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Shell Drills Deep in the Gulf of Mexico

Posted on: Friday, 27 October 2006, 12:00 CDT

U.S. oil production may be a sad story of decline, but not so in the Gulf of Mexico. Beginning in the 1970s, oil companies have been moving further and further out into the Gulf, bringing major amounts of oil and gas on stream.

Current oil production in the Gulf of around one million barrels per day is expected to rise to 1.8 million barrels per day by the end of this decade, as massive projects such as BP's (BP) storm-damaged Thunderhorse finally come on line, estimates Zoe Sutherland an analyst at Edinburgh-based consultants Wood Mackenzie.

Now a whole new round is beginning in ancient geological zones called the Lower Tertiary, or Paleogene, located in even deeper water. In September, Chevron (CVX) announced the first successful production test in a Lower Tertiary field called Jack. Then on Oct. 26, Shell Offshore (RDS) one-upped Chevron by saying it was giving the first green light for a multibillion-dollar commercial development in this frontier zone.

The Perdido Fields "This opens up a new play in the western Gulf of Mexico," said Russ Ford, vice-president for technology for Shell Exploration and Production in the Americas in an interview with BusinessWeek.

Shell plans to exploit three fields, known as Great White, Tobago, and Silvertip. The company estimates that production will be 130,000 barrels per day of oil equivalent, including 100,000 barrels of oil. All of these fields are located in a geological structure known as the Perdido Foldbelt under 7,500 to 10,000 feet of water. Shell won't give project costs, but the capital expenditure could be $3 billion or more, analysts say. The company has already drilled eight wells in the area, and Ford says Shell was confident that it had enough information about the fields to forgo production tests.

Very deep pockets are required because to produce the reserves, which are another 7,000 feet or more below the sea bed, Shell "is going to have to push the boundaries of technology," says Ford. The oil and gas will flow up from the wells to a massive floating platform known as a spar, which will be moored in 8,000 feet of water, making it the world's deepest spar production facility. Other new wrinkles include a "wet tree" system of valves anchored to the sea floor along with pumps that will propel the fluid up to the surface.

Partners in the Lower Tertiary One thing that will help keep costs under control is that Shell can avoid duplicate operating centers by tying multiple fields into a single facility. The company's Perdido Regional Development host will be located in the Alaminos Canyon area 200 miles South of Freeport, Tex. It will link together the three fields and others within a 30 mile radius that Shell may decide to bring on later. This center will be able to handle drilling as well as the processing of the oil and gas.

Shell will be the operator of the facility, with 35% ownership, while partners Chevron and BP have 37.5% and 27.5%, respectively. The fields are also mainly split among Shell, Chevron, and BP. Other big players in the Lower Tertiary include Devon Energy (DVN) and Brazil's Petrobras (PBR).

Won't Stop Exploring Some press reports have compared the Lower Tertiary to Alaska's giant Prudhoe Bay, which originally held about 25 billion barrels when it was first brought on line four decades ago. But the reality is somewhat different -- and certainly not as big. The Lower Tertiary is broken into relatively small fields some of which are long distances apart. The characteristics of the oil also vary from heavy, tarry stuff that will be difficult to extract from such depths to more valuable lighter grades.

Wood Mackenzie figures the Shell development is in the 400 million to 500 million barrel range, or medium sized. Sutherland says there have been 12 Lower Tertiary discoveries to date, with 2 to 3 billion barrels being a good ballpark number for the reserves. Ford says Shell's exploration continues. After all, major resources so close to the U.S. are well worth the effort and money.

Source: Business Week

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