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Record Oil Prices, Strong Energy Demand Highlight 2005

Posted on: Thursday, 16 February 2006, 09:01 CST

By Fagano, Susanne

It has been an amazing, recordbreaking year in the domestic oil and gas market. Crude prices reached a record $70.85 a barrel in late August. There has been historically high global energy demand. And, two devastating hurricanes within weeks of each other caused widespread damage to production platforms, drilling rigs and infrastructure in the Gulf of Mexico. Exploration and production spending increased during the year by an estimated 12 to 14 percent, with all indications pointing to continued doubledigit hikes in capital spending budgets in 2006.

Drillers are upbeat as the mobile rig market exceeds expectations. In midDecember, around 130 rigs were under charter in the U.S. gulf. For rig owners, business conditions are the best in at least two decades. More than three dozen offshore rigs are under construction worldwide, and year-end rig utilization was close to 90 percent, with sky-high commodity prices close to $60 per barrel for oil and $14 per million British thermal units for natural gas, good times have returned to the offshore marketplace. Finding and developing reserves is a top priority in deepwater, ultra-deepwater and deep shelf wells greater than 25,000 feet.

The tightening rig market has prompted one driller, Houston- based Rowan Cos., to order, in mid-December, two jackup rigs that will cost approximately $165 million each. The rigs will be capable of drilling in up to 400 feet of water and will replace units lost in recent hurricanes. To further illustrate the strong demand for rigs, several energy companies joined together to lock-in a new rig for future projects. The group entered an accord with Ensco International to share a semi-submersible to drill in 8,500 feet of water. The rig will be delivered in 2008. Partners in the arrangement include Anadarko Petroleum and KerrMcGee. One international oil company, Brazil's Petrobras, placed a contract to charter five Transocean Inc. drillships and semis. The contracts are expected to generate close to $985 million in revenue for Transocean over several years. The deal ensures Petrobras has suitable rigs for its deepwater program.

The energy industry continues the long recovery from hurricanes Katrina and Rita. The catastrophic storms left a wide path of destruction and forced the temporary shut-in of most oil and gas production as they swept through the gulf in late summer. The U.S. Minerals Management Service (MMS) reported that 109 older platforms were destroyed and at least another 50 platforms suffered significant damage to topside facilities. Shell Offshore's Mars and Ursa tension-leg platforms, which are tethered to the seafloor in water depths exceeding 2,700 feet, were among those reporting damage. Several rigs broke from moorings and drifted miles from their drilling locations. One jackup washed ashore on Dauphin Island, offshore Alabama. The hurricanes quickly boosted demand for inspection and repair services.

Highlights of 2005

Aside from headlines generated by Katrina and Rita, several new projects highlighted activity. Husky Energy's White Rose field off the Canadian east coast flowed its first crude. The SeaRose floating production/storage/ offloading vessel is stationed on the field. Peak production should reach 100,000 barrels per day in the first half of 2006. White Rose oil is transported to onshore markets in two new doublehulled shuttle tankers. Initial oil flow also began at ExxonMobil's remote Sakhalin-1 development, offshore Sakhalin Island in the Russian Far East.

High commodity prices prompted U.S. energy companies to pick up additional leases in the Gulf of Mexico. The firms offered near- record bonus bids totaling about $540 million for rights to drill on about 440 tracts in the central and eastern gulf. oil companies also paid another $285 million to lease 345 blocks in the western gulf offshore Texas. Drilling could likely begin on many of these tracts this year. Several oil and gas companies expressed strong interest in new leasing opportunities in Alaska's Beaufort Sea. In August, the MMS issued 117 leases to Shell Offshore, ConocoPhillips and Armstrong Oil.

A string of new discoveries was reported in North America. ExxonMobil confirmed a new oil find in the Hibernia field offshore Newfoundland, Canada. Anadarko Petroleum discovered oil in its deepwater Genghis Khan well offshore Louisiana.

The Crystal Ball for 2006

There are encouraging signs that the next 12 months will see robust exploration and production. Rig demand is expected to remain strong, with many operators proceeding with deepwater drilling and development programs in the Gulf of Mexico and offshore Brazil and West Africa. There is also intense interest in shallow-water and deep gas prospects. Repair and maintenance of damaged equipment and infrastructure from last year's hurricanes will continue. Challenges lie ahead as energy companies search for more reserves to meet spiraling global energy demand and capitalize on high oil and natural gas prices.

The MMS expects to report to the U.S. Congress early this year in a comprehensive inventory of oil and natural gas resources on the Outer Continental Shelf, as required by the 2005 Energy Policy Act.

The legislation encourages increased domestic production and granted the MMS new authority for federal offshore alternate energy uses. The act will also worked to increase incentives for domestic energy production.

Dozens of new field plans are now taking shape in the U.S. gulf. One of the projects is BP's King field, in about 5,550 feet of water offshore Louisiana.

Chevron is investing $900 million in its new Blind Faith prospect in Mississippi Canyon, plus another $1.8 billion in the Tahiti field. /st/

By Susanne Pagano

Houston, Texas

Copyright Compass Publications, Inc. Jan 2006

Source: Sea Technology

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