?Independents have always had to think outside the box. In the Gulf of Mexico, that means going after opportunities wherever they present themselves.


For W&T Offshore Inc. founder and chief executive Tracy W. Krohn, the deep shelf is tempting. It’s on the shelf, that gently sloping table of continental crust in waters less than 600 feet deep, where a handful of intrepid independents are pushing into reservoirs found at depths below 17,000 feet. They search for plays that 10 years ago were difficult or impossibly uneconomic to develop.

View video interview with Tracy Krohn


The interest is there and remains high.


This was evident when the Western Gulf of Mexico Lease Sale 207, held August 20 in New Orleans, attracted $487.3 million in high bids. The sale, conducted by the federal Minerals Management Service (MMS), saw 53 companies submit 423 bids on 319 tracts comprising more than 1.8 million acres offshore Texas—46% of them being tracts in water less than 600 feet deep.


The shelf has been the keystone of Gulf of Mexico production for decades. The MMS estimates the shelf has proved reserves of 18.96 billion barrels of oil and 178.4 trillion cubic feet (Tcf) of gas, from 1,172 proved fields. The number includes 34 proved fields added during 2004 and 262 proved, expired, depleted fields.


Gas may be more abundant in the Gulf’s deep shelf than last forecast. According to MMS director Randall Luthi, new data, and a better understanding of deep-gas potential due to recent discoveries, have led the agency to increase its estimate of this resource to up to 55 Tcf. The potential has surged from a 2002 estimate of up to 20 Tcf, a remarkable jump.


In an effort to boost drilling for deep-shelf reserves, the MMS has extended royalty relief. Under the incentive program, the MMS provides royalty suspension when companies take the risk of exploring and developing deep-gas deposits in shallow-water areas they have already leased. Lessees are eligible for relief on their existing leases when they drill for new and deeper prospects at greater than 15,000 feet subsea.


While most new oil production has come from the deepwater Gulf, the majority of new Gulf gas reserves have derived from deep plays beneath the shallow shelf, according to Luthi.


And surfacing these deep gas resources are mostly independents, which are six of the top 10 Gulf shelf producers, according to IHS Inc. The top 10 producers account for 1,950 oil wells, 1,488 gas wells and 414 fields.


Independents, Krohn says, have historically followed the majors. Now, their journey into the deep shelf is a departure from that tradition.


“The independents followed them into the marsh, and then we followed them into state waters, and then the OCS,” Krohn says. “And now, the shelf is dominated by the independents, with the majors going into deep water where it is just not economical for us to follow. While the majors went into deep water, the independents will be going after the deep shelf.”

Success at Flatrock
From his New Orleans office, Richard Adkerson, co-chairman of McMoRan Exploration Co., says the Gulf continues to yield treasures, and agrees with Krohn about going deep on the shelf.


McMoRan’s two principal exploration classifications for Gulf shelf prospects are deep shelf and ultra-deep shelf. Prospects between 15,000 and 25,000 feet are considered deep shelf.


Since 2004, McMoRan has focused its exploration almost exclusively on deep-shelf prospects, generally beneath shallow reservoirs where significant reserves have already been produced. The company’s acquisition of Newfield Exploration Co.’s shelf properties in 2007 for $1.1 billion enhanced its portfolio of opportunities, increased its production and reserve base and provided access to ultra-deep shelf plays.


A hotspot for McMoRan is its Flatrock prospect on South Marsh Island Block 212, in 10 feet of water approximately three miles offshore Louisiana, and drilled below 17,000 feet. Based on an independent analysis, the Flatrock discovery contains a whopping 395 billion cubic feet equivalent (Bcfe) of gross proved reserves—74 Bcfe to McMoRan’s interest. The company has about 150,000 gross acres in the immediate area of this discovery.


Since it first hit gas in July 2007, McMoRan has enjoyed a string of successes at Flatrock. On July 6, Flatrock?#2 went online, producing 102 million cubic feet equivalent per day with 19 million equivalent net to the company. Other wells in the Flatrock series include #3, which encountered 256 feet of net pay in the Rob-L and Operc sections. First production is expected before the end of the year. The #4 logged 116 net feet of pay in June in the Rob-L section and was drilled to a total depth of 18,500 feet. Drilling on #5 began July 1 with a target depth of 18,400 feet, and drilling is to begin on #6 before year-end.


“We have had a number of discoveries in the Flatrock area, which validated our deeper-pool concept and is significant in terms of reserve additions and future opportunities,” Adkerson says. “The success at Flatrock has also helped us to replace the inherent decline associated with the production and reserves from the properties we acquired in 2007.”

Deep treasure hunt
McMoRan’s deep-shelf interests don’t stop with Flatrock.


The company acquired rights to the ultra-deep South Timbalier Block 168 #1 exploration well, which is about 115 miles south of New Orleans in 70 feet of water, in August 2007 when it purchased substantially all of Newfield’s properties on the Gulf shelf.


