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Prices, Depletions Hindering GOM Supply Growth

Prices, Depletions Hindering GOM Supply Growth

While no one is ringing the alarm bell and shouting about a supply crunch, near-term Gulf of Mexico gas supplies are expected by many to suffer from depletions and diminished drilling due to low prices.

"This is not a gloom and doom scenario. The long-term potential for supply and demand of gas is very great. I just want folks to realize you can have bumps in the road," cautioned Richard Sharples, chairman of the Natural Gas Supply Association and vice president of marketing at Anadarko Petroleum.

The area of immediate but temporary concern for Sharples is the Outer Continental Shelf (OCS), historically the Gulf's natural gas breadbasket. Decline rates in the shallow water OCS have climbed in recent years. New field discoveries are typically smaller and are tapped out more quickly, thanks in large part to technological advances in drilling and production. Add to this activity declines as producers pull back from the shadow of low prices.

"We're not [currently] seeing enough drilling and recompletion activity on the Shelf to maintain deliverability, and I don't believe we have through 1998 either," Sharples told NGI. "The deep-water is exciting. There's going to be a lot of production from the deep-water, but conceptually it's more oil than gas."

Despite advances in drilling technology that tripled the water depth record for gas and oil production to 5,376 feet in 1997, overall near-term gas production from the Gulf may suffer because of low 1998 gas prices due in part to the crude oil price collapse. That's one finding reported in the Energy Information Administration's (EIA) "Offshore Development and Production," released last week. While 1998 offshore production is not expected to show a substantial drop, the cumulative impact of decreased drilling and other support work during 1998 and 1999 may be substantial going forward. A low-supply scenario suggests overall offshore gas production in 2002 could decline by almost 30% from the 1997 level. A high-supply scenario using more optimistic assumptions suggests 2002 gas production could rise by 39% from 1997 levels.

Over the long term, Gulf gas supplies show potential for strong growth, according to EIA. Recoverable gas in undiscovered fields in federal waters was estimated to be 96 Tcf at the end of 1995, with an additional 37 Tcf to be proven in already known fields. Combined with 29 Tcf of reserves already proved in this area, the total is equivalent to the 1997 estimate of 165 Tcf in proved reserves for the entire United States.

In 1997, production from federal and state waters provided about 29% of total dry gas production in the Lower 48 states, according to EIA. Of this amount, 95% came from the Outer Continental Shelf of the Gulf of Mexico alone. Overall, offshore gas production from the Gulf of Mexico is expected to be between 3.7 and 7.2 Tcf by 2002.

"The near-term outlook for natural gas production from the offshore regions of the Lower 48 states depends on a number of factors, but primarily the prevailing economics. The relatively low oil and gas prices for much of 1998 have resulted in reduced drilling in the shallow waters of the Gulf. While this is of concern in the near term, gas supplies from the Gulf over the long term undoubtedly will be very large given the extremely large estimates of recoverable resource volumes."

The report notes the bulk of Gulf gas production flows from shallow-water fields. "Thus, if shallow-water fields do not maintain their level of production, the offshore Gulf of Mexico total likely will decline as reductions in the much larger shallow-water production rates would more than offset anticipated new deep-water gas production. Significantly larger volumes from the Gulf would depend heavily on new reserves from fields in both shallow and deep waters."

The report predicts overall gas production from the Gulf will range between 10 and 20 Bcf/d by 2002. "The possibility of large additional production has important implications for markets in the Gulf Coast region." Still, there is uncertainty. Deep-water production depends on the development of drilling projects as well as pipelines. In the shallow waters there is greater pipeline infrastructure and drilling projects have shorter lead times. "Consequently, there is not a significant backlog of pending projects, and shallow-water development through 2002 will depend primarily on expected reserve additions." The report says shallow water annual reserve additions are not likely to increase significantly from historical levels due to expected declines in average field size and reduced levels of shallow-water drilling.

Others are more skeptical about Shelf production. During the 1970s and '80s, decline rates on the Shelf were running about 20% per year, said David Pursell, vice president of upstream research for Houston-based investment banking firm Simmons &amp Co. However, the decline rate figure has ballooned by many estimates. Newer fields, which are typically smaller, decline more quickly, particularly as technology improves production capabilities. Pursell says he's heard of some producers with Shelf decline rates as high as 50%. "I thought those numbers were a tad high, but as we did the [research], those were the numbers that we came up with."

Pursell noted Simmons considered Shelf declines as a composite; not all fields decline at the same rate. Still, the industry is working against historically high decline rates at a time when drilling activity has plummeted due to depressed prices. Recent thinking put forth by the industry has been that deep-water production, from massive gas fields and casinghead gas would more than offset Shelf declines.

"Where you run into some question-and I think it's hard to predict-the cycle times for deep-water projects are pretty long. The decline rates on the Shelf are pretty rapid. You're going to have to make that gas up somewhere. Maybe in the nearest term, maybe western Canada is where that happens."

Anadarko's Sharples cites a presentation chart he titled "quickening treadmill" that shows overall domestic gas production decline rates that have gone from 25% in 1987 to 41% in 1995. Right now, deep-water gas production is roughly 2 Bcf/d while gas production from the Shelf is around 12 Bcf/d, Sharples notes. Assuming a modest Shelf decline rate of about 20% means for Gulf production to stay constant, the deep-water would need to add 2.4 Bcf/d per year, an amount that currently exceeds deep-water production. "I would say the 20% [Shelf decline figure] is highly conservative. I wouldn't be surprised to see a 30-plus percent number. That's not based on any kind of scientific study. That's based on speculation.

"I think in the short-term there's a serious problem," Sharples said, noting fields in Kansas' Hugoton Basin, the Texas Panhandle, Oklahoma, and Louisiana also are in decline. These declines are tempered by increases in the Rocky Mountains and San Juan Basin, "but they don't come close to balancing the decline we're seeing everywhere else." And Sharples posits domestic gas production peaked in the fourth quarter of 1996 or the first quarter of 1997, despite record capital spending in 1997.

But what of Canada? "I think the Canadians are facing exactly the same situation that we are, and that's lack of access to capital.. Their rig activity is very, very, low. It's a mistake to assume that just because new pipe is built it's going to be filled on day one.

"We went through a period where both ourselves and our friends in Canada were able to find ways to get more gas out of the ground with the new reserve base." The "easy things," such as infill drilling, have been done, he said. "We've been down that road. In order to continue to grow the gas market, we've got to explore for new reserves."

The EIA report is the third released chapter from "Natural Gas 1998: Issues and Trends," to be published this month. The chapter may be accessed on the EIA's web site. Printed copies of the full report will be made available through the U.S. Government Printing Office and through EIA's National Energy Information Center.

Joe Fisher, Houston

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