Imagine shale-level well expenditures on targets that produce a 60% recovery factor instead of the 3% to 5% yield from tight-formation oil.
Better bang for the buck? It is for a small group of public E&P companies that believe they have discovered a pot of black gold at the far end of the investment rainbow. The scenario is playing out on the Gulf of Mexico Shelf, where operators are employing wide azimuth seismic technology (WAZ), reprocessing older seismic data, mapping reservoirs, and conducting short-radius horizontal drilling to coax new oil pay out of a stacked-pay legacy region.
It is a target-rich environment ranging from a few hundred to 20,000 feet below the mudline in shallow waters off the Louisiana coastline. Despite decades of development, only 4% of shelf wells have penetrated below 15,000 feet of total vertical depth. The deep shelf has now become an exploration play.
So what did the majors, who formerly developed most of the properties, miss? In the old days, operators sought formations 100 feet or more in thickness to compensate for low commodity prices. Later, independents pursued fast-declining natural gas targets on the shelf.
The story line today is that operators are able to locate targets previously overlooked thanks to improvements in seismic capability. After a series of consolidations, new owners have discovered big fields get bigger while technology opens opportunity in newer, deeper resources. On balance, today's shelf targets feature an oilier profile and carry a margin premium up to $10 per barrel greater than tight-formation oil onshore, at similar well costs.
Then there is the wizard of WAZ. After being perfected in the deepwater Gulf, the high-resolution seismic technique is moving closer to shore. It is the equivalent of transitioning from an impressionistic geologic watercolor to a digital photograph. It is shedding new light on the highly varied nature of salt domes. Where older textbooks showed a solid column of salt up to 4,000 feet in height, operators now see a roiled area of hydrocarbon-saturated sands drug up behind a protruding salt bubble. And where processing once required a room full of Cray computers and months to process volumes of seismic data, the task can be executed now on a desktop within days, leveling the playing field for technologically oriented smaller independents.
Consequently, companies working the Gulf shelf are embarking on an exploration effort focused on the numerous salt domes that underlie the shelf. Apache Corp. and Energy XXI, a 25% working interest joint-venture partner, are conducting a 900-square-mile WAZ survey covering 135 blocks at Main Pass and have already reached total depth on the vertical Heron well on Block 295 as part of the nascent salt dome exploration effort.
Farther west, Energy XXI is involved as a 50% working interest partner with Exxon-Mobil in a two-well joint venture exploring a salt dome structure at the Vermillion Block. The Merlin well is targeting the first of seven potential prospects and was drilling below 14,000 feet in early October. Energy XXI is directing a majority of its exploration capital spending to the salt dome program in 2014 after expending big dollars on the ultra-deep shelf in 2012.
The company is also moving forward on a short-radius horizontal well program where it will drill 14 horizontal wells on the shelf with the majority located on its West Delta 73 properties. These are not the 4,000- to 6,000-foot laterals common in tight-formation drilling onshore. Rather, they are short-radius laterals typically 700 to 1,200 feet in length.
The process boosts reservoir recoveries from 40% to 50% on vertical wells, where water coning and inefficient sweep leave stranded oil behind, to a 55% to 65% recovery rate through horizontal drilling. Energy XXI acquired the largest bulk of its oily shelf properties via a $1-billion acquisition from ExxonMobil in 2010. ExxonMobil drilled 32 horizontal wells on the properties during the 1990s. Energy XXI spudded its first horizontal well in 2012 and has since consummated 14 to date, with all but two successful completions.
Energy XXI attributed 2,200 barrels of oil per day of new horizontal production to West Delta 73 in June 2013, double the year-ago period. The company sees a five-or six-year inventory encompassing 95 horizontal locations from South Timbalier to Main Pass, with a majority to be drilled on its West Delta holdings.
Tight-oil formations onshore generate headlines, but the shelf is quietly generating new oil.
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