EconSouth (Third Quarter 2008)
Plumbing the Gulf's Depths for Oil and Gas
Historically high oil prices and gradually dwindling supplies of easily accessible oil and gas deposits worldwide have inspired energy firms to renew and expand exploration and drilling in the Gulf of Mexico. Advances in technology and engineering have not only increased the chances of finding oil deposits but also made it physically possible—and more economically feasible—to plumb depths never before reached in the search for liquid gold.
As oil prices soared during 2007 and 2008, Allen Verret pondered whether the high prices would spark a new boom for Gulf of Mexico oil and gas production.
"You would assume that with a price at an all-time high there would be an all-time high in permits secured to do drilling, in work orders and other activity," said Verret, executive director of the Offshore Operators Committee, a trade group of petroleum firms that work in the Gulf.
Without question, plenty is happening in the Gulf's murky depths, some of it driven by rising fuel prices. Yet, for many reasons, high crude oil prices have not set off a mad rush to extract the Gulf's long-buried hydrocarbons, as oil and gas deposits are called in industry parlance.
"I don't think because oil hits $130 a barrel that you're going to see, all of a sudden, a surge in activity," said Jeffrey Goetz of Poten & Partners in New York, a consultancy that works with shipping and energy services firms.
The business of oil and gas production simply does not lend itself to sudden surges. Finding and pumping oil and gas from miles under the Gulf seabed takes too long—generally five years to a decade from discovery to production—and costs too much, often more than $1 billion in capital investment to develop a field.
Signs of resurgence
"Gulf of Mexico activity today is greater than most observers anticipated even six months ago," said Dean Taylor, chairman, president, and chief executive officer of New Orleans–based energy services company Tidewater Inc., in a July 31 conference call with analysts and investors.
After falling for four straight years, Gulf of Mexico oil production climbed 7 percent in 2007, to 1.34 million barrels a day (see the chart), and will likely rise in each of the next five years, according to projections from the U.S. Department of the Interior's Minerals Management Service (MMS), which regulates and serves as landlord for the Gulf's offshore drilling.
The production of natural gas—which comes from the earth in gaseous form from many of the same rigs that pump oil—also appears to be on the upswing in the Gulf, although not as sharply as oil production. The MMS estimates that the Gulf's gas production was roughly 8 billion cubic feet per day (cfpd) in 2006–07, down from a plateau of about 14 billion cfpd from 1996 through 2001. But, based on new discoveries and producers' announced plans, the MMS projects that gas production will rise slowly over the next few years to 9.8 billion cfpd in 2014.
At the end of 2007, the MMS reported that 130 projects were producing oil and gas in the deepwater Gulf of Mexico, double the number from five years earlier. Firms are plunging their diamond-tipped drill bits through ever deeper water: In 2007, a record 15 rigs were drilling for oil and gas in water depths of 5,000 feet or more.
Experts believe far more deepwater work will likely occur. At least 13 drilling rigs are currently being built and should be in use in the ultradeepwater Gulf in the next two to three years, the MMS reports. These rigs can work in water 12,000 feet and drill to seven-and-a-half miles, or 40,000 feet, under the sea floor.
These ultradeepwater rigs don't come cheap. Thunder Horse, the world's largest moored semi-submersible platform, located 150 miles southeast of New Orleans, cost $1 billion just to build the production rig alone. The total development costs, though—including not only construction but also seismic surveys, preliminary drilling, towing it to sea, and repairs of mechanical problems and hurricane damage during construction—are around $5 billion, according to several news reports.
Despite such hefty price tags to develop these massive platforms, recent sales of drilling rights indicate a long-term interest in deepwater expansion. Exploration companies in March 2008 paid $3.7 billion in winning bids for leasing rights in the deepwater Gulf, the most money raised in a single auction since the federal government began offshore leasing in 1954. Two 2007 lease sales attracted a combined $3.2 billion in winning bids.
