Western GOM Busy; East Waits

Probably the only certainty about oil prices is uncertainty.

On top of the trauma-inducing, wicked price plunge that began last year, one could experience whiplash just by watching the crude oil price swings over the past few months.

This unpleasantness makes it all the more reassuring that activity continues to rock ‘n’ roll in the Gulf of Mexico, which remains the heart of U.S. energy production.

Deepwater projects are very much the trend in the GOM. During the three MMS lease sales in 2008, 73 percent of the tracts receiving bids were in the deepwater areas.

These projects require years from concept to actual production. Not surprisingly, business-as-usual is the operators’ mantra despite the cyclical peaks and valleys in commodity prices and the fluctuating product demand.

The MMS recently released its forecast that GOM oil production will increase substantially over the next several years, possibly attaining 1.8 MMbo per day.

“With continued interest and activity in deepwater areas of the Gulf of Mexico, we anticipate that oil production will continue to be strong, with a large portion of production coming from projects in deeper water depths,” noted Lars Herbst, GOM regional director at the MMS.

As for natural gas production, the agency forecasts a continued decline over the next four years owing to aging projects in shallow water. Future increases in the Gulf hinge on successful development of undiscovered resources.

In 2008, Congress allowed the 25-year-old ban on offshore drilling along most of the nation’s continental shelf to lapse.

“Even though Congress discontinued their annual appropriations moratoria as of Oct. 1, 2008, there are areas that remain under Congressional restrictions,” said Caryl Fagot, public affairs specialist at the MMS.

“The majority of the eastern Gulf of Mexico and a small portion of the central Gulf within 100 miles of Florida are under restriction until 2022, pursuant to the Gulf of Mexico Energy Security Act of 2006,” Fagot said. “Unless the law is changed by Congress, nothing can happen (there) until 2022.”

Eastern Promises

These areas have tremendous potential to supply American-sourced hydrocarbons for this energy hungry nation. The U.S. Geological Survey reportedly estimated that resources for the eastern Gulf area tally 3.06 Bbo and more than 11 Tcf of natural gas.

A striking example of untapped major reserves beneath these waters is Destin Dome. This legendary geologic entity is a large west-northwest trending anticlinal feature lying 25 miles south of the town of Pensacola in the Florida Panhandle.

It’s been estimated that as much as three Tcf of dry natural gas are trapped in the depths of this geologic structure awaiting the drillbit. Plus, there’s a pipeline already in place within 30 miles.

Exxon drilled a well at Destin Dome Block 162 in 1974, kicking off the initial exploratory activity in the eastern Gulf. Following a number of dry holes, exploration halted and the area quickly became known in some circles as “Dusty Dome.”

Chevron made the initial hydrocarbon discovery on the structure in 1987 after acquiring leases prior to the leasing moratoria off much of the Florida coast. Follow-up drilling to the discovery ran headlong into impenetrable obstacles, constructed principally by the state of Florida.

Today, political pressure is building to encourage rather than discourage drilling off the Florida coast.

It no doubt is a golden opportunity – both in the economic sense (new jobs, royalty revenue, tax revenue, etc.) and new energy supply.

Political Dynamics

The near-irresistible lure of tapping into that estimated three Tcf of natural gas at Destin Dome as well as other promising areas beneath now-off-limits eastern Gulf waters has triggered a battle of sorts in Congress.

An amendment has been passed by the Senate Energy and Natural Resources Committee that would reduce the area of no-drilling zones in the eastern GOM – to the delight of some of the lawmakers and the chagrin of others. The amendment was tacked onto a huge energy bill being tackled by Congress.

In accordance with the amendment, the buffer zone for Florida offshore drilling created by the 2006 bill reportedly would be scaled back to 10 miles from 125 miles off the Panhandle and to 45 miles from 235 off Tampa and coastal communities to the south.

As usual, the mere hint of drilling, no matter the proximity to the coastline, has stirred up Florida-based environmental groups, a cadre of angry residents and certain elected state officials.

Some residents reportedly oppose drilling even as far away as 100 miles from the coastline because it may despoil the view from their high-rise-condominium-congested beaches and kill off tourism.

In a bit of irony, the Cuban government recently announced it had signed contracts with Russia that will allow Russia to explore for oil and natural gas in the GOM – perhaps within 45 miles of Florida turf. The area lies in Cuba’s economic zone, so it’s calling the shots.

