Oil Exploration and Production: The Gulf Widens

Written by Elaine Reynolds, Oil Analyst, Edison Investment Research

In a world where National Oil Companies control access to much of the prolific petroleum regions of the world, and with returns squeezed until the pips squeak, where can an oil major go these days to replace reserves and grow production? The answer is the Gulf of Mexico, which continues to throw up surprises, with new plays and large discoveries featuring regularly on the news wires. In particular, the emerging Lower Tertiary play has generated interest, with Petrobras expected to bring its Cascade and Chinook projects on-stream later this year, Chevron moving ahead with its Jack discovery and BP (LON:BP.) announcing its three billion barrel Tiber prospect barely six months ago.

So the commencement of production from the Shell operated Perdido hub in March is significant, as it is the first to do so from this new play in a technically challenging area. Floating in almost 8000ft of water and designed to produce 100,000 bopd and 200 mmscfd, the ultra deep water production technologies that have made Perdido possible were not available as recently as 10 years ago.

The performance of the hub will be watched closely by an industry determined to keep innovating its way to growth, and a string of projects will learn from Perdido’s successes and mistakes. For the majors, operating in a region where technology is king plays to their strengths, and this, combined with the predictable fiscal regime of the US and easy access to markets, ensures continuing investment on a large scale. Indeed, Congress has bent over backwards to accommodate the oil companies, with a 1995 bill that gives royalty relief for deep water exploration estimated to add up to $53 billion in future royalties.

And now prospects are opening up in the relatively underexplored eastern part of the Gulf of Mexico, with BPs Tiber and, most recently, Shell’s Appomatox discovery, underpinning the belief that there remains significant reserves to be discovered in what many thought was a mature province. Even President Barack Obama wants more of it, saying in March he wants Congress to lift a drilling ban in the eastern Gulf of Mexico in a move to unearth more home-grown oil and gas. With the US Minerals Management Service estimating up to 41.5 billion barrels of undiscovered, recoverable oil and 207 trillion cubic feet of undiscovered natural gas in the area, it’s little wonder that the majors love the Gulf of Mexico.

Postscript: As this article went to press, it is likely that the aftermath of the explosion on the Deepwater Horizon rig will have lasting ramifications for the industry in the Gulf. In the first instance, the potential environmental impact on Louisiana’s coastline will put pressure on Obama to keep the drilling ban in place in the eastern Gulf of Mexico. In addition, once the cause of the explosion is understood, the industry will also need to review its operational procedures, and any resulting changes will most likely make drilling in the Gulf even more costly and challenging than before.

About Elaine Reynolds: Elaine is an oil analyst at Edison Investment Research. Prior to joining Edison she had fourteen years experience as a petroleum engineer with Texaco in the North Sea and Shell in Oman and The Netherlands. Edison is Europe’s leading independent investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 50 includes over 30 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 250 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison’s research is read by every major institutional investor in the UK, as well as by the private client broker and international investor communities: www.edisoninvestmentresearch.co.uk