The well, famously known as Blackbeard West, was previously drilled to 30,067 feet by a consortium led by ExxonMobil Corp. The well was spudded in early 2005 and put on hold in August 2006 after costing $200 million. Rowan Cos.’ Gorilla IV rig is now drilling the well deeper for McMoRan, whose partners are Houston-based Plains Exploration & Production Co. and Energy XXI.


“We concluded that the deeper horizons represent an exciting exploration opportunity and elected to re-enter the well and drill to evaluate the potentially significant targets,” Adkerson says. The ultra-deep well has been drilled to 32,560 feet and logs have indicated that it has encountered potential hydrocarbon-bearing zones that require further evaluation.


The revived Blackbeard has attracted a lot of investor attention as the deepest ever drilled below the Gulf mudline. It is permitted for 35,000 feet, “but the novelty has nothing to do with why we are pursuing it. If successful, this well will open up further exploration opportunities within this trend on the shelf and further define McMoRan’s promising future,” Adkerson says.


Going deep at Flatrock and Blackbeard West fits nicely into McMoRan’s strategy for the shelf, Adkerson says. “Both the deep shelf and ultra-deep are largely unexplored areas—only about 6% of the wells drilled on the Gulf shelf have exceeded 15,000 feet in depth.
“There are still plenty of opportunities out there.”

Technology trickle-down
The technology needed to go deep may be developed by the majors, but “it trickles down to the smaller companies eventually,” says Glynn Roberts, president of Northstar Offshore Energy Partners LLC, a Natural Gas Partners portfolio company. While not currently involved in deep-shelf drilling, Roberts says the technology to go deeper beneath the shelf comes from development created by the majors in their rush for the deepwater prize.

View video interview with Glynn Roberts.


Some of those advances include subsalt imaging, seismic acquisition and data processing, horizontal drilling, real-time monitoring of the wellbore, and advanced drilling rigs and drillships that 10 years ago were just concepts.


“The Gulf has always been a place where new technologies are developed, tested and perfected,” says Roberts, who has drilled the Gulf shelf for more than 20 years. “All of that knowledge starts at the top and trickles down to the small independents who use it to expand the envelope even further.


“It makes the Gulf that much more attractive.”


Just how attractive is the Gulf? That depends. “Everyone agrees that ideas come into fashion and fall out of fashion and the Gulf is no different,” Roberts says. “The Gulf of Mexico is pretty much in the eyes of the beholder. If a company is well-capitalized, experienced and ready to react quickly to opportunities like Northstar is, it can be very attractive indeed.”


The Gulf shelf continues to host quality deal flow, robust prices that make even small targets attractive, improvements in technology and improved geoscience. The targets, he says, are small enough to be unattractive to the majors, but large enough to be economic for small independents.


“Acquisitions of acres and assets are happening,” Roberts says. “It wouldn’t surprise me if there is another boom in the time span of 2009 to 2011.”

Bullish on the shelf
Shallow shelf targets are perfect fits for some firms.


Drilling in the shallow end of the deep shelf is Houston-based, privately held Anglo-Suisse Offshore Partners. The company is a joint venture of Anglo-Suisse Investments, a Houston-based E&P, and ArcLight Capital Partners, a private-equity firm headquartered in Boston.


Anglo-Suisse recently completed a five-well exploration program on its acreage in the West Delta region of the Gulf, less than 20 miles offshore Louisiana. The wells, West Delta 27 AH9-ST2, West Delta 27 AH8-ST2, West Delta 29 #37, West Delta 28 #16 and West Delta 27 #12, were drilled with the Pride New Mexico mat jack-up to below 7,000 feet in less than 40 feet of water. The fleet of mat cantilever jack-ups available was built for the soft bottom of the Gulf, so drilling equipment is less of an issue on the shelf.


The company acquired the West Delta properties from Chevron Corp. in July 2004 and those five wells account for about 40% of the company’s total production, which in August was about 10,000 barrels of oil equivalent (BOE) per day.


The West Delta fields include 44 active wells. The company also has production in the Matagorda Island area, offshore Texas. It recently completed a five-well program there.


Anglo-Suisse Offshore chief executive John Sherwood says, “We have a better-than-90% success ratio in completing wells we drill. We focus on oil targets as they are long-life reserves and require a little more geological effort to find than gas, so there are fewer companies playing the oil trends.


“So, our short- and long-term strategies are the same—generate our own drilling prospects, drill as soon as we have matured the prospect and optimize production for maximum ultimate recovery.”

Geauxpher delivers
Of course, some independents have ventured off the shelf into the deeps of the Gulf of Mexico. This province can yield the hefty prizes, and is increasingly a domain where smaller firms can thrive.


Apache Corp. has grown to become a leader of the pack with interests in 2.1 million gross and 1.4 million net acres in the Gulf of Mexico. This position makes the Houston-based company one of the largest held-by-production acreage-holders in the warm Gulf waters. It has accomplished this over time with large acquisitions from Occidental Petroleum Corp., Royal Dutch Shell, Hall-Houston Oil Co. and BP Plc.


