The Gulf of Mexico-and more specifically, the deepwater Gulf-will likely represent the single most important source of oil and gas for the U.S. for many years. The Minerals Management Service estimates remaining undiscovered deepwater Gulf resource potential at 36.3 billion barrels of oil equivalent (BOE), and with current output already representing some 16% of total U.S. production, there is little debate that the region is critical to future supply.

Attraction. There are many attractive features of the region. It has substantial resource potential-Chevron's Jack discovery tested some 6,000 barrels of oil per day and demonstrates the commercial potential of the Lower Tertiary. Also, infrastructure is improving, fields offer long reserve life with significant volumes, and the region's larger exploration prospects and development projects offer a sizable alternative to smaller onshore plays and shallower Gulf shelf plays.

Deepwater GOM Top Producers*

RankOperator

1Royal Dutch Shell

2BP Plc

3Anadarko Petroleum Corp.

4ExxonMobil

5Chevron Corp.

6ConocoPhillips

7Dominion E&P

8Hess Corp.

9Devon Energy Corp.

10Noble Energy Corp.

In addition, the Gulf has relatively low political risk, and projects typically compete favorably with other projects worldwide on a return-on-investment basis and from a reservoir-risk standpoint.

Technological advances and high commodity prices continue to expand the potential value of the region: 3-D imaging of subsalt and salt-related plays has increased considerably during the past 10 years; drilling and completion improvements have enabled drilling at more than 30,000 feet; royalty relief is offered at certain price levels; and large, well capitalized, technologically advanced companies are the primary operators in the area.

Challenges. Yet, the region does include some hurdles for operators. Among them are high capital-investment costs, the need for discoveries to be large enough to support significant investment in infrastructure, rig availability, and rising operating costs, due to increased insurance, labor and supply costs.

Capital costs continue to rise as well, in dayrates, steel and technical personnel. Also, weather-hurricanes and loop currents-play a role in costs. And, the economics of the region are highly affected by technology and commodity prices (such as in the Lower Tertiary Trend), the reliability of transportation and storage facilities, and governmental restrictions in leasing certain areas.

M&A activity. Based on Scotia Waterous' market intelligence, there is a significant appetite for both nonoperated and operated deepwater Gulf assets, and stronger demand for near-term production/development projects than for exploration opportunities, although demand also exists for exploration.

The market for deepwater Gulf assets is widespread: Players interested in the region include companies in Asia, Europe, Latin America and throughout North America.

-Shaun Finnie (832-476-6407), Adrian Goodisman (713-437-5050), Steve Pugh (713-437-5061) and Curtis Newstrom (713-437-5042)

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