With annual production growth rates plummeting from 50% in the late 1990s to flat in 2004, there are clear signs that the Gulf of Mexico has matured. While the recent extended well test of the Jack field in the Lower Tertiary play in the deepwater Gulf holds promise for a production resurgence, significant challenges and enormous risks still cloud the region’s future, according to Gero Farruggio, U.S. Gulf research manager for consulting firm Wood Mackenzie.

Farruggio said it’s still too early to forecast results from the play, which is being targeted from the deepwater Walker Ridge, Alaminos and Keathley Canyon areas more than 200 miles south of Louisiana. “This environment is high-risk and costly. With current high rig rates, this means it’s hard to get change from $100 million to drill a well. Any attempt to put a figure on the production forecasts on the Lower Tertiary at this point would be pure speculation. What is certain is the upstream playground in the Gulf of Mexico has just got a lot bigger.”

There have been 12 Lower Tertiary discoveries to date from 19 exploration wells. “That’s over 63% success rate and the reserves discovered per well in the Lower Tertiary are estimated at 120 million boe/well,” Farruggio said during a Internet broadcast Friday. “That’s truly world class. It’s no wonder the industry sees the Lower Tertiary as a rising star.”

Discoveries in the GOM Lower Tertiary have been from variable depths, wells drilled as shallow as 15,000 feet in some areas and as deep as 30,000 feet in others. Lower Tertiary formations were deposited from about 23-65 million years ago. Until these recent announcements, the reserve contribution of the Lower Tertiary in the Gulf was negligible. Ninety-nine percent of the GOM proved reserves were found in sediments less than 23 million years of Miocene age (Upper Tertiary) and younger, while 1% of the proved reserves are in sediment older than 65 million years (Jurassic and Cretaceous age), which are primarily in nearshore areas off Louisiana and Alabama, the Minerals Management Service (MMS) reported.

It was the recent extended well test of the Jack field by Chevron Corp., Devon Energy Corp. and Statoil ASA at Walker Ridge Block 758 that “captured the imagination of many,” Farruggio noted (see Daily GPI, Sept. 6). The Jack well, in the emerging Lower Tertiary trend, was completed and tested in 7,000 feet of water and more than 20,000 feet under the sea floor, breaking more than a half-dozen world records for test equipment pressure, depth and duration in deepwater. During the test, the well sustained a flow rate of more that 6,000 b/d of crude oil, which represents about 40% of the total net pay measured in the well. Another appraisal well will be drilled in 2007.

“The Jack production test was a positive first indication, but it has far from proven the reservoirs for the entire play,” said Farruggio. “A cloud of uncertainty still hangs over the commerciality of the Lower Tertiary. What we’ll be looking for is an indication of the sustainability of production, decline rates and pressure drawdown over time.” He said geologic factors that lead to low or rapidly declining production rates could “have significant economic implications.”

MMS officials also noted that the widespread industry interest in the Jack well test and the discovery by BP on its Kaskida prospect in 5,860 feet of water preceded heavy bidding activity at MMS’s Western Gulf Sale 200 in August. At that sale, 82 tracts received bids in the Keathley Canyon area. In addition, the highest bid at the sale was offered by BP at $21 million for Block 58 in Keathley Canyon, Petrobras bid $12.8 million for Block 59 there, and Shell bid $6.0 million for Block 56. These bids further illustrate industry’s high interest in this area and the potential for continued offshore production growth.

Devon, a 25% stakeholder in the Jack field, estimated the entire Lower Tertiary trend, about 300 miles wide, could hold 3-15 billion bbl of crude oil and significant gas reserves as well. Chevron holds a 50% stake and is operator of the Jack prospect; Statoil holds the remaining 25% stake.

“BP and Chevron have both capitalized on first mover advantage, discovering sizable reserves, and closely followed by Devon, Petrobras, Shell and Anadarko,” said Farruggio.

But he noted that many of the current licenses on the acreage are due to expire over the next two years. “This is an interesting dynamic that will influence the level of exploration activity that we can expect in the near future. Clearly it will be impossible to drill all of the prospects during this time. Rig availability will surely prove be a problem and a bottleneck. Access to such equipment will be valued as much of the acreage itself. We could well see farm-ins to ensure that some of these prospects are tested. What is certain is that the biggest structures will be prioritized, and given the excellent success rate to date, this could lead us to have high expectations for each well.”

Farruggio said the Cascade field, which was one of the first discoveries in the play but not considered to be the largest, is likely to be the first to be developed near the end of the decade.

The importance of the deepwater extension of the Lower Tertiary trend, which has long been recognized as a major petroleum resource throughout the Texas and southwestern Louisiana area, is the significant increase in oil and gas reserves it could provide for decades to come, the MMS said.

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