Operators will focus on proven areas as the deepwater push continues.

Consultants at Wood Mackenzie and Robertson are due to produce a new report in April 2004 entitled "The Future of Deepwater" examining some of the issues facing frontier explorers in deepwater. Dr. Andrew Latham of Edinburgh-based consultants Wood Mackenzie is project-managing the report and discusses some of the conclusions.

Four areas remain major deepwater plays: The Gulf of Mexico, Brazil and West Africa, with West Africa split into two principal countries, Nigeria and Angola.

"There is not a lot of similarity between Angola and Nigeria," Latham pointed out.

"The United States still accounts for the lion's share of drilling."

Other countries or regions have historically seen deepwater drilling, but interest remains modest relative to the big four areas. "Indonesia is third ranked by number of wells completed, behind Brazil and the United States."

Several factors - history, politics and geology - set Angola and Nigeria apart in terms of deep drilling. Also Latham suggested deepwater exploration in Angola is more advanced. "It has a much larger number of exploration wells drilled and deepwater successes."

Angolan deep offshore exploration has been relatively recent - since the early 1990s, primarily since the end of a civil war.

Salt structures can be important controls on the formation of hydrocarbon reservoirs there which are in Tertiary horizons, he said. "Deepwater will account for two thirds or three quarters of Angolan production by the end of this decade. The relative contribution in Nigeria is lower because there is already a huge onshore and shallow water play," Latham said. "There is much more gas in Nigeria, and Nigeria has OPEC membership which may or may not play a part in delaying projects because of production quotas."
Conversely, in the North West Atlantic deepwater drilling has been less successful with only two major discoveries Foinaven and Schiehallion. "But they are barely deepwater." Foinaven, estimated to contain 360 million bbl of oil, is in water depths between 1,300 ft to 1,968 ft (400m to 600 m) and Schiehallion, 425 million bbl and in a depth of 1,312 ft (400 m). "There has been in excess of 80 wells in deepwater West of Shetland and the reserves they have discovered is relatively modest. The success rate is low."
Another reason for concentrating on major regions is the estimated yet-to-find reserves.

Wood Mackenzie and Robertson are currently calculating yet-to-find figures for each of the major regions and early results include some huge numbers, "We already have some large yet-to-find estimates for Nigeria and Angola. I suspect we will see big numbers for the Brazilian and Gulf of Mexico regions. And that is why activity is focused on those regions."

According to the calculations made so far for the joint report, yet to find reserves offshore Nigeria alone are at least 25 billion boe - only 5 billion boe less than the estimated total remaining reserves on the United Kingdom Continental Shelf.

Other regions of the world with potential, like the Arctic Seas and the Barents Sea for example, may offer bigger deepwater challenges, due to the harsh environments they present. Latham believes such areas like the Arctic and Antarctic will only become attractive for deep drilling once environmental safeguards have been established, then regulatory barriers may be negotiated.

"It is one thing to get exploration going, and quite another to undertake a whole field development," he said. "West Africa is benign, the West of Shetlands or the United Kingdom [or Norway] is a lot more challenging and so is the Gulf of Mexico because of hurricanes."

Latham believes environmental regulations preventing deep drilling in harsh environments may be overcome in time, once technical drilling challenges are overcome: "If a company can satisfy themselves that it can be done in a safe manner the other [barriers] will follow. The first challenge is the biggest challenge."

Leaders

The new Wood Mackenzie/Robertson report will rank the top 20 international oil companies in deepwater exploration including BP, Shell, Petrobras and ExxonMobil. Shell was an early leader in deepwater drilling mostly in the Gulf of Mexico but, "Of late, BP has been catching up," said Latham. "It has had a great deal of success in the Gulf of Mexico.

"The top three are BP, Petrobras and Shell, and the next ranking is ExxonMobil which is quite a long way behind - they came to the game a bit later, certainly [later] than Shell."

ExxonMobil has made up ground though, with the Kizomba A and B developments and Kizomba C also forthcoming in Block 15 offshore Angola. But ExxonMobil's position in the Gulf of Mexico is less prominent.

Between 1999 and 2001 BP made a series of deepwater discoveries in Block 18 offshore Angola in depths between 3,936 ft and 4,920 ft (1,200 m and 1,500 m) which are now moving towards development with a single floating production, storage and offloading (FPSO) vessel as the Greater Plutonio project which was recently sanctioned by Angolan state operator Sonangol.

Shell has achieved deep drilling and development success both in the Gulf of Mexico and Nigeria. It has the Great White discovery in the Gulf of Mexico, the 600 million bbl Bonga development offshore Nigeria, and, more recently still, the Bonga South West project - also thought to contain around 600 million bbl.
"The reason behind the rankings is really strategic decisions about whether or not to go into certain areas which have turned out to be the key plays," Latham suggested. "ExxonMobil starting bidding and competing very aggressively for acreage offshore Angola in the early 1990s. Total is very strong in West Africa but almost non-existent in the Gulf of Mexico."

