NGI The Weekly Gas Market Report
Deepwater discoveries by the majors in the Gulf of Mexico have attracted a lot of attention, but quietly, smaller North American independents have staked their claims in the shallower waters of the Gulf. Better technology, an infrastructure already in place, less cost and a consumer thirst for natural gas have made the shallow waters of the Gulf an enticing niche for independents wanting to make their mark.
Since August 1999, when a low of 117 rigs was working in both deep and shallow waters of the Gulf, the working count has steadily increased. The Baker Hughes Rotary Rig count for Aug. 25 in the Gulf stood at 151, up from 103 a year ago. Better than two-thirds of the rigs are in water less than 400 feet deep.
What’s driving the rise? And why are independents taking the leases? For the little guys, it couldn’t come at a better time. Leases are expiring on many of the majors’ blocks, and the big companies are moving toward deepwater drilling to hunt for oil, and slowly trimming their shallow water portfolios. For some companies, like Oklahoma City-based Devon Energy, the answer is simple.
“It’s quick cash flow and quick pay back,” said Zach Hager, Devon Energy’s senior investor relations analyst. “The shallow water is just an economical place to drill for the smaller companies.”
Devon didn’t have much of a presence in the Gulf until about a year ago. Its acquisition of PennzEnergy last year (see NGI, May 24, 1999), gave Devon an opportunity to move into the Gulf, with PennzEnergy’s portfolio of shallow water leases.
“PennzEnergy had some shallow water blocks and even a few deepwater blocks but they were capital constrained, and didn’t have much of a budget,” said Hager. “Our situation this year is that we’ve moved into the Gulf and dedicated quite a bit of resources to shallow water. We’re fortunate because we picked up a good inventory and our success so far has been good. Shallow water is paying off for us.”
Devon also picked up some Gulf blocks through its recent acquisition of Santa Fe Snyder (see NGI, May 29), which has given the company “more blocks to work with,” said Hager.
A lot of independents are aggressively bidding on U.S. Minerals and Management Service (MMS) leases. MMS reports that most of the active players in the Gulf now are independents. Of the rigs now working on the shelf, 85% are working for independents. The number of operators also has risen. In 1986, about 86 companies operated on the shelf. Today, it numbers around 140.
Some of the more aggressive smaller companies, like Forest Oil, Houston Exploration Co. and Magnum Hunter Resources Production, all picked up shallow water leases in MMS’s August lease sales. Companies like Magnum and Houston Exploration spend most of their resources on shallow water drilling and are finding more success every year.
Offshore Data Services of Houston, which tracks MMS lease bidding, reported that in the Western Gulf of Mexico sale, completed Aug. 23, nearly all of the bidding was concentrated on tracts in water less than 600 feet deep – bids were made on 129 tracts up to 200 meters deep; six between 200 and 400 meters deep; 10 on tracts 400 to 800 meters deep; and 81 on tracts 800 and more meters deep.
At least 16% of the tracts were on the inner shelf, considered the shallowest water and that with the highest probability of natural gas reserves. MMS reports that exploration and production is just as directed today at finding natural gas as it is oil.
While most of the shallow tracts have been leased before — usually by larger companies — many of the leases were dropped when natural gas prices dropped. That was, of course, before this year. Many majors still drill in shallow waters, but more and more, it’s the independents which are in charge.
A great advantage to drilling in shallow water is that smaller companies can usually do it without a partner, something usually required even by the majors in deepwater. Other factors fueling the shallow water drilling are gas depletion rates and drill rig day rates. It’s closer to land, so it’s cheaper to provide infrastructure. Just about any place a company drills will be close to a pipeline.
As important to shallow water drilling is the improved technology – specifically, the 3D seismic instruments that make finding natural gas more efficient to find. The best success rates for 3D so far have been in the shallow water, allowing companies to more quickly find gas, and find smaller targets.
“There’s just a high probability of success when you use it, and instead of it being a 1 to 8 shot, it’s more than likely going to be a 1 to 3 shot that you’ll find something with 3D,” said Hager.
Carolyn Davis, Houston
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