Cuba reportedly is also in talks with the Chinese and Brazilians.

Long Time Coming?

The eastern Gulf conundrum is a highly emotional issue, and at least one high-profile expert involved in one way or another in the years of back-and-forth wrangling over drilling offshore the Sunshine State isn’t optimistic about the potential for change.

“Don’t hold your breath,” admonished AAPG member Gene Shinn, courtesy professor in the College of Marine Sciences at the University of South Florida at St. Petersburg.

Shinn, who is a recognized pioneer in carbonate sedimentology and coral reef ecosystems, also serves on the MMS Science Advisory Committee. He was formerly affiliated with the USGS for 31 years as a research geologist following a stint at Shell Oil in the 1960s as a carbonate geologist.

“I’ve been fighting this (Florida drilling) battle a long time,” Shinn noted. “This is déjà vu for me all over again.

“It’s okay to have a 500-mile-long gas pipeline in a six-foot wide trench from Mississippi to Tampa Bay,” he said. “There’s never been any fuss over that, but people go crazy over drilling – by that, I mean the politicians that want to get re-elected.”

Shinn noted he recently hosted former Shell Oil president John Hofmeister, who commented publicly that the United States can never have an energy policy because of the two-year election cycle – members of Congress have to be re-elected back home. Hofmeister emphasized that only a grass roots effort can make it happen.

Immediate Concerns

But hope springs eternal – indeed, it’s a must in this business.

Spectrum Seismic recently announced it has acquired and processed 38,000 kilometers of modern seismic data in the eastern Gulf that allows oil companies to evaluate the prospectivity of this region. Some of these data were acquired in partnership with TGS.

The data acquisition took place between 2006 and 2008 as part of Spectrum’s “Big Wave” multi-client seismic program.

The company reported that analysis of Big Wave Phase 1 data along and outboard the Florida escarpment revealed a number of possible hydrocarbon accumulations on the platform area and also in the deeper waters. Big Wave Phase 2 kicked off in July.

Meanwhile, the western Gulf was the MMS focus du jourin August as the agency prepared for the Western Gulf Lease Sale 210, which encompassed about 3,400 unleased blocks covering approximately 18 million acres in the western GOM offshore Texas (see tables).

The blocks are located from nine to about 250 miles offshore in water depths of 16 to more than 10,978 feet.

The MMS estimates that Sale 210 ultimately could result in the production of 242 to 423 million barrels of oil and 1.64 to 2.64 Tcf of natural gas, according to Fagot.

Top Ten Companies based on Total Number of High Bids Submitted

Company Total High Bids Sum of High Bids BP Exploration & Production Inc. 37 $50,634,191 Chevron U.S.A. Inc. 26 $9,075,343 ConocoPhillips Company 22 $15,172,500 Exxon Mobil Corporation 17 $8,587,021 Focus Exploration, LLC 15 $,732,858 Anadarko E&P Company LP 5 $5,367,544 Entek USA General LLC 5 $755,050 Petrobras America Inc. 4 $10,000,000 Byron Energy Inc. 4 $916,800 Castex Offshore, Inc. 3 $1,912,000

Companies Submitting Top Ten Single Highest Bids

Company	Protraction Name/Block	Water Depth	High Bid Amount
BP Exploration & Production Inc.	Keathley Canyon/96	800-<1600	$28,133,843
Petrobras America Inc.	Keathley Canyon/223	800-<1600	$9,122,000
BP Exploration & Production Inc.	Keathley Canyon/180	800-<1600	$5,133,843
ConocoPhillips Company	Alaminos Canyon/476	800-<1600	$3,060,000
BP Exploration & Production Inc.	East Breaks/875	800-<1600	$2,933,843
ConocoPhillips Company	East Breaks/406	400-<800	$2,550,000
Anadarko E&P Company LP	East Breaks/729	800-<1600	$2,249,351
BP Exploration & Production Inc.	Garden Banks/841	800-<1600	$1,933,843
Chevron U.S.A. Inc.	Alaminos Canyon/774	>2000	$1,462,076
Anadarko E&P Company LP/ Nexen Petroleum Offshore U.S.A. Inc.	Garden Banks/448	400-<800	$1,415,200