Other smaller companies have had marked success in deepwater, too. Unocal is regarded as operating in one of the world's most exciting plays in East Kalimantan offshore Indonesia. "...Where they have had some small to medium sized oil successes and some quite large gas oil or gas/condensate discoveries that are moving forward as a commercial developments," Latham observed. "Unocal has been drilling these slim-hole wells very cheaply."

Latham ranks offshore Indonesia as the third most important area in terms of the number of deepwater wells drilled worldwide. "But a lot of these [Unocal] wells are going down for US $3 million or $4 million."
Also he notes Unocal has exposure to Gulf of Mexico ultradeep water of 4,920 ft (1,500 m) and more, drilling even beyond 8,200 ft (2,500 m).

However much of the technical capability for drilling this deep is not coming from the operators, but drilling contractors.

Anadarko, another deepwater player, is described as having found only modest reserves with its deep operations, whereas Shell is thought to have discovered an estimated 550 million bbl of oil and 850 Bcf with Great White in the western Gulf of Mexico in May 2002 in a water depth of 9,676 ft (2,950 m). Potential development options include an FPSO possibly by 2008 but a project using an FPSO has yet to be sanctioned by the Minerals Management Service for use in the Gulf of Mexico. Unocal's nearby Trident discovery - estimated at 300 million boe, 250 million bbl of oil and 280 Bcf of gas - is thought likely to use Great White infrastructure. Shell is also thought to have made significant finds offshore Brazil.
Differentiators between the leading deepwater operators tend to be their acreage positions: "BP has withdrawn from Nigeria but is strong in Angola and the Gulf of Mexico.

"Shell is extremely strong in the Gulf of Mexico, very strong in Nigeria and relatively under-exposed to Angola and is the best placed western major in Brazil as well," The consultant suggested. "ExxonMobil is mostly in the Gulf of Mexico and Nigeria and strong in Angola and ChevronTexaco is strong in Angola, Nigeria and the Gulf of Mexico.

Value

There are economic factors which also govern where deepwater drilling takes place: Deepwater reserves in the Gulf of Mexico are deemed to have much more value than those in Brazil or West Africa.

"The post-tax value of a barrel of oil equivalent in Brazil, Angola and Nigeria is roughly $2 and in the Gulf of Mexico it is roughly $5. The consequence of that is the Gulf of Mexico accounts for half of the activity, which is disproportionate. It means that the threshold for commerciality is much lower in the Gulf of Mexico. It is measured in tens of millions of boe in the Gulf and in the hundreds in West Africa."
Also Latham said fiscal terms in the United States are "extremely attractive." Although the pre-tax value of a boe is broadly similar in each region, the post-tax value is "very different."

Most tax is levied on the development itself - exploration costs can be offset against future production revenue - certainly in the United States.

A stand alone development in Angola might need a 200 million bbl reservoir to be commercial, whereas in the Gulf of Mexico fields of between 50 and 80 million bbl are commercially viable. "In the Gulf of Mexico we have seen 10 million bbl fields being developed."

A lot of other countries also have attractive fiscal terms - Australia and the United Kingdom for example. Others do not. "In Brazil there is some irritation with duties and some aspects of taxation and the requirement for local provision of services which is all fairly political," Latham noted.

"There has been some modest success for companies since it [Brazil] opened up in 1998. There has been a lot of exploration success in the last five years but most of that has been for Petrobras, with Shell also enjoying some success." Other regions less likely to receive attention are the Lofoten Islands off Norway, the Barents Sea, Greenland, the Faeroes and the Falklands. "The prevailing perception is that these are very high risk, high cost areas to drill."

Wood Mackenzie and Robertson have been comparing exploration and success globally and looking at the future for deepwater and the investigation has suggested that deepwater exploration is still on an upward trend. Going forward, the share of reserves in new field discoveries accounted for by deepwater drilling is expected to be something like two thirds. "It has become the lion's share of success."

A "creaming curve" has been developed by the consultants, comparing the number of wells globally against amount of reserves added. Under this model, early drilling success is rewarded with large finds, but then much more drilling is required to get more success in maturing basins - effectively more drilling to get less and less. Wood Mackenzie and Robertson calculate 1,600 deepwater wells have been drilled worldwide - taking 1,312 ft (400 m) as the deepwater benchmark. These 1,600 wells have added 80 billion boe to reserves - roughly 50 million boe per well in deepwater. "The rate of reserves addition has not really changed over the entire history of deepwater exploration which is an extremely positive message. We cannot see any slowing up in the rate of discovering new reserves," Latham said.

At present, around 200 deepwater exploration wells are drilled worldwide annually. "I do not see any huge growth in that," he said. "It may carry up towards 250 but that will depend on factors which are quite hard to forecast and on exploration budgets. I think there will be a greater fraction of those wells drilled in West Africa than there has been in the past and a gentle drifting away from Gulf of Mexico."
Wood Mackenzie and Robertson Research International are due to publish their joint report "The Future of Deepwater" April 2004.

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