Debunking the hype over the Jack-2 'discovery'

Debunking the hype over the Jack-2 'discovery'

This article combines a 2-part article that was run in ASPO-USA's "Peak Oil Review" (issues 18th and 25th September 2006).

Far from being the good news that the mainstream media have portrayed it, this 'find' only shows how difficult it is becoming to discover new oil resources.

And even if the euphoric claim of 15 billion barrels is borne out in practice, that is still less than 6 months' worth of world oil consumption.

http://www.aspo-usa.com

Jack 2 and the Lower Tertiary in the Deepwater Gulf of Mexico

By Dave Cohen (and “Bubba”), The Oil Drum

It seemed important for those of us concerned about peak oil to respond to the Jack-2 test well result and all the publicity it has spawned.

With the successful test drilling of Jack-2 in the ultra deepwater Gulf of Mexico, there has been a media blitz proclaiming the good news. Further, the "peak oil" theory is under attack. From Business Week's September 7, 2006 article “Plenty of Oil—Just Drill Deeper,” the authors write “You can tune out all the scare talk about Peak Oil for a while--probably a long while.”

There is no doubt that the successful Jack-2 test well is a technological achievement. It set more than a half a dozen world records for test equipment pressure, depth, and duration in deepwater were set during the Jack well test. More importantly, it demonstrated that these reservoirs are capable of producing at rates that are potentially economic. But in the end, what did Jack-2 prove and what how significant is it relative to the future of exploration and production in the Lower Tertiary of the Gulf of Mexico? What has been missing is a realistic appraisal of the discovery that goes beyond the public hyperbole.

Large estimated recoverable reserves (EUR) numbers have been quoted in the business and popular press--anywhere from 3 to 15 billion barrels (Gb). Many of these articles have given the public the misperception that all of these billions of barrels were demonstrated by and will shortly flow from the Jack discovery alone. This two-part series is meant to enlighten readers on the true significance of the Jack discovery, the Lower Tertiary play in general, and what can truly be expected from it.

Our four key conclusions:

The LTGOM (Lower Tertiary Gulf of Mexico) play consists of a number of fields as shown in Figure 1 below. All of these fields have an EUR in the 350 million to 500 million-barrel range, according to Rigzone and other unpublished sources. The production capacity of the various fields and the types of fluid they can deliver vary considerably. Aside from their great depth, the reservoirs and fluids present many challenges. Some of these fields will get produced, others will not. It is important for everyone to understand that the large EUR numbers quoted do not apply to any one field but rather represent the entire Lower Tertiary region.

The Jack-2 well test indicated a flow of 6000 barrels per day. This one data point encourages further appraisal but does not guarantee flow rates that will justify the massive (billions of dollars) investment required to put the LTGOM into full-scale production. Whether the economics of commercial exploitation is favorable for the various fields remains an open question.

Implementing development plans, where they exist, for these fields pushes the limits of deepwater technology. A myriad of questions exist about completion and production of the wells. Unanswered logistical concerns include securing rigs, transporting produced oil to market and what to do with associated natural gas.

Realistically, initial production of some fields in the LTGOM may happen by 2009 or 2010 at the earliest. The other fields that do get developed, including Jack 2, will likely not achieve first production before the 2012 to 2014 period. Delays are likely given that many technical problems are being solved for the first time. Under most forecasted scenarios, production from the LTGOM will likely only offset declines in US production that will have occurred by then.

Figure 1:

Marvin Odum, Shell's executive vice president of exploration and production in the Americas, recently said that while the Gulf of Mexico will remain a key producing region of the world's biggest energy consumer, it was unclear if new discoveries could counter decline rates at existing fields.

The Original Number for Estimated Ultimately Recoverable Oil (EUR)

The World Oil issue of May of 2005 cited a paper, Emergence of the Lower Tertiary Wilcox trend in the deepwater Gulf of Mexico. That paper contained the following statement: “More than 12 Bbbl of oil in place have been discovered to date. Potential recoverable reserves per discovery range from 30 to 400 MMboe, with a 69% success rate, i.e., 9/13 [4 dry holes]. Trend-potential ranges from 3 to 15 Bbbl of recoverable oil.”

So, you can readily see the origin of the EUR numbers thrown around in the press. The reserves estimate applies to the entire Lower Tertiary play, not just to the Jack discovery as has been implied by press reports.

The Geology, Reservoirs and Fluids

When evaluating hyped new discoveries, ask a simple question: What hasn't been discussed? In the case of the Jack-2 test, news sources don’t address the characteristics of the Jack-2 reservoir and what kind of oil flowed from the well at a rate of 6000 barrels per day.

