A new development paradigm?
  from: Offshore Engineer
  by: Dr Roger Knight and Julian Callanan
  Thursday, June 19, 2008

In terms of revenue raised, the recent Gulf of Mexico licensing round was the most prolific ever. However, with the delays and complications surrounding some deepwater projects, did the latest bidding round reflect a new development paradigm? Kicking off OE’s latest Gulf of Mexico round-up, Infield Systems’ Dr Roger Knight and Julian Callanan investigate the competing strategies shaping the region’s development.

Round 206 developed on the deepwater bidding theme seen strongly in both rounds 204 and 205. A key factor driving this process is the continuation of robust oil and gas prices, which have encouraged operators to look for quick production wins. Indeed, the time between discovery and first production in the Gulf of Mexico was on average 2.16 years between 1990 and 2004. Since then, as the oil price has been sustained above $40 per barrel, despite the increase in the technical scope of projects relating to increasing field depths, average development time has fallen to just 1.5 years. (Although for solely deepwater developments it should be noted that this time remains substantially longer.)

While deepwater bidding remains a concurrent theme, contained within this we are now starting to witness a clear reinforcing of development strategy, with bidding rivalries being most fierce on the Lower Tertiary blocks, as operators position themselves into strategic ‘clusters’. These clusters are created through operators seeking to take advantage of existing or potential extraction infrastructure, thus potentially dramatically cutting into project economics. Green Canyon blocks 944 and 945 demonstrate this competitive process; here Chevron fought off the interests of nine other operators paying $55 million and $81 million respectively to cement a position. Key in justifying this decision is Chevron’s nearby Tahiti TLP, located some 25 miles away, providing a ready-made tieback solution. Indeed, development stratagems of this type are predicted to characterise the Gulf arena over the upcoming years, with an associated increased demand for subsea, rather than topside services, as operators look to save on project economics by utilising subsea tiebacks into existing infrastructure, and expanding the use of the ‘hub and spoke’ approach.

Further characterising recent bid rounds is the growth of collaborative offers in the Gulf of Mexico. These accounted for 12% of all high bids submitted for round 204, but had risen to 18% by lease sale 206. This approach again finds a certain degree of causality in the robust oil prices, as operators, and particularly independents, calculate that with prices high it is more cost effective to establish a widespread profit sharing base than to risk being cut out of projects altogether as a result of increasingly sophisticated strategic planning.

This then can be likened to something of a growth in risk averse behavior, as operators act to protect long-term access to oil supplies, while maintaining a share of the currently prolific revenue stream. Eventually, as a logical conclusion to these strategies, we would expect to see an increase in one-off lease block bids, a move away from clusters, and a lengthening in the average time taken to develop fields, as operators delay development relying on the inflated oil price to ensure short-term profitability, and believing that these frozen lease blocks will provide the platform for longterm sustainable growth.

Symptomatic of this increasingly cautious behavior, and as a result of the costly delays in developing certain deepwater projects, of which BP’s Thunder Horse is perhaps the clearest example, the recent bid-round saw a reinvigoration of shallow water interest. This interest is being fuelled both by individual operators and the US Minerals Management Service stratagem.

For operators, the allure of shallow water is simple: already well developed with proven production infrastructure, projects here can be undertaken quickly, and with less capital expenditure than their deepwater counterparts. Also, with the continued improvements in extraction technology, fields worth only a cursory glance a few years ago are now well worth fuller exploration.

For the MMS, strategy is less obvious and the five-year lease block plans walk a tightrope between operators seeking more access to hydrocarbon resources, with an estimated $143.92 billion to come from production in this area at stake, and environmentalists who would claim what is at stake cannot be covered in fiscal terms. Add to this the influence of the neighboring states – with Florida refusing any exploration of territories under its jurisdiction, Louisiana harboring fears of further storm damage and Texas pushing for more production – and it would seem that the levels of different strategy competing in the Gulf make the waters as turbulent now as any in a hurricane season. OE

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