THE DEEP SHELF

The Deep Shelf play gathering momentum in the Gulf of Mexico sounds like an oxymoron. It isn't. Someone joked it is just a fancy term to create a new play, invented by marketers to boost seismic data sales. It's more than that. It is a revival for shallow state and federal Gulf waters; "shallow" is defined as water less than 600 feet deep. The revival is welcomed since production declines fast there and the average-size discovery has been getting smaller. In this new frontier in an old place, only 5% of the wells have been drilled below 15,000 feet. "This August marks the 50th anniversary of the Outer Continental Shelf Act, a bill passed with the idea of making the shelf an opportunity. Here we are looking at it again," Chris Oynes, regional director of the Minerals Management Service, told attendees at a conference, "Back to the Shelf," held in Houston in March. "We realized a couple years ago that gas production from shallow water was declining. It was down to 3.9 trillion cubic feet (Tcf) annually in 2000 from 4.8 Tcf in 1996. That has several policy implications, as we know demand is on the incline." The Deep Shelf is not one geologic formation or area, but represents many complex opportunities stretching from Texas state waters to Mobile Bay off Alabama. It usually refers to Miocene zones found below 15,000 feet. Generally the reservoir quality in the central Gulf is better than in the western Gulf, and wells there usually go deeper. Two recent events highlight how much the Deep Shelf is becoming a distinct trend. First, the MMS Central Gulf Sale 185 in mid-March drew bids on 561 exploration blocks, and two-thirds of these are in shallow water. Many of the winning bidders emphasized their intent to pursue deep-gas plays on these blocks. Second, a week after the sale, U.S. Interior Secretary Gale Norton announced further incentives for Deep Shelf gas wells. She proposed that the royalty relief now given to deep wells (greater than 15,000 feet) in shallow water on new leases since March 2001, also be granted to the first new well drilled below 15,000 feet on any existing Shelf lease. This is good news for hundreds of companies holding the 2,400 existing Gulf leases predating 2001. Royalty-payment obligations will be suspended on the first 15 billion cubic feet (Bcf) of production from a well drilled between 15,000 and 18,000 feet, or on the first 25 Bcf from a well drilled 18,000 feet or deeper. A dry-hole incentive to encourage activity and offset deeper risks is allowed on 5 Bcf, applied to future production of gas or oil from any drilling depth on a lease, if there is an unsuccessful well drilled 18,000 feet or deeper. These incentives apply only if natural gas averages less than $5 per thousand cubic feet as adjusted for inflation. "A typical program on deep wells could see finding and development costs decline about 15% and project rates of return may improve about 6%, from about 14% to 20%," says analyst Jeffrey L. Mobley of Raymond James & Associates in Houston. Even so, he says, access to more Rocky Mountain acreage and offshore areas now under drilling moratoria would increase U.S. gas supply more than the Deep Shelf will. MMS estimates that undiscovered gas resources in this "new" frontier may be as much as 10- to 20 Tcf, with the royalty relief adding about 2.4 Tcf of incremental supply that is technically recoverable. "The Deep Shelf may reverse the gas production decline for the next 10 years or so, but it will not cause a major increase. It can play a role in near-term supply," says Oynes. "No one drills a well just for the royalty relief," says Magnum Hunter Resources senior vice president of exploration Chuck Erwin, echoing many comments from others. "You've got to believe you will find something better, but if not, at least the relief helps you recover some of your cost. The targets and production rates are bigger on the Deep Shelf, and that's why we are involved." Somewhat ironically, the majors, which for the most part abandoned the shelf for deep water, are returning to take a look at this gas play. Many have joint exploration programs set up with independents-Shell with Nexen and BP with Newfield Exploration, for example. Marathon is said to be building a new Deep Shelf team. ChevronTexaco is a big player. ExxonMobil is looking. Ken Butler, vice president of Unocal's Gulf Region, says, "This is a natural extension for [the industry and Unocal], in terms of where technology is going. It's in an area where we have a good probability of finding additional material hydrocarbons. Deep wells have been drilled