Director Burton Remarks — North American Natural Gas
Summit
November 19,2003
Houston,Texas
Greeting and Opening
It has been my pleasure today to listen to the other speakers outline our current natural gas situation.Thank you for this opportunity to discuss the role the Gulf of Mexico may play in our natural gas supply situation in the next several years.
· Let me first tell you a little about the Minerals Management Service. MMS is a bureau of the Department of the Interior. We have oversight over 1.76 billion acres of outer continental shelf (OCS) acreage.
· Today, the OCS produces more than 30 percent of United States’ oil production and about 25 percent of our natural gas.
· Most of that production comes from offshore the coasts of Louisiana and Texas in the Gulf of Mexico. And over half of all the United States technically-recoverable undiscovered oil and natural gas resources are located in the Federal OCS.
· As you probably know, Congressional and Presidential actions have placed the entire Atlantic and Pacific coasts as well as most of the eastern Gulf of Mexico off limits to energy exploration until 2012. Let me just say to you that this administration has no plans to try and “roll back” those decisions.
· The administration respects the wishes of coastal States in having a voice in the decision that affect their coastal communities. This attitude is reflected in MMS 5-year program of oil and gas lease sales, which calls for 20 sales between 2002 and 2007 — in the Gulf of Mexico and offshore Alaska.
· What is the role of the Gulf of Mexico?
· The Gulf of Mexico is the workhorse of providing natural gas from the OCS.
· 25 percent of natural gas produced domestically comes from the OCS. Almost all of that is from the Gulf of Mexico.
· In the year 2000 MMS estimated that there were 192 TCF of gas still to be discovered in the Gulf of Mexico.
· This compares to the 150 TCF that has been produced from the Gulf over the last 40 years. So, after 40 years, the glass is still half full.
· Until recently about 5 TCF per year of natural gas was produced from the Gulf of Mexico.
· That figure dropped to about 4.6 TCF in 2002. This is a serious decline and is caused by a major decline in shallow water production.
· One of the significant trends occurring in the Gulf is the strong decline in the number of new gas completions. There were 1,046 new gas completions in the Gulf of Mexico in 1994; there were 1,245 in 2001. We estimate that there will be only 893 new gas completions in 2003. This represents a 28 percent drop from 2001.
· Coinciding with this drop in completions has been an acceleration in decline rates. Each year we are seeing gas reservoirs deplete faster.
· These recent trends mean the Gulf of Mexico is now struggling to maintain its contribution to domestic natural gas supply.
· What of the future? The future role of the Gulf can be addressed by looking at three components of the OCS energy supply: drilling deeper on the shelf, and exploring in deep, and ultra-deepwater.
· What about the deep horizons on the shelf of the Gulf of Mexico?
· As I noted earlier, production from the shallow waters of the Gulf of Mexico OCS, the United State’s premier natural gas province, is in decline. The ability to find significant gas deposits in relatively shallow horizons of the shelf in shallow water has been decreasing steadily. So, why are we promoting this already heavily used area of the Gulf?
· Well, recent exploration information indicates resource potential could be much higher than originally estimated, but we have to look into deeper strata of the shelf
· Successes deep into the shelf (at least 15,000 ft in less than 600 ft of water) indicate that this area of the Gulf offers one of the last best hopes to stem the decline in offshore natural gas production. The Gulf’s deep shelf natural gas prospects hold great potential, but are yet relatively unexplored.
· Historically, the deep shelf has had substantially fewer wells drilled than the shallower geological horizons.
· Production from deep horizons has been increasing. Deep shelf gas production rose from 360 Bcf in 1997 to 421 Bcf in 2002. (A 17 percent increase.) This is a pretty modest rise but greater potential is there.
· One of the main features of these deeper wells is that they tend to have higher production rates than shallower wells. We recently found that completions with a depth of greater that 17,000 ft. had an average of three times the flow rates of wells at the 15,000 to 16,000 ft range
· Recent announcements by several companies including McMoRan Exploration are encouraging. McMoRan announced a production rate of 30 million cubic feet per day from their Mound Point Offset well (19,000 ft.) and 50 million cubic feet per day from their JB Mountain prospect well.
· But these deep reservoirs also have steep decline rates. For example, two significant deep shelf discoveries deeper than 17,000 ft. have lost half their initial high rates in only 18 months. So they may not last as long and thus have to be replaced.
· Still MMS estimates that there is a significant resource potential in this area.
· Today MMS is releasing a new resource assessment of the potential in this area. It shows that the high estimate of this region’s potential could now be as much as 55 Tcf of natural gas. This is more than double our previous high estimate of 20 Tcf for the deep horizons on the shelf.
· We believe that the deep shelf is truly an area where significantly more US production can be found. It represents one of the truly bright spots in our energy picture. And one of the most notable things about this “new” frontier is that it lies beneath one of the most extensive existing oil and gas infrastructure in the world. This is a major factor why this area has the ability to be quickly developed, creating a near-term boost for the Nation’s energy portfolio.
· To further encourage the development of this area MMS has also included an economic incentive in OCS lease sales since 2001…that is, royalty relief for production from deep shelf reservoirs. The cost to drill through these reservoirs, over 3 miles beneath the Gulf’s surface, is expensive, and the technology is still being developed.
The structure of MMS’ deep gas royalty relief has two components:
· The first is for new leases. Lease sales for the past three years provided new shallow water leases a royalty incentive if the lessee drills and produces from reservoirs deeper than 15,000 ft. The first 20 Bcf of natural gas is royalty free, if production begins within 5 years.