The areas in ultradeep water are attracting the most interest and dollars. In 2007, exploration companies bid on 152 "blocks," or sections of the Gulf, in waters greater than 7,500 feet deep, according to the MMS, up from just six blocks bid on in 2006. In the 2008 auction, more than 93 percent of the total of the winning bids was spent on deepwater blocks.
Motivated to produce
In another sign that energy producers are busier in the Gulf, Tidewater reported that the day rate it charges customers to use its boats in the Gulf increased 9 percent in the second quarter of 2008 from the previous three months. Tidewater operates the world's largest fleet of boats, more than 450, serving the offshore energy industry.
Much of the demand for services like Tidewater's appears to be coming from major oil companies plumbing the Gulf's deep waters. Giants such as British Petroleum (BP), BHP Billiton, Royal Dutch Shell, Chevron, and Devon Energy began producing oil and natural gas from several new fields in the Gulf in 2007, and more projects are due to come online in 2008 and 2009.
For example, BP announced that in late 2008, after a series of delays, it will begin extracting oil and gas at Thunder Horse, which can produce up to 250,000 barrels of oil a day, nearly a fifth of the Gulf's total production in 2007.
Meanwhile, in late 2007 and the first half of 2008, Australia-based BHP Billiton began pumping oil from three deepwater fields, boosting its Gulf production more than eightfold—to 100,000-plus barrels of oil a day from an average of 12,000 a day in its 2007 fiscal year. Another major field, Tahiti, in which Chevron owns a 58 percent interest, is expected to produce its first oil in 2009. Chevron predicts that the $4.7 billion project will generate as much as 125,000 barrels of oil and 70 million cubic feet of natural gas a day.
Oil and gas prices that most experts expect to remain elevated over the longer term are motivating exploration in the Gulf and worldwide, said Eric Smith, associate director of the Entergy-Tulane Energy Institute at Tulane University in New Orleans. Global oil and gas exploration and production spending will rise 20 percent in 2008 versus 2007, according to a midyear survey of 398 energy companies by the former investment bank Lehman Bros. And the world's largest oil company, ExxonMobil, reported that capital and exploration spending was up 35 percent, to $12.5 billion, in the first half of this year.
Energy still golden in Louisiana
Many of those jobs are high paying. For instance, operators of small unmanned submarines and heavy, sophisticated cranes aboard offshore rigs typically earn more than $100,000 a year, Smith said.
Back on land, the energy services industry in Louisiana is growing. Port Fourchon in Galliano, about an hour southwest of New Orleans, serves much of the offshore oil and gas business in the Gulf. The port is in the midst of doubling its size to more than 1,500 acres.
Although most of Tidewater's revenue and profits are generated outside the United States, the New Orleans–based company also enjoys strong domestic operations. Tidewater's two shipyards in Houma, La., have produced four 220-foot platform supply vessels in the past three years and are now building two 250-foot supply ships. In the past eight years, Tidewater has purchased or built 140 vessels for about $1.6 billion, according to company reports.
McMoRan Exploration Co., also headquartered in New Orleans, has been able to reduce debt and invest in potentially rich natural gas fields in the Gulf of late, according to James Moffett and Richard Adkerson, the company's co-chairmen. McMoRan's specialty is returning to depleted fields in the shallower Gulf and drilling deeper into the seafloor for untapped reservoirs of gas.
This year, in fact, the company drilled what is billed as the deepest well ever at a field called Blackbeard, in just 70 feet of water in the Gulf. (Like most major offshore oil and gas projects, Blackbeard is a partnering venture among McMoRan and other firms, though McMoRan is the operator.) ExxonMobil gave up on Blackbeard after drilling to 30,000 feet, or 5.7 miles, under the seabed. McMoRan reported in July that it had reached 35,000 feet at Blackbeard and was going deeper in search of natural gas.
Technology gives and takes
Only a handful of AUVs are operating around the world, Smith said. The machines advance the more common technology of remotely operated vehicles (ROVs). Unlike an AUV, ROVs are generally tethered to a ship or platform and guided by an onboard operator. They maintain drilling and pumping equipment and do other submarine chores. An AUV needs no driver because internal computers store its instructions.