in the past that are attractive and are analogs to what we're going after. It's not that two years ago we broke through a magic barrier. It's just that industry began to think about this as a concentrated trend. It is not new, but it will be important going forward." Some operators complain that it is increasingly difficult to find partners willing to commit time and money in a play this expensive. "They say they want to see more data, they want to study the prospect themselves," says one. "Or they don't trust these high gas prices. It's hard to find a partner with the same philosophy, and even if you do, they may not be on the same time table, or they want a greater percentage than you want to give up." Nevertheless, at press time about 43 Deep Shelf wells had been drilled in the Gulf year to date, with 15 completed. Several new seismic surveys are also under way. The Deep Shelf play may not be a new idea, but it is happening now out of necessity, says Erwin. "The Gulf is maturing, so if you want to find something of significance without going into deep water, this is it." Attractive big wells Deep Shelf leads have been around for some time. A sterling example: the Alex Field in the Corsair Trend, located less than 100 miles southwest of Galveston in 135 feet of water. More than 400 shallow wells have been drilled there since 1968. In 1999, Shell E&P Co. with 85% and Spinnaker Exploration with 15% drilled a blockbuster at Brazos Block A-19 in the former Picaroon Field, now called Alex. They dusted off a concept first proposed by Shell geologist Billy Frank in 1978. It was based on 2-D data, according to Robert Rooney, Shell staff geologist for near-field exploration and development in New Orleans, who spoke at the Deep Shelf conference. The discovery, Shell's #2 (JC-1) went to 18,760 feet and found 132 feet of gross sand with average porosity of 27%. It came onstream flowing 87 million cubic feet per day and made 2 Bcf of gas before a mechanical failure shut it in. A second well, the Alex JD-1, was drilled 200 feet away and brought onstream in March 2002 at high flows. It was tested again in February 2003 at a hefty 117.5 million cubic feet a day. In less than a year it has produced 32 Bcf of gas. While some of these wells are not deep enough to qualify for royalty relief, that hardly matters. Alex Field is producing 120 million cubic feet a day. "We rejuvenated Picaroon by recognizing the merits of the deep Alex prospect and acquiring new 3-D data, which allowed the wellbore to avoid the overlying depleted sands," says Rooney. Also in the field, the A20 #A2 has produced 87 Bcf of sweet gas from 11,100 feet and the #D5 has produced more than 50 Bcf. More recently, El Paso Production Co., a very active Deep Shelf explorer, has apparently hit big. With carried partner McMoRan Exploration Co., it drilled the JB Mountain wildcat on South Marsh Island 223 in 10 feet of water. The well has a measured depth of 22,000 feet. JB Mountain tested 14 million a day but was constrained by the equipment available. It is rumored to hold at least 750 billion cubic feet of gas. A McMoRan press release indicates it could produce up to 61 million cubic feet of gas per day, with first production expected this year. Neither company would talk about it at press time. The El Paso-McMoRan program calls for four wells, with El Paso funding all exploration and owning 100% until aggregate production reaches 100 billion cubic feet of gas equivalent (Bcfe), after which McMoRan owns 50%. This could be a dramatic follow-up to El Paso's South Timbalier 204 Field, which was brought onstream in 2001. El Paso says it holds 400 billion cubic feet of proved gas reserves, and perhaps as much as 600 Bcf. Wells were drilled to 19,000 feet. At one time, one of them, the B-6, was producing 118 million cubic feet a day, making it one of the best gas wells in the Gulf of Mexico in years. The $16-million hole paid for itself in two months. And, on West Cameron 45, 46 and 47, several wells drilled by El Paso and ChevronTexaco in 2002 also caught the industry's attention. From two wells, they have 250 Bcf. These kinds of results are motivating companies to return to the shelf with new technology for old ideas. "In 1983 when I was with Sohio, we were in West Cam 46-47. We knew then we should look at the Miocene, but we were data-constrained," recalls Lance Moore, Gryphon Exploration Co. central Gulf exploration manager. "So the idea has been around but we had to wait for the technology and data to catch up with us. We had no amplitudes then. Most of us grew up in the bright-spot era but