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Ultra-deep makes a splash with new discovery

As exploration ramps up in the Gulf of Mexico, the Lower Tertiary and Paleogene plays have become hot prospects

It is three years since the Macondo disaster, and the Lower Tertiary is once again at the forefront of exploration in the ultra-deep water Gulf of Mexico (GOM). A pair of significant discoveries and a $1.2 billion land sale in western federal waters have added new momentum to the play.

On 26 March, Chevron announced a discovery at the Coronado prospect in Walker Ridge Block 98. The discovery well, the first spudded on the prospect, was drilled to total depth of 31,866 feet in 6,127 feet of water, and hit 400 feet of net pay.

The Coronado find comes hard on the heels of Anadarko's Shenandoah-2 appraisal well, which encountered 1,000 feet of oil-saturated sands in the Lower Tertiary. It was drilled in Walker Ridge Block 51 to 31,400 feet, in 5,800 feet of water.

Bob Daniels, Anadarko's senior vice-president of deep-water exploration, said Shenendoah-2 exhibited “rock and fluid properties of much higher quality than previously encountered by industry in Lower Tertiary discoveries".

Even before the Deepwater Horizon disaster in 2010, the Lower Tertiary was an emerging frontier play, made possible by advances in deep-water drilling and sub-salt imaging.  With higher-quality data at explorers' disposal, significant discoveries came thick and fast. Chevron's 2002 Cascade discovery was followed by St Malo in 2003, Jack in 2004 and Kaskida in 2006. Jack-2 tested 6,000 barrels per day (b/d), setting a record for the deepest well drilled to that point - 20,000 feet total depth in 7,000 feet of water.

By now, ultra-deep wells were becoming routine. BP's Tiber discovery in 2009 was the 18th in the Lower Tertiary trend - and the biggest, holding between 4 billion to 6 billion barrels of oil-in-place - opening the deeper and more technically complex Paleogene formations to exploration.

In 2010, the play was being extended into the deeper Green Canyon and Walker Ridge areas, but the public outcry after the blowout and spill at Macondo saw all GOM E&P shut down after a federal moratorium was imposed. Macondo, in Mississippi Canyon Block 252, was targeting a high temperatre/high pressure formation. The well was drilled to 35,000 feet in 5,000 feet of water, and while it proved the impressive potential of the Lower Tertiary, it also confirmed the risks associated with the trend.

Since the moratorium was lifted in October 2010, exploration has picked up. Now, with a new post-Macondo regulatory regime in place, companies are eager to stake a claim in the ultra-deep.

On 20 March this year, all the big offshore players, except BP, gathered at the Super Dome in New Orleans for a Bureau of Ocean Energy Management (BOEM) auction of 1.72m acres in the western GOM. The tracts achieved an average price of $705/acre. 

Ultra-deep blocks, in depths greater than 5,250 feet, accounted for a third of the bids received, accounting for $703.4m of the sale proceeds. Intermediate depth tracts in 2,600 feet to 5,250 feet of water were sold for a total of $405.59m.

A partnership of Statoil and Samson Offshore tabled the auction's highest bid, an offer of $81.79m for a 271-acre tract on Walker Ridge. It was also the highest price paid per acre, at $14,199. But the big spender was ExxonMobil, which spent $220.25m to acquire seven deep-water parcels in the Walker Ridge, Keathley Canyon and Green Canyon areas.

Shell came next at $139.83m. It had the most high bids, winning 38 parcels or more than 10% of total acreage sold. BHP Billiton rounded out the top three buyers, spending $107.16m to secure 24 leases, including $46m for Green Canyon Block 564.

BP did not attend the sale, the second it has missed while it defends criminal charges stemming from the Macondo disaster. On 14 March, the BOEM granted BP permission to participate in the 20 March sale, with the caveat that any high bids would be disqualified while it remains under suspension from the Environmental Protection Agency (EPA).

Under terms of the EPA order, BP is precluded from bidding on government contracts or buying leases until the suspension is lifted. 

Nonetheless, BP remains one of the largest producers in the GOM. It has three operated projects under development: Galapagos; Na Kika Phase 3 and Mad Dog Phase 2.  It   also has a stake in the Shell-operated Mars B development, as well as interests in a number of Miocene prospects.

Meanwhile, production from the GOM is slowly increasing. According to the Energy Information Administration (EIA), federal offshore regions accounted for 23% of US oil production in 2012, down from 30% before Macondo. Since then, offshore production has fallen as output from the Lower 48's onshore unconventional plays has soared to 20-year highs. The EIA estimates GOM production dropped 6% to 1.3m b/d in 2012, and is unlikely to recover to pre-spill levels of 1.67m b/d before 2016. But

A number of deep-water developments are poised to add close to 200,000 b/d to US production by 2014. Chevron expects first oil from the Jack/St Malo, Big Foot and Tubular Bells projects on stream by late 2015.

Chevron is also appraising the Buckskin and Moccasin discoveries, also in the Lower Tertiary trend. Drilling on both wells started before the moratorium, and finished after it was lifted. Buckskin-1 encountered more than 300 feet of net pay, while  Moccasin-1 hit 380 feet of net pay.

Likewise, Anadarko expects the the 80,000 b/d Lucius field to come on stream in 2014, followed by the 80,000 b/d Heidelberg in 2016. This will keep the project pipeline full over the near term.

Future development in the deepwater hinges on a series of high-impact wells expected over the next 18-24 months. Successes - or failures - will have a direct bearing on the scope and pace of Gulf production growth to the end of the decade.

Following on the success of Shenandoah, in March ConocoPhillips spudded a new well on the Ardennes prospect. Thorn is expected to follow this year, and will mark the company's return as an operator in the GOM.

Anadarko is moving ahead with appraisal work at Shenandoah, in the sub-basin of the same name, while it waits on results from the nearby Yucatan well, which tests the same sub-basin. 

International players are also entering the GOM, with ExxonMobil's deal with Russian state-run oil company Rosneft the most recent.

Other deals are forthcoming. Marathon Oil is looking for partners to explore its Madagascar prospect in De Soto Canyon Block 757. The company already has BOEM approval for a 24,000 foot exploration well. Water depths in the area are 8,300 feet.

The well will target the Jurassic Norphlet formation, about 40 miles northwest of Shell's Appomattox field.

Discovered in 2009, Appomattox represents the next generation of emerging play in the ultra-deep water. According to analysts Wood Mackenzie, the Jurassic offers higher returns and is less remote than the Lower Tertiary. Drilling costs are lower and it has better access to infrastructure. After 2014, the majority of capital spending in the region will be directed to the Paleogene as dollars shift from mature fields.

Wood Mackenzie added that  all Gulf plays, including the Lower Tertiary, are economic at an average oil price of $60 a barrel.

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