Chevron Hits Deep Oil Strike in Gulf

By Matthew Bunk, BUSINESS WRITER

Chevron Corp., the second-largest U.S. oil company, said Tuesday it discovered oil in the deepest well ever drilled in the Gulf of Mexico. It was a joint effort with three other oil company partners.

Also Tuesday, Chevron said it lost $600 million in fourth quarter revenue because of production problems caused by this season’s destructive hurricanes. Even now, more than three months after Hurricane Katrina ravaged Gulf Coast oil facilities, oil production still lags pre-storm levels.

Chevron said it will take additional losses next quarter because of fires that disrupted production earlier this month at the Bruncefield oil depot north of London. The company owns a 40 percent share at Bruncefield.

Shares of Chevron rose on news of the deepwater oil discovery and then fell following the release of the damage estimate, ending the day up 12 cents to 56.87 in trading on the New York Stock Exchange.

The Knotty Head No. 1 underwater discovery was drilled to a total depth of 34,189 feet at a point known as the Green Canyon block about 170 miles southeast of New Orleans. Further drilling will show the extent of the discovery, Chevron said in a statement.

San Ramon-based Chevron is the largest leaseholder in the Gulf of Mexico. It owns 25 percent of the Knotty Head well. Other owners include Nexen Inc., Anadarko Petroleum Corp. and BHP Billiton, which each own a quarter share in the project.

Deepwater drilling has become more common in the Gulf of Mexico as the easier-to-reach reserves dry up. The lack of shallow deposits and advances in extraction equipment have pushed oil companies further offshore, leading to discoveries such as Knotty Head.

“Chevron’s deepwater technology is allowing us to continue to strengthen our presence in this key producing area,” said Ray Wilcox, president of Chevron’s North America Exploration and Production Co.

Deepwater oil discoveries accounted for 65 percent of the total offshore production lastyear in the Gulf of Mexico, up from 6 percent in 1985 and 16 percent in 1995, according to the Department of the Interior.

There are more than 90 known deepwater prospects in the Gulf of Mexico. The previous record for deepest well was 32,681 feet, said Guy Cantwell, a spokesman for Transocean Inc., whose Discover Spirit drillship sank the well.

Analysts at Friedman, Billings, Ramsey & Co. wrote in a note to investors that they estimate the value of the Knotty Head reserve at anywhere from $1.1 billion to $1.9 billion based on current market conditions.

Chevron, which didn’t release a value estimate, said the well has encountered a 600-foot column of oil sands, which are literally pieces of quartz sand stuck together by a tar-like substance.

It will take further drilling, the company said, to determine whether the deposit is large enough to be commercially viable. On average it takes 2 tons of oil sands to produce one barrel of synthetic crude oil, according to estimates.

An appraisal well to be drilled sideways off the original deepwater well will give a better idea of the deposit’s size. So far, the drilling has cost $140 million, a spokesman for Nexen said.

While the discovery raised the earnings expectations for the smaller partners, some analysts said it probably won’t have a significant impact on Chevron’s overall performance, simply because the company is so large.

Bloomberg news service contributed to this report.