we have to leave old ideas behind and step up to a new level of prospects based on new ideas. "Some of the bigger companies with deep pockets are looking at deeper targets. I think 20,000 feet is going to be common soon and 25,000 is not out of reach." No wonder at Sale 185, the most money bid on a single block was in shallow water. Dallas-based Hunt Petroleum and partners paid $8.2 million for South Marsh Island 109, an area where several companies are pursuing Deep Shelf leads. "With the non-geopressured or conventional bright spot shelf game pretty much done, what are the companies seeing? Deep Shelf or ultradeep shelf possibilities," says John Herrlin, an E&P analyst with Merrill Lynch. "It [offers] 25% to 30% probability of success...with 30-Bcf average prospect realizations." The reservoirs better be good because this play is expensive. Dry-hole costs are $6- to $10 million. A completion can cost that much again because of high pressures and a bottomhole temperature hotter than 350 degrees Fahrenheit, which tests the outer limits of most standard downhole tools. Strong pressure variations occur laterally and vertically as the well goes down, passing through high-pressure zones, then back to lower-pressure ones where production is depleted, and back again. "The biggest challenge relates to adequately assessing the risk of your prospects, based on images that are hard to see. This is subtle, deep and expensive. Because the wells are expensive, partnering appropriately and deciding how much working interest you want to keep are important," says Newfield's Elliot Pew, senior vice president of exploration. "It's important to focus on the regional context, map a wide area and high-grade your leads." Here's a snapshot of what some leading Deep Shelf players are doing. Unocal Corp. Unocal is making the Deep Shelf a priority, allocating 40% of its Gulf of Mexico spending, roughly equal to its deepwater budget. "We've been in the Gulf for 50 years and we have some of the oldest producing fields there. But as we looked around for what's next for long-term viability of this piece of countryside, the Deep Shelf came up," says Butler. After two years of intense study, the company began to zero in, drilling eight tests in 2002 and making good wells out of four of those. It will test at least 12 gross wells this year, most Unocal-operated. "Some of our tests are in and around existing fields, such as our Vermilion 39 Complex," says Butler. "We are basically going deeper on the same structures as a field that's produced for 50 years, but this is a true wildcat. Since it is deep and expensive it has to be carefully planned and we have to overcome the deep imaging and processing challenges. Being in a developed area doesn't lessen the risk." Butler emphasizes that this play takes work. Companies need to get back to "thoughtful, difficult" basics: regional mapping, understanding sand distribution and traps, charge and reservoir, pore pressures and rock properties. That's because direct hydrocarbon indicators such as amplitude anomalies, used so commonly in the 1990s, that "glowed and were easy to see" aren't working as well in this deeper play. Pioneer Natural Resources The Deep Shelf has attracted interest from as far away as Perth, Australia. Woodside Energy USA, a unit of Woodside Energy Ltd., recently formed a two-year joint exploration program with Dallas-based Pioneer Natural Resources to focus on the shallow-water Gulf. Woodside, Australia's largest independent by market cap, had been looking for cost-effective ways to expand its reach and make the Gulf one of its four international focus areas. It is building a balanced portfolio of shallow and deepwater opportunities in the Gulf. It took a 50% interest in 47 blocks leased and operated by Pioneer, covering eight prospects and 19 leads. Five wells will be drilled this year-the first was to spud in March-and three in 2004. Most of the wells will target gas plays below 15,000 feet. Says Pioneer's executive vice president of worldwide exploration, Chris Cheatwood: "There are many plays on the Deep Shelf. We focus on those offshore Texas as those leases were available back in 1998 when we started looking at this. We are using long-offset AVO analysis. But our plays may not be the same thing others are doing in the central Gulf." The prospects Pioneer looks for are generally 15,000 to 20,000 feet deep and 50- to 250 Bcf. It had a few successes in the late 1990s, then stepped back to evaluate the play and wait for drilling costs, which were rising at that time, to come back down. "It's a different ball