While economics and technology are stimulating more exploration in the Gulf, other forces are working against it. Among those are shortages of expert labor and equipment and a resulting rise in prices for equipment and materials, Smith and other experts said.
Indeed, in August the BP Web site included a help-wanted notice for offshore technicians in its Gulf of Mexico operations. In the past 20 years, the United States has not produced enough petroleum engineers to satisfy the current demand, not to mention other workers such as technicians and operators of ROVs, Smith said, noting that during sluggish times in the industry fewer people enter the field.
"The industry is so cyclical that we have a missing generation, if you will," Smith said. "We just don't have the people to do the work."
What's more, he said, most of the companies that produce the more sophisticated offshore equipment are European. Norwegian firms, particularly, took the lead in offshore technology while working in the North Sea through the 1970s, '80s, and '90s, said Smith, who held strategic planning positions at major energy companies before joining Tulane's faculty.
Marvels of engineering
Those platforms are typically built on land and towed to the drilling location, where ballast tanks filled with water hang about 80 feet underwater to stabilize the structure. Enormous chains anchor the platform to the sea bottom. Some of the newest rigs are not anchored to the bottom but include systems of pontoons and ballasts designed to keep them stationary.
These designs are critical because the most difficult engineering problem involved in the offshore drilling process is keeping a rig in place amid powerful currents and waves, according to BP. Hurricanes Katrina and Rita proved that even giant rigs can be tossed about by nature.
There is plenty more infrastructure underwater too. Modern production platforms do not simply drill and pump oil from directly below. Gas and oil wells spread over miles of sea floor are often tied back to a single platform.
For example, the Independence gas hub in the Gulf, which began production in 2007, is at the center of 10 undersea fields spread over an area as large as metropolitan Atlanta or Houston. Its longest subsea tieback, linking a well to the platform, stretches 45 miles. Most subsea wells are within 10 miles of the host platform, but the longest tieback in the world currently is 62 miles, part of the Mensa platform in the Gulf, according to a 2008 MMS report.
Drilling ships are also sometimes used in ultradeep water. Networks of propellers are programmed to keep these vessels still while they bore into the seabed.
The science of sighting
Advances in seismic techniques have increased the hit rate from 10 percent or less in early offshore days to about 50 percent for wells drilled in areas with no existing oil or gas production, according to Smith and to BP's Web site.
All this design and technology are aimed at finding big reservoirs of hydrocarbons and then tapping them in a way that will allow enough oil or gas to be extracted to make the venture profitable. Until recently, production rates (the volume at which oil can be pumped out) from the deepwater fields were not sufficient for commercial success, Smith said.
Aside from finding the oil or gas and then accessing it, bringing it out has been a huge challenge. Extraordinarily high temperatures of rock and liquids, along with crushing pressure that collapses the pipe that sucks out the oil, are among the difficulties. Reservoirs of oil or natural gas are often trapped within the pores of rocks, like a fossilized sponge, and not in large underground pockets that would be easier to drain.
Once they get oil or gas out of those rocks, producers must then tie into the Gulf's existing pipeline network, which now totals about 33,000 miles. As drilling goes farther and farther from shore, and thus from the pipelines, some companies are experimenting with sending their oil and gas to shore via tanker ships, Goetz said.
It appears that oil and gas exploration and production in the Gulf of Mexico will continue to move farther offshore and deeper under the sea floor. But there might not be a boom coming. Compared to some other oil-rich regions of the world, the Gulf's petroleum is expensive to find and produce. And while high prices make producing that petroleum more economical, they also have shown signs of reducing U.S. demand for oil and gas. It seems certain, though, that if oil and gas remain expensive, efforts will only intensify to find it and pull it from the nethermost crannies of the earth under the Gulf of Mexico.
This article was written by Charles Davidson, a staff writer for EconSouth.