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03/09 09:56 Aging Natural Gas Wells in U.S. Gulf Curb Growth of Production By Bradley Keoun

Sugar Land, Texas, March 9 (Bloomberg) -- On a drilling platform in 40 feet of water off the Louisiana coast, Unocal Corp. employees are working to prolong the life of a 52-year-old natural gas field called Vermilion 39.

About 96 percent of Vermilion 39's reserves are gone, and getting what's left is increasingly difficult. Unocal drilled six new wells and reworked 20 old ones to boost production in November, and already the gas flow is falling. The story's the same at shallow-water platforms throughout the Gulf.

``We're able to squeeze hydrocarbons out of these old fields, but they decline very fast,'' said Ken Butler, Unocal's Gulf Region vice president in Sugar Land, Texas. ``The industry has got to work very, very hard'' to keep them productive.

Deposits in the Gulf accounted for about one-fifth of the $100 billion of gas consumed in the U.S. last year. The fields that were the biggest and easiest to reach are mostly tapped out after decades of drilling. That's going to keep supplies low and prices high for the next few years, until producers can pull gas from wells in deeper water and new onshore sites.

Production of the fuel used to run power plants, heat homes and make chemicals is down about 8 percent from a peak in 1997 because low prices in the late 1990s prompted energy companies to cut spending on exploration and development. The number of natural gas rigs, onshore and offshore, jumped 45 percent last year, when prices quadrupled.

Some producers are drilling for gas in the Rocky Mountains and West Texas. Others are hunting in the Gulf beyond the continental shelf, where the sea floor falls to depths of more than 5,000 feet. Such deep-water drilling is expected to spur a boom in Gulf production later this decade.

Harder to Grow

For now, supplies will be delayed until wells are completed and connected to existing pipelines.

``The Gulf of Mexico is an area that a lot of companies relied upon in the past for production growth,'' said Claiborne Deming, president and CEO of Murphy Oil Corp. in El Dorado, Arkansas. ``It's much more difficult to do that now.''

U.S. gas demand outpaced production last year as, electricity suppliers burned more of the fuel in power plants. The coldest November and December in more than a century boosted heating demand, draining utilities' supplies of the fuel to their lowest levels on record and prompting fears of winter shortages.

Natural gas prices on the New York Mercantile Exchange reached $10.10 per million British thermal units on Dec. 27, far above the $2.30 seen a year earlier. High prices helped boost U.S. inflation in January to its highest rate in almost a year and helped push California utilities PG&E Corp. and Southern California Edison Co. to the brink of bankruptcy.

The top four U.S. gas producers -- Exxon Mobil Corp., BP Amoco Plc, Royal Dutch/Shell Group and Burlington Resources Inc. - - all said production was little changed or lower last year.

Rising Production

Total U.S. production is expected to rise 2 percent this year to 51 billion cubic feet a day from 50.1 billion last year, according to Cambridge Energy Research Associates, an energy- consulting firm in Cambridge, Massachusetts. Output reached 54.4 billion in 1997, a 16-year high.

Combined with Canadian imports of 10 billion cubic feet a day, supply this year will just about match U.S. daily consumption of 61.6 billion cubic feet, according to Cambridge figures. Utilities will need another 1 billion cubic feet a day to replenish low inventories.

Wellhead prices will average $4.95 per thousand cubic feet this year, one-third higher than in 2000 and more than double the average in 1999, according to U.S. Energy Department forecasts.

Higher prices have attracted a slew of prospectors. The number of U.S. rigs drilling for gas rose to 910 last week, the most since Houston-based Baker Hughes Inc. began tracking them in 1987. Still, production hasn't rebounded as quickly as some energy executives expected.

``I was surprised,'' said Craig Clark, executive vice president of U.S. operations at Houston-based Apache Corp., a top- 20 U.S. producer. ``I would have thought 600 or 700 rigs would have increased supply more than they did.''

Lower Yields

Wells are turning up less gas because deposits in the shallow waters of the Gulf's continental shelf are smaller than those found a decade ago, and the wells don't last as long. The shelf accounts for four-fifths of total Gulf production.

In the early 1990s, a typical well on the shelf produced about 15 billion cubic feet over a life of seven to 10 years, said Robert Esser, director of global oil and gas resources at Cambridge Energy. Now, wells yield about 10 billion cubic feet over two to three years.

``The Gulf has just been so thoroughly drilled that the remaining wells are relatively small,'' said Darryl Smette, senior vice president of marketing at Devon Energy Corp. in Oklahoma City. ``For most of the shelf producers, you don't realistically expect to grow production very much. Your overall expectation is to maintain production.''

Looking for Elephants

Producers such as Unocal, Royal Dutch Shell, BP Amoco and Exxon say the deep waters of the Gulf of Mexico may hold the next generation of ``elephants,'' as the industry calls its gigantic gas and oil fields.

Deep-water drilling may boost total Gulf production by 65 percent in the next 15 years, according to the Gas Research Institute, a consulting firm in Arlington, Virginia. Overall, the Gulf's share of U.S. production will grow to almost 30 percent by 2015 from 27 percent now.

That won't help consumers this year. While deep-water production has grown sevenfold since 1992, it can take years to bring in new supplies.

BP Amoco's Marlin Field, discovered in 1993 in 3,232 feet of water off Alabama, didn't begin producing continuously until December 2000.

El Segundo, California-based Unocal, which expects its total Gulf production to be down 5 percent to 10 percent in 2001, has a ship hunting for gas fields in 7,800 feet of water in the Gulf. Such efforts may lead to higher production a few years down the road. For now, the company will keep squeezing Vermilion 39.

``These old workhorse fields are still very important in terms of pulling reserves out of the shelf,'' said Unocal's Butler, whose company gets a fifth of its gas from the Gulf.

``They come on quick, and you get your money back, but it really is a treadmill because you have to work that much harder'' to keep the gas flowing.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOqjvLRWLQWdpbmcg

-- Martin Thompson (mthom1927@aol.com), March 09, 2001