game deeper," says Cheatwood. "The calibration is so poor you have to drill several wells to have some well control. It is not a 70%-chance play. It may be more on the order of 25%. We run our economics on $3.50 gas. It doesn't have to be $5." Spinnaker Exploration Placing more emphasis on the Deep Shelf than any of its peer group, the province accounts for more than 80% of Houston-based Spinnaker Exploration's Shelf production. Even as it moves into deep water as well, Spinnaker's Deep Shelf plans will command about half its capital spending. Its minimum prospect target is 30- to 35 Bcfe, but its average is around 75 Bcfe. "We've drilled more than 70 Deep Shelf wells and opened three trends," says chief executive officer Roger Jarvis. "We own 650,000 gross acres and just added 12 blocks from Sale 185-all Deep Shelf prospects. We'll drill 10 to 12 of these wells by year-end." The company's latest success is Resolute Field on High Island 197. It is flowing about 80 million cubic feet per day from four wells. Westport Resources and Continental Land & Fur Co. are the partners. The pays are between 14,000 and 17,000 feet, but one well went to 20,000 feet. The Deep Shelf is a play driven by overcoming seismic imaging problems. It requires attribute analysis, and lots of seismic processing and well control, Jarvis says. This is not the bright-spot type of play that was so prolific-and relatively easy to analyze-that dominated Gulf action in the 1990s. "It's like reading with Coke bottles instead of glasses. It is difficult to image, to predict the pore pressures. We all started looking for big structural prospects deep in the section, but they don't express themselves the same as they do in shallow-water, conventional plays. The seismic attributes can be so different. "We evolved from hoping to see in the Deep Shelf what we see in shallow plays, to needing to reprocess the seismic sequence and do intense attribute analysis." While many operators note that in the shallow water, existing infrastructure facilitates bringing the wells on sooner than in deep water, Jarvis is a bit skeptical. "Alex Field [which Spinnaker has with Shell] produced 110 million a day at 11,000 psi pressure. You aren't going to put that kind of production through an existing facility not built for that production capacity, you have to set a new platform. Your proximity to pipelines is an advantage, but this idea of using shelf infrastructure-it's not that easy." Magnum Hunter Resources About a third of Irving, Texas-based Magnum Hunter Resources Inc.'s wells are Deep Shelf targets, with four such wells planned for this year. It has acquired many offshore blocks at the last two Central Gulf lease sales with Deep Shelf targets in mind. While the company is enthusiastic, it also declares the play difficult technically, expensive, and not a panacea for overall production declines. "You have the same stratigraphic complexities that are present in deepwater reservoirs but with a much more complex structural history," explains geologist Erwin. "We participated in a well last year that had the tightest sand I've ever seen in the Gulf of Mexico. It was more like what you'd see onshore. The structure had gone through compaction and dewatering. Added to the geological risk is the chance of large cost overruns when drilling wells at these depths and pressures." At press time the company was completing a well that was drilled 19,000 feet on Eugene Island 299. Remington Oil And Gas is the operator. Also with the latter partner, the company tested a Deep Shelf well in February at 20 million cubic feet and 870 barrels of oil per day, on South Marsh Island 24 and is drilling a 19,000-foot test in South Timbalier 109. Newfield Exploration As it has grown, Houston-based Newfield Exploration has added higher-risk, higher-reward prospects to its portfolio. It did so again at Sale 185 when it won 51 blocks. Of those, six are traditional shelf prospects, nine are Deep Shelf and 33 are ultradeep shelf blocks below salt. More than half the high bids were on ultradeep opportunities under an exploration agreement it has with BHP Billiton of Melbourne, Australia. "As we looked around the Gulf for the best trends to be in, we liked the Deep Shelf. But we found we needed a new approach," says Pew. "The amplitudes are very subtle, so it's important to calibrate them to the rock properties. We've made quite an investment in prestack depth migration data and we hired a rock property-AVO specialist and a seismic imaging specialist. In these deeper intervals it is harder to see good images." This year, out of 25 