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September 6, 2006 Big Oil Find Is Reported Deep in Gulf

An announcement yesterday by three oil companies of a successful production test in the Gulf of Mexico — potentially the largest American oil find in a generation — was seen by experts as ushering in a new era in ultra-deepwater offshore drilling.

Chevron, Devon Energy and Statoil ASA, the Norwegian oil giant, reported that they had found 3 billion to 15 billion barrels in several fields 175 miles offshore, 30,000 feet below the gulf’s surface, among formations of rock and salt hundreds of feet thick.

While it is too early to know exactly how big the fields are, the oil companies expressed hope that they had the potential of being even larger than those at Prudhoe Bay, off the northern coast of Alaska.

The United States has reserves of 29 billion barrels, meaning that at the high end of the estimates, the discovery could increase reserves by 50 percent. It comes as the output of oil and gas in shallower wells in the Gulf of Mexico, with about one-quarter of American oil reserves, is ebbing and environmental resistance to offshore drilling in areas closer to coastlines remains strong.

“This is frontier stuff,” said Daniel Yergin, president of Cambridge Energy Research Associates, noting that the discovery is at levels deeper than deep-sea fields in the North Sea and off North Africa. “Success at these depths in the Gulf of Mexico would facilitate ultra-deepwater exploration elsewhere in the world because it will have proven the technology and capabilities.”

It will take more than a year of drilling to confirm the value of the find, and the depth of the water will make extraction extremely expensive — profitable only if oil prices remain at least $40 a barrel, according to oil industry analysts.

The analysts cautioned that there was little likelihood the report would give drivers much relief at the pump because full production might not come on line for five years or more. By itself, it also appears that the discovery could make little more than a dent in the country’s energy dependence.

And given that the United States uses 20.5 million barrels of crude oil a day, the new areas at most hold supplies that would quench the nation’s oil thirst for two years.

In addition, there is a shortage of rigs able to drill in deep water, another constraint in exploiting the find quickly.

But Chevron and the other companies involved expressed excitement. The discovery in American waters, said J. Larry Nichols, chairman of Devon Energy, “could not have happened in a better place.”

According to Chevron, the successful test was the culmination of about two years of drilling by the three companies, using seismic and drilling equipment at record depths and pressure.

“Our strong strategic position in the deepwater Gulf of Mexico,” said George L. Kirkland, a Chevron executive vice president, “will continue to be a platform for future growth for years to come.”

Shell, BP, Exxon Mobil, Anadarko Petroleum and Petróleo Brasileiro have leases on comparable waters in the gulf, and the successful test is likely to set off a wave of drilling in deep water as well as the building of platforms and the laying of pipelines.

“It’s going to attract deep-pocket and patient investment to work these fields,” said Wayne Andrews, oil analyst at Raymond James & Associates. “These are very expensive wells to drill, and the production facilities required to produce the reserves are also going to be very expensive operations.”

Chevron reported that the test on the Jack No. 2 well, situated 270 miles southwest of New Orleans, broke a record for the deepest successful well test in company history. It has sustained a daily flow of more than 6,000 barrels, a quantity thought to mean considerable reserves.

The successful test was first reported yesterday by The Wall Street Journal.

The stock prices of the three companies rose yesterday. Chevron, which owns 50 percent of the field, gained $1.51, or 2.33 percent, closing at $66.34. Devon Energy, which owns 25 percent of the field, was up sharply, rising $7.99, or 12.5 percent, to $72.14.

American depository receipts of Statoil, which owns the other 25 percent, rose 66 cents, or 2.4 percent, to close at $28.17.

The three oil partners said they would drill another appraisal well next year to confirm the extent of their find, and would probably decide on developing the field late in 2007 or in 2008.

The deep waters of the Gulf of Mexico may represent the last area in the United States where large oil and gas reserves remain to be discovered, although some experts see the potential for big discoveries deep off the Atlantic and Pacific coasts, which would require Congressional action to exploit.

“This is a breakthrough that confirms very large reserves of recoverable oil in the gulf,” Mr. Yergin of Cambridge Energy Research Associates said. “This announcement also reflects how the oil industry is marching offshore into deeper and deeper waters around the world.”

Successful exploitation of the reserves requires new drill technology and computerized seismic technology to work in water more than a mile deep. “This would have been unthinkable 10 years ago,” Mr. Yergin said, “but the technology keeps advancing.”

The oil in the area is considered top quality, light and sweet, unlike the oil in many new fields around the world that is heavier and more difficult to process.

Because the new reserves are so far off the gulf coast, they seem unlikely to attract the intense opposition from environmentalists who oppose drilling close to beaches.


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