· The second is a proposed rule that covers pre-existing leases. This rule was proposed on March 26, 2003 and provides for two levels of royalty relief — 15 Bcf if a lessee drills and produces from reservoirs 15,000 to 18,000 ft. deep, and 25 Bcf for if the lessee drills and produces from reservoirs deeper than 18,000 feet. Production must begin within 5 years. The rule also provides a dry hole credit of 5 Bcf (for unsuccessful drilling deeper than 18,000 ft).
· We are hopeful that we can issue this proposed rule as a final rule very soon. It is presently being reviewed outside of DOI by the Office of Management and Budget
· Some of the recent incentives are beginning to yield results.
· Nine different companies have notified MMS of their intention to drill wells that should receive royalty relief for deep wells in shallow water. This involves the drilling of 20 wells. As of November 7th sixteen of these wells began drilling. These are very encouraging results that may be in part the result of the incentives MMS has initiated.
· Major companies are starting to come back to the shelf. At the last Central Gulf of Mexico lease sale held in March 2003 there was significant activity by three major companies. The headlines have frequently noted that the major oil companies have been abandoning the shelf, selling properties, and going for deepwater and larger finds. At this sale, however, there was significant bidding for new leases by Shell, BP and ChevronTexaco on leases in the shallow water shelf. We assume that they are going after deep gas.
· MMS issued in May 2003 a production forecast for the entire Gulf of Mexico thru 2006, which shows a flat rate of production although we know the shallow shelf production is steeply declining. The difference is made up by the deep shelf and deepwater resources, but we must be conservative in our projections for both. Time will tell.
The Deepwater Area
· What about deepwater Gulf of Mexico? The Minerals Management Service has been doing its best for almost a decade to get the most from this critical domestic supply source.
· Guided by Congress, we have provided economic incentives since 1995 for deepwater leasing and drilling. This and many technological developments have allowed the production of oil in the Gulf to double to almost 1.7 million barrels of oil per day, making the OCS the largest single source of oil for the American consumer.
· With several new developments scheduled to come online in just the next few months, the reward for these efforts has been considerable indeed.
· Some of the means and methods of tapping this resource have involved spectacular displays of industrial ingenuity. From dynamic positioning of drill ships to subsea completions of multiple fields tying back to a single production facility…the list goes on.
· In fact, Kerr McGee’s VP for Exploration recently remarked that the deepwater play is now more of a “technological play” than some new found geology.
· The deepwater area of the Gulf of Mexico has also rapidly expanded gas production. In 1995, the deepwater area of the Gulf was only yielding 181 Bcf. In 2001, it was yielding over 1 Tcf.
· Without that additional 1 Tcf in production from deepwater the decline in total Gulf of Mexico production would have been disastrous. We are thankful for some 83 deepwater oil and natural gas projects that are now producing.
· One of the most attractive features of deepwater gas wells is that they have very high production rates. The average deepwater gas well flows at 7 times the rate of a typical shallow-water gas well.
· What of the long term potential from deepwater? The long term potential of deepwater will involve both significant amounts of oil but also significant natural gas. In its year 2000 national assessment, MMS estimated there was over 100 TCF yet to be discovered in the Gulf deepwater area.
· A third piece of this new frontier, which industry is just beginning to explore, is the ultra deepwater Gulf of Mexico. This region can be defined in various ways. One definition could be 7,500 feet (about 2,400 meters) of water or greater.
· About 2.3 million acres of this ultra deepwater area in the Gulf is under lease (400 leases).
· The vast majority of this area is largely unexplored and its true production potential is not well understood. It is truly a frontier.
· Yet there have been some recent promising discoveries in this ultra deep area. Seven discoveries have been announced in the last three years. These include Shell’s Great White, Unocal’s Trident and St. Malo, and BHP Billiton’s Chinook.
Conclusion
· So, in conclusion, where does the Gulf of Mexico fit? The Gulf is a major source of supply but it will take perseverance, technology breakthroughs, and lots of drilling to reach its full potential. Deepwater gas production will continue to thrive. The deep shelf will have an impact, but how much remains to be seen.
· Other areas of the country need to be factored in and onshore areas such as the Rocky Mountains CBM need to be carefully explored. Although LNG has made a lot of recent news headlines, by itself it still won’t solve our long term need for natural gas, but it will help a lot and is certainly a bright spot.
· The best solution continues to be a diversity of solutions. All sources of supply need to be tapped.
· In the OCS, the decision making process must be informed with the current realities of how the offshore oil and gas industry is regulated and how it performs. This decision making process must also strike a balance between national and state interest, and economic and energy needs.
· Today the OCS is a critical source of energy for the U.S. Its contribution is projected to grow significantly over the next few years as more deepwater projects come online, and as MMS continues with its leasing program in the Gulf of Mexico and Alaska.
· However, shortly after an oil and gas field comes online it begins its decline curve and, if the present situation continues, the acreage available in the OCS for resource exploration won’t be getting any bigger. At some time in the future, decisions will have to be made about where to find other sources of energy. How can we add to our energy portfolio? While we still have time to tap into our existing resource areas we should begin the discussion of where our future energy will come from – open access/alternative sources. (15 % of OCS opened to exploration)
· If access to existing resources in this country is the issue, then we must make a huge effort to educate the American consumer so that the issue of tradeoffs between energy production and the environment is debated by informed stakeholders.