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

“This is not a gloom and doom scenario. The long-term potentialfor supply and demand of gas is very great. I just want folks torealize you can have bumps in the road,” cautioned RichardSharples, chairman of the Natural Gas Supply Association and vicepresident of marketing at Anadarko Petroleum.

The area of immediate but temporary concern for Sharples is theOuter Continental Shelf (OCS), historically the Gulf’s natural gasbreadbasket. Decline rates in the shallow water OCS have climbed inrecent years. New field discoveries are typically smaller and aretapped out more quickly, thanks in large part to technologicaladvances in drilling and production. Add to this activity declinesas producers pull back from the shadow of low prices.

“We’re not [currently] seeing enough drilling and recompletionactivity on the Shelf to maintain deliverability, and I don’tbelieve we have through 1998 either,” Sharples told NGI. “Thedeep-water is exciting. There’s going to be a lot of productionfrom the deep-water, but conceptually it’s more oil than gas.”

Despite advances in drilling technology that tripled the waterdepth record for gas and oil production to 5,376 feet in 1997,overall near-term gas production from the Gulf may suffer becauseof low 1998 gas prices due in part to the crude oil price collapse.That’s one finding reported in the Energy InformationAdministration’s (EIA) “Offshore Development and Production,”released last week. While 1998 offshore production is not expectedto show a substantial drop, the cumulative impact of decreaseddrilling and other support work during 1998 and 1999 may besubstantial going forward. A low-supply scenario suggests overalloffshore gas production in 2002 could decline by almost 30% fromthe 1997 level. A high-supply scenario using more optimisticassumptions suggests 2002 gas production could rise by 39% from1997 levels.

Over the long term, Gulf gas supplies show potential for stronggrowth, according to EIA. Recoverable gas in undiscovered fields infederal waters was estimated to be 96 Tcf at the end of 1995, withan additional 37 Tcf to be proven in already known fields. Combinedwith 29 Tcf of reserves already proved in this area, the total isequivalent to the 1997 estimate of 165 Tcf in proved reserves forthe entire United 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 notes the bulk of Gulf gas production flows fromshallow-water fields. “Thus, if shallow-water fields do notmaintain their level of production, the offshore Gulf of Mexicototal likely will decline as reductions in the much largershallow-water production rates would more than offset anticipatednew deep-water gas production. Significantly larger volumes fromthe Gulf would depend heavily on new reserves from fields in bothshallow 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, said David Pursell, vice president of upstream researchfor Houston-based investment banking firm Simmons &amp Co. However,the decline rate figure has ballooned by many estimates. Newerfields, which are typically smaller, decline more quickly,particularly as technology improves production capabilities.Pursell says he’s heard of some producers with Shelf decline ratesas high 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 noted 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.”

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

“I think in the short-term there’s a serious problem,” Sharplessaid, noting fields in Kansas’ Hugoton Basin, the Texas Panhandle,Oklahoma, and Louisiana also are in decline. These declines aretempered by increases in the Rocky Mountains and San Juan Basin,”but they don’t come close to balancing the decline we’re seeingeverywhere else.” And Sharples posits domestic gas productionpeaked 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 exactlythe same situation that we are, and that’s lack of access tocapital.. Their rig activity is very, very, low. It’s a mistake toassume that just because new pipe is built it’s going to be filledon day one.

“We went through a period where both ourselves and our friendsin Canada were able to find ways to get more gas out of the groundwith the new reserve base.” The “easy things,” such as infilldrilling, have been done, he said. “We’ve been down that road. Inorder to continue to grow the gas market, we’ve got to explore fornew reserves.”

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.

Joe Fisher, Houston

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