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Houston Chronicle: Oil companies go deep into Gulf’s potential

They are taking the bet they can extract oil lying 30,000 feet below the sea floor

Copyright 2007 Houston Chronicle
June 13, 2007, 12:56AM

Last fall, a team led by Chevron Corp. became the toast of the oil industry when it demonstrated that an alluring deepwater region of the Gulf of Mexico could deliver on its promise.

Now, oil companies are taking concrete steps to unlock the area’s potential, with an eye toward extracting oil from there in as little as two years.

Devon Energy Corp., an Oklahoma City-based firm with about 2,000 employees in Houston, is planning to drill what could be the first commercially producing oil field in the region by late 2009. Chevron has assembled a 60-person team to explore how it will develop the offshore frontier. Shell Oil has ordered a floating platform and plucked 200 employees to work on a project planned to come online by the turn of the decade. Others are also studying ways to turn prospects and discoveries into producing oil fields.

The activity has been spurred by predictions that up to 15 billion barrels of oil — enough to increase the nation’s reserves by 50 percent — could be trapped in an ancient rockbed known as the lower tertiary.

The area of greatest interest, known in industry lexicon as the lower tertiary trend, has been hailed as the biggest discovery since Alaska’s North Slope in the late 1960s. It runs about 200 miles from the central Gulf of Mexico to the South Texas Coast, spanning an area about the size of West Virginia.

But the challenges of pulling oil from the region still loom large. Not only are the reservoirs more than 30,000 feet under the sea floor in places, they are hidden under nearly 10,000 feet of water. Getting to the rock means sending drills into densely compacted formations that will be stubborn in yielding resources and that may require new tools that can withstand higher temperatures and higher pressures. All of that means huge costs.

Last week, Devon talked of those challenges during a tour of the Ocean Endeavor, a newly renovated drilling rig it has under contract for the next four years as part of a huge company bet on the lower tertiary.

Stephen Hadden, Devon’s senior vice president of exploration and production, compared the task to trying to thread a needle from 10 feet away in the dark. Yet if successful, the company could double its proven oil and gas reserves and see a huge return on investments, he said.

“The reward is worth the risk,” he said.

Incentives growing

The excitement over the ultra-deepwater Gulf region comes as high commodity prices and growing global energy demands are providing incentive for companies to invest in higher-risk projects.

Chevron’s successful test in September of its Jack No. 2 well told the industry that enough oil could be drawn from the lower tertiary trend to justify the massive investments.

“It proved that this trend could be produced economically and that it even holds a good potential to impact domestic and global oil production,” said Matt Pickard, an analyst with Quest Offshore Resources in Sugar Land, which does market research and analysis for the global offshore energy industry.

The Jack well was completed and tested in 7,000 feet of water, and more than 20,000 feet under the sea floor, including a wide salt layer. Such layers, called salt canopies, have been obstacles for oil companies in the region because the formations hampered traditional seismic survey work needed to map underground deposits. But in recent years, more sophisticated 3-D seismic equipment has allowed oil companies to “see” through the salt.

12 finds and counting

So far, 12 discoveries have been announced in the lower tertiary trend since 2001, according to the Interior Department’s Minerals Management Service. Yet that number could grow as international oil companies and state-owned firms including Brazil’s Petrobras show more interest in the area.

Devon has leased more than 230 blocks — second only to Chevron — from the federal government. Each block is about 5,000 acres.

In coming weeks, Devon will use the Ocean Endeavor to drill a prospect well at its Chuck field, which it owns with Exxon Mobil and ConocoPhillips. Then, it will drill another well at Chevron’s Jack field, in which it owns a partial stake. After that, it will move the massive rig to Cascade, a field in which it holds a majority interest and expects to begin producing oil from in 2009.

Each well will cost at least $100 million and take three to four months to drill, Devon said.

That’s why operators are cautious about diving into the region too quickly.

James Cearley, Chevron’s general manager of deepwater exploration, said Chevron’s team is in the “earliest stage” of a feasibility study to determine how it should invest resources to develop oil fields in the lower tertiary trend.

The company won’t begin producing oil in the region until at least 2010, he said.

Other firms, including Houston’s BHP Billiton, have sold some stakes in discoveries to focus on lower-risk projects. Such moves are a reminder that not everyone is sold on the outer waters of the Gulf.

Gregory Simmons, Devon’s manager of Gulf of Mexico deepwater exploration, said after many years in the industry and seeing many booms and busts, it is hard to blame them.

“Regardless of how good these look,” he said, “there’s never a sure thing.”

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