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Houston Chronicle: Finds in Gulf slump

Analyst says explorers assessing what’s in hand as discoveries hit a 10-year low

By TOM FOWLER
Copyright 2008 Houston Chronicle
March 5, 2008, 10:46PM

New oil and natural gas discoveries in the Gulf of Mexico hit a 10-year low last year, but that doesn’t mean the region is running dry, analysts with research firm Wood Mackenzie said Wednesday.

Companies are putting more of their time and money into assessing their current holdings in the Gulf rather than looking for new ones, said Julie Wilson, a lead analyst with the Edinburgh, Scotland-based research firm.

“This doesn’t mean we see a long-term falloff in drilling in the Gulf,” Wilson said. “It’s just new exploration is riskier than appraising what you already have.”

The head of Exxon Mobil Corp., speaking to analysts Wednesday, also noted that Gulf exploration has yielded less-than-stellar outcomes lately.

According to the Wood Mackenzie report, companies found the equivalent of 553 million barrels of oil in the Gulf last year, half as much as in 2006 and the lowest figure in a decade.

The number of exploration wells drilled in 2007 was also down and close to the 10-year-low. Only 29 percent of the new exploration wells drilled in 2007 were in the deepest parts of the Gulf versus 53 percent in 2006.

The Gulf of Mexico will continue to be a huge source of energy for years to come as it accounts for 25 percent of U.S. oil production and 15 percent of natural gas production.

The U.S. Minerals Management Service estimates daily production late last year was about 1.3 million barrels of oil and 8 billion cubic feet of gas.

But Exxon Mobil Chairman and CEO Rex Tillerson said that Gulf players now have to cobble together a number of smaller fields under one production and delivery system, rather than finding large discoveries that are economical on their own.

“Each well is extraordinarily expensive, so it’s just a question of if there will be enough barrels through the straw to make it worthwhile,” Tillerson said.

Exxon Mobil said Wednesday it is increasing its overall capital investments, including spending on exploration, by about 20 percent this year to $25 billion and will spend $125 billion in the next five years.

Royal Dutch Shell, the world’s second-largest oil company after Exxon Mobil, has said it will invest up to $25 billion in new projects this year.

BP plans about $22 billion in new spending, and Chevron Corp. and Houston’s ConocoPhillips predicted 2008 budgets of $22.9 billion and $15.3 billion, respectively.

While the Gulf of Mexico will undoubtedly see some of that investment — companies wouldn’t break out their data by region — for the most part the profits tend to be better in parts of the world where costs are lower.

For example, Exxon Mobil’s average production cost for a barrel of oil in the U.S. increased 62 percent from 2005 to 2007, from $5.56 to $9.03.

In the Middle East, that cost is up just 6 percent, while in Russia and the Caspian Sea area it has dropped 38 percent, according to Exxon Mobil’s annual report.

But Wilson said the Gulf of Mexico remains attractive because of the stability of U.S. markets and regulations.

A sign of that continued long-term interest is the record sums companies paid for new leases in the Gulf during government auctions last year.

In October companies spent $2.9 billion for the right to explore tracts off Mississippi, Alabama and Louisiana.

Hugh Hopewell, an upstream analyst with Wood Mackenzie, said it’s likely companies have invested more resources poring over the seismic data for these new leases.

A tight market for drilling rigs shows some signs of easing this year, he said, so exploration activity will most likely pick up in the next two or three years.

“As always, it’s hard to say if the size of the discoveries will be significant,” Hopewell said. “You can have quiet years mixed in among the more successful years.”

FROM THE TOP

Rex Tillerson, chairman and CEO of Exxon Mobil Corp., spoke with analysts Wednesday in New York. Some highlights of his presentation:

• Exxon Mobil plans $125 billion in capital spending over the next five years, a 25 percent increase over last year’s estimate.

• Nineteen projects over the next three years will increase production by 725,000 oil-equivalent barrels per day.

• The company plans to double its production of liquefied natural gas during the next three years by building new liquefaction plants and commissioning tankers.

• The company spent a worldwide average of $7.14 to produce each barrel of oil in 2007, up from $6.04 a year earlier.

• Exxon Mobil, which is embroiled in a multibillion-dollar dispute with Venezuela over property it seized to nationalize its oil industry, might consider swapping Venezuela’s 50 percent stake in an Exxon Mobil-operated refinery in Chalmette, La., for the seized property.

TOM FOWLER; BLOOMBERG NEWS

[email protected]

http://www.chron.com/disp/story.mpl/headline/biz/5596564.html

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