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Deepwater Lower Tertiary Holds Prospect for Significant Reserves

It will take years to develop, but industry observers are watching what may be the most significant discovery in the Gulf of Mexico (GOM) deepwater to date. The discovery was announced last week by Chevron Corp., Devon Energy Corp. and Statoil ASA after the trio completed the deepest extended drill stem test in history, with a successful production test on the Jack No. 2 well at Walker Ridge Block 758.

The Jack well, in the emerging Lower Tertiary trend, was completed and tested in 7,000 feet of water and more than 20,000 feet under the sea floor, breaking more than a half dozen world records for test equipment pressure, depth and duration in deepwater.

Devon, a 25% stakeholder in the Jack field, estimated the entire Lower Tertiary trend, about 300 miles wide, could hold 3-15 billion bbl of crude oil and significant gas reserves as well. Chevron holds a 50% stake and is operator of the Jack prospect; Statoil holds the remaining 25% stake.

"This could not have happened in a better place," said Devon CEO Larry Nichols in a conference call. "It's close to major oil and gas markets, there is a favorable fiscal regime, and it has relatively less political risk than any place else in the world... This is an exciting development for Devon, but there is still a lot of work going forward."

Most of the significant GOM discoveries have to date been made in the Miocene Trend of the GOM because it is not as deep and is "more recent rock" than the formations in the Lower Tertiary, said Nichols. "The deeper rock has just not been penetrated. That is why this is significant, not just as an individual field, but for the entire trend. This is a very significant trend, and we don't know where the outer limits are."

According to Chevron, the tests on the Jack well broke its 2004 Tahiti well test record in the deepwater GOM (see NGI, June 24, 2002). The Jack prospect is located about 270 miles southwest of New Orleans and 175 miles offshore; it was discovered in September 2004. The Jack No. 2 well drilled to a total depth of 28,175 feet during a test in 2Q2006, which evaluated a portion of the total pay interval. During the test, the well sustained a flow rate of more that 6,000 bbl/d of crude oil, which represents about 40% of the total net pay measured in the well. Another appraisal well will be drilled in 2007.

Gary Luquette, president of Chevron North America Exploration and Production, said the test well results will allow the stakeholders "to better understand the deliverability of the emerging Lower Tertiary trend," where Chevron is the largest stakeholder.

Chevron geologists in 2005 estimated the Lower Tertiary held 3-15 billion bbl of oil. If as much as 15 billion bbl of oil were discovered in the trend, it would increase U.S. oil reserves by 50%. Current reserves stand at about 29.2 billion bbl. But Chevron and Devon believe the Lower Tertiary estimates may be conservative. "I suspect today that is on the low side," said Devon's Nichols.

"The results of the Jack test are very encouraging," said Devon's Stephen J. Hadden, senior vice president of exploration and production. "We have high confidence in the results so far." Devon's Lower Tertiary position "could more than double our current reserve base of about 2 billion equivalent barrels in the coming years."

The Lower Tertiary trend is a relatively unexplored region, with a shallow salt cover that forms a "salt canopy" across the play, said Hadden. In 2002, only a few wells had penetrated the deep rock, and few believed the Lower Tertiary sands would be productive in the deepwater. That changed in June 2002 with the Cascade discovery by Devon, BHP Billiton and Petrobras (see NGI, Aug. 21). Like the Jack well, Cascade is located in the Walker Ridge area of the central GOM.

Wood Mackenzie energy analyst Zoe Sutherland said the Lower Tertiary trend "is one of the few exploration success stories where potentially world-class finds have been made in recent years."

There have been four announced discoveries to date near the Jack prospect. Five more discoveries within the trend are about 200 miles to the west, anchored by Royal Dutch Shell's Great White field, which holds an estimated 500 MMboe of oil and natural gas, according to Wood Mackenzie. Chinook and St. Malo discoveries in the trend followed in June 2003 and October 2003 (see Daily GPI, Oct. 30, 2003).

These significant discoveries extend the Lower Tertiary more than 300 miles across several structural provinces in Alaminos Canyon through Keathley Canyon to Walker Ridge. Trend water depths range from 7,000 to 10,000 feet, with objective depths ranging between 10,000 to 30,000 feet subsea.

Most of the initial Lower Tertiary data remains confidential until more appraisal work is completed by the producers. However, the results to date are encouraging. Last month, BP plc (55% stakeholder), Anadarko Petroleum Corp. (25%) and Devon (20%) announced the first Lower Tertiary discovery in the Keathley Canyon area, a hot prospect that attracted the most interest in the Minerals Management Services' Western GOM Lease Sale 200 (see NGI, Aug. 21).

According to Anadarko, the Kaskida prospect in Keathley Canyon Block 292 encountered 800 net feet of hydrocarbon-bearing sands, the second-thickest oil zone ever found in the GOM. The well drilled in 5,860 feet of water to a total depth of 32,500 feet. The large amount of net pay indicates that Kaskida's estimated reserves could come in at the higher end of the 350-500 million bbl of oil range.

"The Kaskida discovery represents Anadarko's first test of the Lower Tertiary play as a primary target," said Bob Daniels, Anadarko's senior vice president of worldwide exploration. "Kaskida significantly enhances the prospectivity of Anadarko's acreage position. Commercializing the Lower Tertiary play could substantially elevate Anadarko's already robust deepwater Gulf of Mexico exploration and production profile."

After Chevron, Devon stands to benefit the most from its prospects in the Lower Tertiary -- but it could set up the producer for a takeover by one of the thirsty majors, analysts said last week. Chevron is the leading leaseholder in the Lower Tertiary, but Devon is No. 2 with stakes in 19 prospects. Devon has participated in four Lower Tertiary discoveries. Besides the Jack and Kaskida wells, Devon participated in the discoveries at the Cascade and St. Malo prospects.

Devon estimates that its participation in just four discoveries within the Lower Tertiary could yield 900 million boe, which would increase its 2005 year-end booked reserves by 43%, and perhaps boost the interest of acquirers even more. Buying reserves is, of course, easier than prospecting.

Devon might have appeared solid by itself in another time, but ConocoPhillips paid a premium for Burlington Resources (see NGI, Dec. 19, 2005), and Anadarko swallowed up Kerr-McGee Corp. and Western Gas Resources (see NGI, Aug. 28). The oil majors, including BP plc, ExxonMobil, Royal Dutch Shell and even partner Chevron Corp. all have plenty of cash to spend following several years of record earnings.

Regardless, drilling within the Lower Tertiary won't be an inexpensive endeavor. Pulling oil and gas out of deep rock in deep water requires technology and know how. Devon's CEO said with the data from the early discoveries, information can be extrapolated for other prospects. Cost, said Nichols, will not be a paramount concern for future wells within the trend. "You will be able to flow these wells at a commercial rate."

It will take time -- perhaps several years -- to determine whether the wells' results translate into actual oil and gas production. Chevron and its partners plan to assess its results from the Jack well, and they will determine early in 2007 whether to proceed with a third test. If those drill tests prove positive, Nichols estimated production could ramp up sometime in 2009. Some analysts don't expect to see results before 2010.

Devon's Hadden said the producers now understand a few things about the Lower Tertiary, including the rock properties, fluid data, pressure data, log information and well test data. What they remain uncertain about is the optimum well design, completion design, facilities design and "development scenario." Still, he said the "Jack test adds to our confidence not only in Jack but in other discoveries in the play." With all of the data so far, he said, "we haven't seen any major roadblocks."

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