Deepwater discoveries by the majors in the Gulf of Mexico haveattracted a lot of attention, but quietly, smaller North Americanindependents have staked their claims in the shallower waters ofthe Gulf. Better technology, an infrastructure already in place,less cost and a consumer thirst for natural gas have made theshallow waters of the Gulf an enticing niche for independentswanting to make their mark.

Since August 1999, when a low of 117 rigs was working in bothdeep and shallow waters of the Gulf, the working count has steadilyincreased. The Baker Hughes Rotary Rig count for Aug. 25 in theGulf stood at 151. Better than two-thirds of the rigs are in waterless than 400 feet deep.

What’s driving the rise? And why are independents taking theleases? For the little guys, it couldn’t come at a better time.Leases are expiring on many of the majors’ blocks, and the bigcompanies are moving toward deepwater drilling to hunt for oil, andslowly 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 shallowwater is just an economical place to drill for the smallercompanies.”

Devon didn’t have much of a presence in the Gulf until about a yearago. Its acquisition of PennzEnergy last year (see Daily GPI, May 21, 1999) gave Devon an opportunity tomove into the Gulf, with PennzEnergy’s portfolio of shallow waterleases.

“PennzEnergy had some shallow water blocks and even a fewdeepwater blocks but they were capital constrained, and didn’t havemuch of a budget,” said Hager. “Our situation this year is thatwe’ve moved into the Gulf and dedicated quite a bit of resources toshallow water. We’re fortunate because we picked up a goodinventory and our success so far has been good. Shallow water ispaying off for us.”

Devon also picked up some Gulf blocks through its recentacquisition of Santa Fe Snyder (see Daily GPI, May 30), which has given the company “moreblocks to work with,” said Hager.

A lot of independents are aggressively bidding on U.S. Mineralsand Management Service (MMS) leases. MMS reports that most of theactive players in the Gulf now are independents. Of the rigs nowworking on the shelf, 85% are working for independents. The numberof operators also has risen. In 1986, about 86 companies operatedon 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, allpicked up shallow water leases in MMS’s August lease sales.Companies like Magnum and Houston Exploration spend most of theirresources on shallow water drilling and are finding more successevery year.

Offshore Data Services of Houston, which tracks MMS leasebidding, reported that in the Western Gulf of Mexico sale,completed Aug. 23, nearly all of the bidding was concentrated ontracts in water less than 600 feet deep — bids were made on 129tracts 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 moremeters deep.

At least 16% of the tracts were on the inner shelf, consideredthe shallowest water and that with the highest probability ofnatural gas reserves. MMS reports that exploration and productionis 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 droppedwhen natural gas prices dropped. That was, of course, before thisyear. 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 smallercompanies can usually do it without a partner, something usuallyrequired even by the majors in deepwater. Other factors fueling theshallow water drilling are gas depletion rates and drill rig dayrates. It’s closer to land, so it’s cheaper to provideinfrastructure. Just about any place a company drills will be closeto a pipeline.

As important to shallow water drilling is the improvedtechnology — specifically, the 3D seismic instruments that makefinding natural gas more efficient to find. The best success ratesfor 3D so far have been in the shallow water, allowing companies tomore quickly find gas, and find smaller targets.

“There’s just a high probability of success when you use it, andinstead of it being a 1 to 8 shot, it’s more than likely going tobe a 1 to 3 shot that you’ll find something with 3D,” said Hager.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.