to 35 wells planned on the shelf, six to eight are Deep Shelf plays. The unrisked potential could be 320 Bcf. "We are five out of eight on the Deep Shelf so far, and our finding and development costs have been good," says Pew. "The average prospect size is 35 Bcf and the finding and development costs are averaging $1.35 per thousand cubic feet equivalent. The average depth of these wells has been 16,750 feet, all drilled in 30 to 150 feet of water." The company's first success was West Cameron 293-294 in 2001. Today three wells produce and the field holds 60- to 70 Bcfe. In addition to these wells, Newfield is maturing new prospects in the so-called ultradeep shelf, where the well would be drilled below a salt structure to 25,000 feet or deeper. (Shell and partner Nexen also are reportedly pursuing this type of well.) None have yet been drilled this deep-at least, not that any company will confirm. It underscores the challenge of finding new reserves, says Pew. Companies always look for what's next, he says. "Lots of ideas will fall by the wayside, but then again, one may work." Also, on 27 shelf blocks off Louisiana, in water up to 250 feet, Newfield and BP Exploration & Production have formed a joint exploration agreement they call the Treasure Island Project, an ultradeep shelf concept generated by EEX Corp. Newfield inherited the deal when it acquired EEX last fall. This is separate from its Deep Shelf play. Gryphon Exploration Privately held Gryphon Exploration Co., Houston, is analyzing 3-D seismic data covering 2,300 blocks from Texas to Louisiana, a large database for a company its size. Its portfolio is balanced between traditional shallow and Deep Shelf prospects, but most of its new prospects are below 15,000 feet. "We have 18 Deep Shelf prospects-all in less than 75 feet of water-and 21 traditional shelf ones," says president and chief executive Mike Harvey. The company plans to drill six Deep Shelf wells this year. Gryphon, formed in 2000 to focus on offshore exploration, uses techniques such as Class 2 AVO (amplitude versus offset) and prestack time-migration data, seeking reserves not readily visible on conventional 3-D data. "We think the deepwater drilling experience has shown that the deepwater sands concepts extend back to the Shelf, more than previously thought," says Ron Krenzke, executive vice president and co-founder. "We have a new depositional model and prestack helps the industry identify those targets more clearly. We're looking at developments of 100- to 200 Bcfe, so the economics are just outstanding." "If a well costs $10 million, is completed for another $4 million and production facilities cost $3 million, that totals $17 million. A minimum 6 Bcfe find would pay out, although Gryphon would never drill a well for that few reserves," Harvey says. If a 50-Bcf prospect has a one-in-three chance, that's 16.5 Bcf of risked reserves against $17 million, for a finding cost of $1 per thousand cubic feet of gas-$1.35 including allocated geological and geophysical costs. "That works," Krenzke says. The overall success rate for Deep Shelf wells is less than the 60% to 70% operators enjoy for shallow wells, but the rewards for even a one-in-five shot are great enough to make the greater risk worth it. And like many, he cites the law of diminishing returns on shallow wells. "We have a salt dome prospect on Eugene Island 111 that people were basically fighting over after we did a proprietary prestack depth migration on it. It could be 500 Bcfe.That's not guaranteed, but it is the style of prospect we are looking for: deep and big." Newfield has 50% of the well, which is to go to 15,000 feet. Many other players are studying the Deep Shelf. Anadarko Petroleum says 40% of its $98-million Gulf of Mexico exploration outlays this year will go to three Deep Shelf wildcats. At press time it was drilling the first on High Island 129. Its South Marsh Island 208 Field was producing 113 million a day last November. Privately held Walter Oil & Gas has drilled some wells. Even Bill Howell, an independent geologist who typically generates a prospect and turns it over to an operator to drill, is taking a look. This year he is pursuing one Deep Shelf well in the Brazos area off Texas. He thinks it could be in the 100-Bcfe range. The E&P subsidiary of GlobalSantaFe Corp. had an option on it at press time. More operators hope to find success in this play in order to replace reserves. "This is risky geology and risky mechanically. It is not boring," sums up Unocal's Butler of the Deep Shelf. "But the size of the prize merits the difficulties."