U.S. Oil Reserves Get a Big Boost
Chevron-Led Team Discovers Billions of Barrels in Gulf of Mexico's Deep Water

By Steven Mufson
Washington Post Staff Writer
Wednesday, September 6, 2006

An oil discovery by Chevron Corp. has bolstered prospects that petroleum companies will be able to tap giant reserves that lie far beneath the deep waters of the Gulf of Mexico.

Oil analysts and company executives said newly released test results from a well 175 miles off the coast of Louisiana indicate that the oil industry will be able to recover well more than 3 billion barrels, and perhaps as much as 15 billion barrels, of oil from a geological area known as the lower tertiary trend, making it the biggest addition to U.S. petroleum reserves in decades. The upper end of the estimate could boost U.S. reserves by 50 percent.

"This looks to be the biggest discovery in the United States in a generation, really since the discovery of Prudhoe Bay 38 years ago," said Daniel Yergin, chairman of the consulting firm Cambridge Energy Research Associates Inc. "There's been a lot of anticipation about what's called the Wilcox formation, and this is the validation of the theory and of the technology," he said, using another name for the area of the Gulf.

Cambridge Energy forecasts that the deep-water area of the Gulf of Mexico will produce 800,000 barrels of oil a day within seven years and account for 11 percent of U.S. oil production. That would not solve the world's energy problem or eliminate U.S. reliance on oil imports, but it would help stabilize U.S. oil production, which has been declining, and cover some of the world's rising demand for petroleum. Prudhoe Bay, in northern Alaska, produced about 1.5 million barrels a day at its peak.

Although oil companies have been exploring the deep-water area of the Gulf of Mexico for the past five years, there have not been any previous production tests from the older tertiary trend, which is made largely of Eocene era sediments more than 35 million years old. Chevron and its partners said the test showed that the oil deposits in the older rock formations were technologically and economically viable.

"The big question for everybody has been whether these rocks would flow and at what rates," said Paul Siegele, head of Chevron's deep-water Gulf exploration unit. "These are older rocks than have been explored before. While everyone was excited about the amount of oil in place, the question was whether it would flow at rates that would be economic, and that's why the test was so important."

Chevron said yesterday that 6,000 barrels a day of crude oil flowed through a test well from the tertiary trend more than 20,000 feet beneath the sea floor in 7,000 feet of water. Chevron's partners noted that the oil flowed from just 40 percent of the more than 350 feet of oil-bearing sediments. Siegele said that the oil was high quality and low in sulfur and that it flowed through an opening less than an inch in diameter. But he said the company would not divulge the exact size of the opening, an important detail for analysts.

Still, John P. Herrlin, an oil analyst with Merrill Lynch & Co., said the production test announcement was "meaningful because it opens a new fairway" in the deep-water Gulf of Mexico oil area, which also includes other geological prospects. Herrlin said the lower tertiary trend alone could hold 3 billion barrels to 15 billion barrels of recoverable oil reserves.

That's a figure Chevron used earlier this year to describe the size of the tertiary trend prospect. In an interview yesterday, Siegele said the new test results reinforced that estimate. But separately, Stephen J. Hadden, senior vice president for exploration and production at Devon Energy Corp., a partner in the Chevron exploration well, said the 3 billion barrel figure was too low. Cambridge Energy's Robert W. Esser said the Eocene or Wilcox sediments could hold 10 billion barrels.

Exploration and production in deep-water areas have become more important to world oil production as production from older fields on or close to shore begins to decline. And technological advances have made it easier to work in the difficult deep-water conditions. Companies are also searching in deeper waters off places such as the west coast of Africa.

But the costs of exploring for oil in deep water far from shore run high, which makes it important to find bigger fields. Chevron's Siegele said the test well, called the Jack No. 2, cost more than $100 million. Devon Energy's Hadden said a production facility in the area could cost between $250 million and $500 million, plus a series of production wells at a cost of $80 million to $120 million each. It isn't clear whether the companies would build a floating platform and put the oil directly into tankers or a platform would connect to pipelines that would run to shore.

"What's really happening is the opening up of a whole new horizon in the ultra-deep waters of the Gulf of Mexico, and it looks like the upside is very significant," Yergin said. "But it will take time and billions of dollars to get there."

Chevron operates and owns 50 percent of the Jack No. 2 well. Devon Energy and Statoil ASA each own 25 percent of the project.

Hadden said Devon's share of the reserves in the lower tertiary trend could more than double the company's reserve base of about 2 billion barrels of oil and oil equivalents, such as natural gas. It vindicates a strategic decision the company made in 2001 to invest heavily in the deep water of the Gulf of Mexico, he said. The company expects to begin production from another deep-water area in the Gulf, called Cascade, in 2009, Hadden said. The company's stock jumped 12.5 percent yesterday to close at $72.14 a share.

Chevron is the company with the most leases in the lower tertiary trend, which Hadden said is a couple of hundred miles long and 50 to 70 miles wide. Devon is next, followed by Anadarko Petroleum Corp., Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC.

Last week, in another indication that big reserves lie in deep-water Gulf of Mexico, BP said it had found more than 800 feet of oil-bearing rock in its Kaskida discovery well in the Keathley Canyon area about 75 miles north and west of Chevron's Jack well. It is part of the same geological trend.

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