Clarification of the Huge Chevron Gulf Oil Discovery (Randy Kirk)

  Sept. 6, 2006 -- The Sept. 5th announcement by Chevron and Devon and Statoil of the huge Gulf of Mexico discovery should be clarified. The announcement claims that the discovery could increase U.S. proven reserves of oil by as much as 50 percent. However, the total amounts are highly speculative. Additionally, the discovery likely won't impact oil markets but could potentially impact natural gas markets since the discovery is probably mainly natural gas. The area will not come online for at least four years and, at a full rate, for at least seven years. Further, it is likely that there are political motivations behind the announcement, as the vote to open offshore drilling in the United States is upcoming in the U.S. Senate.

  1. The range of amount -- from 3 billion to 15 billion (in itself a huge range -- reserves of Exxon Mobile are around 14 billion barrels total) is comprised of no single field of more than 300 million barrels. An entire area of as much as 15 billion barrels with no "giant" over 1 Bn bar oil field is unusual. Oil discoveries tend to cluster with a giant (King) and several queens and even more jacks.

  2. The area is very deep: 7,000 feet of seawater and a further 20,000 feet below the ground. That is about three miles below the surface, in more than one mile of deep water. The normal time to accurately estimate oil and gas field size is months. These fields are more challenging because of the extreme depths. It is therefore likely that very little is known with certainty about the potential reserves from a geological standpoint.

  3. Production will not start, at the very earliest, at 2010. Full production, will not start at the very earliest 2013. Many projects are being delayed so these dates are most likely the best possible scenario.

  4. The wells are located in deep water and will not be served by underground GOM pipelines. The oil will be pumped directly to tankers. Pipelines are faster and more efficient, and tankers will put a higher price and limited the amount of oil pumped out.

  5. The wells are most likely mainly natural gas, as they are very deep. All estimates are in barrels of oil equivalent. Oil tends to form closer to the surface, gas deeper. Therefore the discovery is likely to impact natural gas markets, not oil, if the gas exists in meaningful quantities.

  6. The U.S. Senate is weeks away from voting on the lifting of the 25-year ban on offshore drilling off the majority of the coasts in the United States. This offshore drilling bill was approved in the Congress but political analysts believe the bill will face more opposition in the Senate. The oil industry stands to make high profits if Congress will open up Florida and the Offshore East coast to drilling. To date the offshore drilling bill has not been approved by both houses because of environmental interests. A large potential oil “discovery” in the Gulf would provide evidence that the passing of the offshore oil bill would be beneficial.

  7. Related to point #6, the announcement is reminiscent of the Mexican "huge oil discovery" announced last year, of a possible 10 billion barrels, which was quietly revised this year to around 43 million barrels, a downward revision of 99.57%. This similar "discovery" was made in Mexico last year a few months before the Mexican parliament was to vote on Pemex (state oil co)'s budget and rights to expand drilling. This illustrates the potential political pressure to announce oil and gas discoveries.

  8. The wells are estimated to cost between $80 million to $120 million each, starting in 2010, and a completion time of 60 days. Payback period with gas at $7 is about three to five years (by my rough calculations). Although it is likely that some new technical issues will be likely be needed to be resolved as the depth is approaching record levels. Further, insurance rates at these depths in the Gulf will likely be very high -- the rough payback period here doesn’t include insurance costs.

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  Randy Kirk is a senior financial analyst at a investment management firm in San Francisco, California.

LINK: Energy Bulletin