What's new in production

	Vol. 225 No. 1
ROBERT E. SNYDER, EXECUTIVE ENGINEERING EDITOR

More deepwater oil coming. Deepwater oil production, which averaged some 2.4 MMbpd worldwide in 2002, is expected to exceed 8 MMbpd over the next 15 years. Addressing delegates at the November Deep Offshore Technology Conference in Marseilles, France, John Westwood of energy analysts Douglas-Westwood (DW) said that he expected deep water to be the most significant source of domestic production for the US.

Quoting from his company's published energy business studies, he said over 100 MMbbl of deepwater oil has been produced to date. Brazil is presently the world leader, but its deepwater production is likely to be greatly exceeded over the next decade by that from West Africa and the US Gulf of Mexico. In 2002, Brazil and the US produced about 1 MMbpd. Brazil is expected to increase to 1.5 MMbpd, but the US could grow to 2.8 MMbpd; and West Africa, which produces about 500 Mbpd, is expected to reach about 3.9 MMbpd, if Nigeria can persuade OPEC to increase its quota.

The forecast says worldwide deepwater activity will require capital expenditure exceeding $56 billion over the next five years. This will continue to be focused in Brazil, the US and West Africa. The five-year industry shopping list for installations in water depths beyond 1,000 ft (300 m) is likely to include: 826 subsea wells, 242 surface wells, 195 templates/ manifolds, and 64 platforms (mainly floaters).

Recent deepwater drilling growth is set to continue, with the combined spend on exploration/ development/ appraisal drilling set to total $40 billion over the current five-year period. And floating production systems will continue to be the preferred method for major deepwater developments. Considering the period 2004-2008, DW's World floating production database shows that 61 floating production systems of various types are being considered for installation, and 32 of these are FPSOs.

And more deep shelf gas. This important resource may be more abundant in the deep gas, shallower water shelf area (the “deep shelf”) of the US Gulf of Mexico than originally forecast. Officials from the DOI's Minerals Management Service (MMS) announced a 175% increase in its new resource estimate. Gas, the lifeblood of many American homes and industries, accounts for 23% of all US energy consumed. The deep shelf gas lies 15,000 ft or greater below the outer continental shelf in water depths up to 656 ft, much of which is accessible from existing infrastructure.

According to MMS officials, new data, and a better understanding of the deep shelf gas potential due to recent discoveries, have led them to increase their resource estimate to up to 55 Tcf. The number is up from the previous estimate of 20 Tcf. If converted into electricity, 55 Tcf could provide a 3-year energy supply for every US home.

Specifically, MMS revised its estimate based on: better understanding of deep potential derived from: recent discoveries now producing (Anadarko's Hickory, El Paso's ST 204 and Shell's Alex); recently announced large discoveries (McMoRan's JB Mountain and Mounds Point); and new seismic data to improve greater-depth imaging and help MMS define “conceptual plays” with gas potential.

MMS called the new estimate a very hopeful sign of where additional gas supplies may be found for the American public. The DOE is predicting supply shortfalls; and it is imperative to find diverse sources of gas, even though transportation of LNG via tankers will be helpful. Overall, deep shelf gas production increased by an estimated 137 Bcf per year between 2000 and 2002. Production in 2000 was 284 Bcf, an estimated 421 Bcf was produced in 2002, and new wells coming online could help raise this. Through mid-November, 66 new deep shelf wells had been started in 2003.

Multiple Service Contracts in Mexico. In late 2003, there was bidding in Mexico for Pemex's Multiple Service Contracts (MSCs). This marks an important step on the road to freeing Mexico from its growing dependence on gas imports, as noted in a Wood Mackenzie (WM) analysis through November. Controversial within the country, because they circumvent the constitutional ban on foreign leaseholders, MSCs were born out of the fact that Mexico, a gas-rich country with huge resources, imports 25% of its gas from the US. However, the four MSCs awarded in recent weeks are unlikely to boost Mexico's gas supply to any significant degree, and the country will have to work harder if it is to substantially reduce, let alone end, its dependence on foreign imports.

Seven MSC blocks were put on offer and four were awarded through November. Of the other three, two did not attract any bids, while the bidding deadline for the third was moved to January 2004. Significantly, only one of the four blocks awarded attracted more than one offer. WM thinks the bidding round was significant from its historic nature, but it “cannot be regarded as having generated huge enthusiasm among potential bidders.” Still, four blocks were awarded to well-respected international oil companies, including: Repsol-YPF, Petrobras and Tecpetrol, hence, the bidding round was not a complete failure.

MSCs came about as a direct result of Mexico's strategic need to increase gas production to stem the rising tide of imports. In 2002, Pemex launched its Strategic Gas Plan to see gross Mexican gas production rise from 4.4 Bcfd in 2002 to 8 Bcfd in 2008 – an important component being the MSC program, through which seven MSC blocks would increase output from a current 130 MMcfd to about 1 Bcfd by 2008/9.

The real success of the MSC program should be judged against the strategic objective that it is supposed to fulfill, and in this respect the program seems to have only been partly successful. The four blocks awarded so far are only expected to provide about 500 MMcfd, half of Pemex's target. WM's own analysis forecasts that, in 2003, gross gas production will be 4.5 Bcfd, but after subtracting 1.8 Bcfd of oilfield consumption and other losses, actual net gas to market will be 2.7 Bcfd. And demand will be 3.6 Bcfd. Hence, imports will average 900 MMcfd, 25% of demand. Imports should peak at 940 MMcfd next year, then the MSCs kicking in and a slowing in gas demand growth should reduce imports.

The irony is that Mexico has ample gas reserves, to not only meet domestic demand, but even to export gas to the US. However, far more sizeable investment will be required if Mexico is ever to achieve this dream, WM speculates.