Despite advances in drilling technology that tripled the waterdepth record for gas and oil production to 5,376 feet in 1997,near-term gas production may suffer because of low 1998 gas pricesdue in part to the crude oil price collapse.

That’s one finding reported in the Energy InformationAdministration’s “Offshore Development and Production,” releasedthis week. While 1998 offshore production is not expected to show asubstantial drop, the cumulative impact of decreased drilling andother support work during 1998 and 1999 may be substantial goingforward. A low-supply scenario suggests offshore gas production in2002 could decline by almost 30% from the 1997 level. A high-supplyscenario using more optimistic assumptions suggests 2002 gasproduction could rise by 39% from 1997 levels.

Over the long term, Gulf gas supplies show potential for stronggrowth. Recoverable gas in undiscovered fields in federal waterswas estimated to be 96 Tcf at the end of 1995, with an additional37 Tcf to be proven in already known fields. Combined with 29 Tcfof reserves already proved in this area, the total is equivalent tothe 1997 estimate of 165 Tcf in proved reserves for the entireUnited States.

In 1997 production from federal and state waters provided about29% of total dry gas production in the Lower 48 states, accordingto EIA. Of this amount, 95% came from the Outer Continental Shelfof the Gulf of Mexico alone. Overall, offshore gas production fromthe Gulf of Mexico is expected to be between 3.7 and 7.2 Tcf by2002.

“The near-term outlook for natural gas production from theoffshore regions of the Lower 48 states depends on a number offactors, but primarily the prevailing economics. The relatively lowoil and gas prices for much of 1998 have resulted in reduceddrilling in the shallow waters of the Gulf. While this is ofconcern in the near term, gas supplies from the Gulf over the longterm undoubtedly will be very large given the extremely largeestimates of recoverable resource volumes.”

The report says Gulf gas production trends to date show the bulkof offshore production will flow 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 reductionsin the much larger shallow-water production rates would more thanoffset anticipated new deep-water gas production. Significantlylarger volumes from the Gulf would depend heavily on new reservesfrom fields in both shallow and deep waters.”

The report predicts overall gas production from the Gulf willrange between 10 and 20 Bcf/d by 2002. “The possibility of largeadditional production has important implications for markets in theGulf Coast region.” Still, there is uncertainty. Deep-waterproduction depends on the development of drilling projects as wellas pipelines. In the shallow waters there is greater pipelineinfrastructure and drilling projects have shorter lead times.”Consequently, there is not a significant backlog of pendingprojects, and shallow-water development through 2002 will dependprimarily on expected reserve additions.” The report says shallowwater annual reserve additions are not likely to increasesignificantly from historical levels due to expected declines inaverage field size and reduced levels of shallow-water drilling.

Others are more skeptical about Shelf production. During the1970s and ’80s, decline rates on the Shelf were running about 20%per year, says David Pursell, vice president of upstream researchfor Houston-based investment banking firm Simmons & 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 some producers with Shelf decline rates ashigh as 50%. “I thought those numbers were a tad high, but as wedid the [research], those were the numbers that we came up with.”

Pursell notes Simmons considered Shelf declines as a composite;not all fields decline at the same rate. Still, the industry isworking against historically high decline rates at a time whendrilling activity has plummeted due to depressed prices. Recentthinking put forth by the industry has been that deep-waterproduction, from massive gas fields and casinghead gas would morethan offset Shelf declines.

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

The EIA report is the third released chapter from “Natural Gas1998: Issues and Trends,” to be published this month. The chaptermay be accessed on the EIA’s web site. Printed copies of the fullreport will be made available through the U.S. Government PrintingOffice and through EIA’s National Energy Information Center.

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