

Ms Sutherland says the fiscal terms in the Gulf are good, the government take is small, it is in a politically stable country and there is a large market on the doorstep.

“All of these things add up,’’ she says. Besides, she adds: “The successes of 2006 shows that there is still the potential for big finds to be made in the Gulf of Mexico.”

Renato Bertani, Petrobras’ outgoing US president, says the oil industry is working towards developing the technology and the new ideas necessary to find oil in increasingly difficult places to tap into, such as the Gulf.

“There is a lot of undiscovered oil in the Gulf of Mexico,’’ he says. “In order to find new resources, you need to take much bigger risks.’’

The risk-taking, however, is being constrained by the astronomical rise in costs for increasingly scarce equipment, as the oil majors scramble to tap into resources, and the lack of experienced manpower.

Day rates for some of the deepest drilling rigs are between $400,000 and $500,000, which is double what was seen in the region two years ago.

Staff are so hard to come by that in December EPCglobal, the international engineering staffing company, successfully organised the first speed recruit event for the oil industry in Houston.

“As you can imagine, large US and oil and gas corporations can be a conservative bunch, and I think it helps illustrate how desperate the industry is for skilled, experienced engineers that they would even consider this as a way of recruiting new talent,’’ says Richard Spragg, communications manager for EPCglobal.

Between 900 and 1,000 candidates turned up – twice what organisers had expected, he said. The industry was so impressed that it encouraged EPCglobal to set up another speed recruiting event for the industry on May 5.

“The market being what it is, people are becoming prepared to try new and different things,’’ says Mr Spragg. “It’s increasingly common to find oil and gas companies facing a staff shortfall on major projects, which can put delivery in jeopardy.’’

Hurricanes prompt action to refine strategies

When hurricanes Katrina and Rita cut through the Gulf of Mexico in 2005, they left a string of damaged oil and gas assets in their wake. Among the hardest hit were the refineries that are based along the Gulf to process oil brought in from the ocean, writes Sheila McNulty.

The US was forced to step up imports of refined products from abroad to make up the shortfall until the refineries were repaired.

“What the hurricanes did was sharpen the focus of the world on how short refining capacity is in the world,’’ says Bruce Smith, chief executive of Tesoro, a US independent.

The US refining industry exemplifies the problem. In the 1980s, the country had more than 300 refineries, Mr Smith says, and now it has just 144, forcing it to import about 12 per cent of its petrol (gasoline) supply. “Capacity has declined around the world.’’

Nobody wants a refinery in their backyard, making it difficult for companies to build, and obtain permits to run, new facilities. Besides, refining has traditionally been a low return business relative to the capital needed to run it. A new refinery could cost up to $6bn, and US refiners have been forced to spend a substantial amount of capital seemingly every year to comply with new and changing regulations to produce cleaner fuels. “Slowly and surely new regulations and increased competition have driven marginal refineries out of business,’’ Mr Smith says.

Yet, since the shortage in refined capacity was brought home by the hurricanes of 2005, oil majors have put forward plans that would add substantial capacity to existing refineries.

Shell is considering doubling the size of its Motiva Port Arthur refinery to make it the largest refinery in the US. “We hope to take a final investment decision on it later this year,’’ says David Sexton, vice president of Shell Oil Products for the US.

Others have already moved forward, yet they are competing for skilled labour with those still doing repairs from the hurricanes, and this has pushed up the cost of projects.

Parrish Potts, who leads Accenture’s hydrocarbon supply chain practice in north America, says: “The coastline is still devastated. There is a lot of labour – construction and engineering labour – going into that. Yet all the competition wants to build capacity.’’

The resulting inflation in labour and capital costs has led some to roll back plans. In August Tesoro cancelled investment plans for a new coker project in at a refinery in Washington state after the projected cost rose from $250m to $500m.“We wrote off $28m in engineering and preliminary design work and some advance land preparation,’’ Mr Smith says.“But The economics just did not justify continuing with the project,’’ says Mr Smith.

Nonetheless, he believes with strong demand there are still a number of good years to come for refiners.

Wood Mackenzie, the energy consultancy, says, however, that the turning point will come within the next few years, when the US deficit in petrol will peak and start declining. It might well catch some refinery owners, rushing to expand capacity, off guard.

“North American refiners need to spend more time looking at global developments,’’ says Mike Wilcox, Wood Mackenzie’s head of global downstream oil. He expects the current surplus in petrol in Europe to continue to grow, even as the deficit in the US peaks and falls. “This could create a gasoline glut in the Atlantic.’’

Mr Wilcox expects 1.6m barrels per day in crude capacity to come on stream in north America by 2020 – even as demand for refined product declines with private vehicle ownership reaching a peak, topping out, cars becoming more efficient and biofuels being used increasingly as an alternative.

Published: May 8 2007 13:02 | Last updated: May 8 2007 13:02

Copyright The Financial Times Limited 2007

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