More Oil G O M*

March 24, 2004
Trying to Squeeze More Oil and Gas From the Gulf of Mexico
By SIMON ROMERO

BOARD THE MARCO POLO PLATFORM, in the Gulf of Mexico - With energy prices climbing to their highest level in more than a decade, amid OPEC threats to cut oil production and concern about soaring demand for natural gas, federal officials and energy companies are making the Gulf of Mexico the focus of a renewed push to increase domestic production.

It is not at all clear whether these new forays will pay off, even though the Minerals Management Service, the federal agency that manages offshore mineral resources, recently increased its estimates of reserves of "deep shelf" natural gas by 175 percent.

Oil production in the gulf has almost doubled in the last decade, and could reach 1.87 million barrels a day this year, according to federal estimates, even as onshore output in the United States has been declining for years. With energy prices rising, investors are piling back in: the latest round of bidding for federal offshore leases, held last week in New Orleans, attracted the largest number of bids in six years, the minerals agency said.

Skeptics in the oil patch, however, still call the Gulf of Mexico the "Dead Sea" because many earlier production forecasts proved illusory. They criticize investments in the gulf even as many of them praise investments in leases and wells in other, more exotic offshore tracts from western Africa to Kazakhstan to Brazil.

When Anadarko Petroleum installed this 12,500-ton floating platform in the waters 160 miles south of New Orleans in January, for example, it was considered a feat of engineering. But the financial markets were not impressed. Shares in Anadarko, based in Houston, fell more than 4 percent in the days after the installation as investors complained that the company was badly behind schedule. And Anadarko itself soon cut its own production forecasts, citing stormy weather.

"This is certainly not a positive development for a company aiming to restore investor confidence," John A. Bailey, an analyst at Deutsche Bank, said in a report. Another analyst, John Gerdes of Southwest Securities, downgraded Anadarko.

Even as the Gulf of Mexico's role in domestic oil supplies has grown more prominent - it accounted for 30 percent of domestic production last year, from 16 percent in 1995, and is expected to grow to 40 percent by 2010 - the area is a small part of the global market. It accounted for just 2 percent of total world production in 2003, and while production in the gulf is growing and is expected to peak at 2.4 million barrels a day around 2009 or 2010, it is expected to decline to about 2 million a day by 2020, according to the Energy Information Administration.

Gas production, which was once thought to have peaked in the early 1990's, is also expected to increase from current levels. Projections of a decline in the gulf explain in part the mammoth investments oil companies are making in other countries with large offshore reserves. In Kazakhstan, for example, a group including ENI of Italy, Exxon Mobil and Royal Dutch/Shell confirmed recently that it was proceeding with a $29 billion project to develop that nation's Kashagan field.

Still, largely because the Gulf of Mexico is so close to major refineries and pipelines in Texas and Louisiana, Robert W. Esser, a senior consultant and director at Cambridge Energy Research Associates, said he considered the region "the world's premier exploration province."

That may explain why exploration companies submitted 827 bids worth a total of $368.8 million for 557 tracts at the mineral service's auction in New Orleans last week. The most sought-after tracts were in shallow waters that could contain gas deposits deep under the continental shelf and in very deep waters where technology is allowing drillers to search for gas with greater efficiency.

The main risk of drilling in deep-shelf waters, where wells descend 15,000 feet or more beneath the sea floor, is the possibility that companies might find no gas at all after investing millions of dollars. Nexen, a Canadian energy company, jolted the industry in February when it reported that a well it had drilled with a unit of Royal Dutch/Shell had come up dry. The unproductive well, at nearly 26,000 feet the deepest ever drilled on the gulf shelf, cost the companies about $35 million.

"Folks think the Gulf of Mexico is just around the corner again when something like this dry hole pops up," said William Walker, president of Howard Weil Labouisse Friedrichs, a New Orleans investment bank. "Is the gas there, and is it there in quantities that justify large investments? Yes, but the technology needs to get better to reduce the costs and risks."

Anadarko's new platform illustrates the lengths - literally and figuratively that energy companies will have to go to if they want to tap the region's reserves. This platform, in 4,300 feet of water, is connected to the sea floor by flexible metal tendons, and it sways so much that visitors arriving by helicopter are given motion-sickness tablets before they land. Still, the platform can produce 50,000 barrels of oil a day.

Federal officials also say that incentives are needed to encourage greater investment in the gulf. The Minerals Management Service, a part of the Interior Department, took one such step in January, when it said it would suspend royalty collections on successful wells drilled in some parts of the gulf. It cited the domestic demand for natural gas, which is forecast to grow 42 percent over the next two decades.

"The gap between supply and demand for natural gas is a national problem that is not going away," Interior Secretary Gale A. Norton said in an interview. "Our incentives should help offset the tremendously high costs of exploration and production in frontier areas of the gulf."

While energy executives and analysts said that fewer royalty payments would generate more revenue from some projects, it remains to be seen whether the new policy will result in more exploration. At best, over the life of a project, the minerals agency's program would cut royalties on some producing wells by more than 10 percent, but such a reduction would matter little to companies weighing the risk of spending $20 million to $30 million to drill a well.

"The royalty relief is much ado about nothing," Mr. Esser of Cambridge Energy said.

The biggest test of whether the gulf can fulfill expectations of meeting a growing portion of the nation's demand for oil and gas is expected over the next three years, when bidding is set to begin on expiring leases for many deepwater tracts. Still, many companies are waiting to see how relatively new projects like Anadarko's platform proceed before they consider bidding.

In an unusual arrangement, Anadarko operates the platform while it is owned by two other Houston energy companies with experience in the gulf - GulfTerra and Cal Dive International. Executives at Anadarko said this arrangement freed them to focus on producing from the field directly below Marco Polo and in nearby areas that can be served by the platform, which was designed to process as much as 120,000 barrels of oil and 300 million cubic feet of natural gas a day eventually.

"This project needs to pay not only for itself but for other explorations as well," said Richard C. Pratt, Anadarko's manager of Gulf of Mexico operations, as he gained his footing shortly after arriving on Marco Polo, swallowing Dramamine tablets. Mr. Pratt, who used to manage Anadarko's operations in Algeria, said the platform's first barrels of oil should be pumped by the middle of this year - several months behind schedule.

"The attractions of the gulf are its lack of political risk compared with other parts of the world and its proximity to the U.S. market," Mr. Pratt said. "But the fundamental risks here, like the weather or the chance your investment will come up dry, are the same as anywhere else."


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