Apache chief executive Steven Farris says the company’s shelf properties, although economically rewarding and one of the company’s core areas, are operationally challenging.?On the downside, the shelf is geologically complex and has limited exploration potential at depths of about 18,000 feet or more. It also has high rates of depletion and is subject to yearly hurricane exposure.


“These risks are more than offset, however, by hydrocarbon plays with multiple productive formations, premium prices, dependable markets, extensive existing infrastructure and exceptionally high margins, realizations and rates of return,” Farris says.
The company will drill 65 wells in the Gulf this year.


Its latest success is its Geauxpher prospect, drilled to a depth of 23,156 feet in 2,700 feet of water on Garden Banks Block 462. Geauxpher could have proved and probable reserves of about 100 Bcfe. Houston-based Mariner Energy Inc. operates Garden Banks 462 and holds 60% interest.


Mariner farmed into Geauxpher and provided the rig to test the prospect. The rig remains on location and a second well is planned, although the timing of that hasn’t been released.


Mariner chief executive Scott D. Josey says, “Our discovery at Geauxpher provides further evidence of the value potential in Mariner’s deepwater-prospect inventory.”


The company is also taking a 12.5% position in Heidelberg, a Miocene subsalt prospect. Heidelberg is operated by Anadarko Petroleum Corp. on Green Canyon blocks 816, 859, 860 and 903. An exploration well will spud on the acreage by year-end.


Well-rounded Gulf player
Founded in 1983, Houston-based W&T has focused on the Gulf of Mexico, where the company holds working interests in about 155 fields in federal and state waters, covering about 1.7 million gross acres.


W&T plans capital expenditures of $611 million this year with $325 million on development and $250 million on exploration. The revised budget calls for drilling up to 18 exploration and three development wells in the second half of the year. The company works a spectrum of Gulf opportunities: conventional, deep shelf and deep water.


Krohn says the capital expenditures in the development category include dollars allocated for completion work, front-end engineering and development of successful exploration wells and proved undeveloped wells.


In 2000, W&T acquired its first interest in water deeper than 500 feet. The company’s long-term strategy depends on the deep shelf, Krohn says.


“We believe this was a natural extension of our historical activity and experience in the shallow waters of the Gulf,” he says. “We believe a significant portion of our acreage has exploration potential below currently producing zones, including deep-shelf reserves.”


Going after deep-shelf plays is not for everyone, Krohn says. It’s not a gamble—but a calculated risk where the rewards can outweigh the potential risks with market prices of oil staying above $100 a barrel and gas above $7 per thousand cubic feet.


“What we are looking at is not a gamble,” Krohn says. “Our goal is to grow our reserves and grow our earnings and that means looking at going deeper on the shelf in areas that many may have thought were not productive just a few years ago.”


That strategy has paid off.


“We drilled 10 wells in the second quarter and continue to enjoy high success rates. We have an 85% success rate with exploration wells, and are one-for-one in development drilling,” Krohn says. “We currently have eight rigs running and expect to maintain this level of activity through the remainder of the year. We still have several high-potential projects in the program and are looking forward to bringing some of our recent successes on production.”


The success lies in its core assets in the Gulf, Krohn says.


One of W&T’s deepwater success stories is the Daniel Boone development on Green Canyon Block 646. Situated 165 miles south of New Orleans, the well, in 4,230 feet of water, was drilled to 12,365 feet and encountered 275 feet of high-quality oil- and gas-bearing sands in Jurassic Tithonian formations. The discovery was drilled in 2004.


W&T will produce the well through a subsea production system that will be tied back to the Front Runner spar, which is operated by Murphy Oil Corp.


“The timing is excellent to commence the development of Daniel Boone, and we expect first production in second-half 2009,” he says. “It has taken a considerable amount of time to finalize the details of the project and locate the optimal facility to deliver the production.”

Excellent outlook
According to the MMS, within the next 10 years, total Gulf production is expected to exceed 1.7 million barrels of oil per day. If industry-announced discoveries and undiscovered resources are realized to their full potential, production could reach 2.1 million barrels of oil per day.


Gas production is expected to exceed 9 Bcf per day within the next 10 years, under the same caveat.


Anglo-Suisse’s Sherwood says the shelf will remain a key focus for independents because of its positive risk/reward history. “As long as projects are profitable, oil companies will continue to explore,” Sherwood says. “The shelf, while a lot more mature, still has a significant contribution to make to the overall production profile. A number of smaller companies doing 10,000 to 20,000 barrels of oil per day adds up to significant production very quickly.”


Northstar’s Roberts says that, with the absence of the majors, “the Gulf shelf will continue to be the playground of the independents. That’s what we do best and that’s where the independents will stay and continue to develop older fields that the larger companies just can’t make economic.”


And that means going deeper. “The independents can do it.”


Finally, deepwater prospects will continue to beckon. As independents become more comfortable with the challenging water depths and ultra-deep wells, and infrastructure blossoms across the trend, they will increase their already considerable presence.

Senior exploration editor Peggy Williams contributed to this article.

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