The Lower Tertiary Gulf of Mexico (LTGOM) play contains oil of highly variable quality.
Given their great depth, many of these reservoirs are at very high pressure.
Most of the oil-bearing reservoirs are low-permeability sandstones. These reservoirs, due to their deep burial depths, will be challenged to flow their oil at the necessary rates to pay out the required investments. That was the main reason for the Jack 2 well test -- to prove that oil could be produced at sufficiently high rates to warrant further development work.

Thus, the fields are not uniform across the LTGOM region. Moreover, four appraisal wells were dry holes. According to Business Week, the Jack-2 test flowed light, sweet crude. However, the low permeability and high viscosity of the heavy, sour crude in some of the other fields—Stones, Das Bump, Cascade and Chinook—present well flow-rate challenges, especially at such great depths.

The Economics and Technology

Assuming commercial oil discoveries, the economics of producing the LTGOM depends on many factors and cannot be divorced from technology concerns. Key technical challenges for trend commerciality are: 1) reservoir quality and flow capability; 2) drilling and completion technology; and 3) development of infrastructure. Continued discoveries in the trend and successful flow tests planned in early 2007 could very well transform the Lower Tertiary Wilcox into a world-class deepwater petroleum system.

Several inherent technical challenges need to be addressed to ensure economic feasibility of the Lower Tertiary Wilcox trend. These range from the cost-effective drilling of complex salt canopies and evaluating deep structural targets to the completion and production of reservoirs in water depths that have not occurred to date.

Start-up costs are very high and likely will be subject to inflation down the road, given the rising capital commodity costs of almost everything. Due to the high demand for and limited supply of deepwater drilling rigs, Business Week reported that BP will be paying $520,000 per day in 2007 for the same rig that costs $190,000 today. So LTGOM wells may cost between $80 million and $120 million each; producing facilities may cost between $600 million and $1.5 billion.

Concerning marginal costs, a reasonable guess is that it is likely that unit technical costs will be $20 to $50 per barrel. At $20/bbl these projects will fly economically. At $30 and up, they will struggle to attract investment capital. Experts believe that producing oil from ultra-deep wells can be profitable as long as oil stays at or above $40 to $45.

Transportation Challenges

Transportation infrastructure and associated natural gas present two crucial, related issues for producing the LTGOM fields. There are no pipelines in place to carry the extracted oil and gas to shore, so operators may use floating production, storage and offloading vessels instead of pipes. Without pipelines, any natural gas produced from the wells may have to be reinjected into the reservoir or released into the atmosphere via flaring. Mineral Management Service, from whom the operating companies lease these deepwater blocks, "frowns on gas flaring". Problems will mount if a lot of natural gas is produced.

Reserves and Timing of Production Flows

Take the 15 billion barrel estimate with a grain of salt. The low-end estimate of 3 billion barrels reflects the large degree of uncertainty in the LTGOM trend's EUR. Phrasing like "as much as 15 billion barrels" leads the reader to believe the high-end estimate. To recover 15 Gb of oil, one would need to drain an equivalent to 276 square miles or 31 contiguous Gulf of Mexico lease blocks. Jack itself covers only two outer continental shelf blocks (Walker Ridge #758 and #759) or 18 square miles.

Devon states "the [original] Jack discovery on Walker Ridge block 759 was drilled in 2004. The discovery well encountered more than 350 net feet of pay. The Jack #2 well was drilled to delineate the discovery." The new well test represents one more piece of the puzzle, albeit an important one.

Business Week asserted that the LTGOM will "get into full-fledged production four or five years from now." Given all the factors covered above, this is a dubious statement. A Bloomberg article states, “The partners [Devon, Statoil & Chevron] plan to drill another appraisal well at the site in the Walker Ridge Block in 2007. A decision whether to develop Jack may be made in 2007 or 2008. The [Jack] field would start production in 2013 if development goes ahead.”

Furthermore, Devon Energy "expects to drill one to three exploratory wells from this inventory [19 exploratory Devon prospects] in each of the next several years." None of this sounds much like "full-fledged production" four or five years from now.<

Assuming there are no serious delays, what production can we expect in 2013? Schlumberger estimates that production from [presumably] the entire Lower Tertiary area could add 300,000 to 500,000 barrels of oil a day to U.S. output, compared to the Gulf’s current production capacity of about 1.5 million. It is hard to imagine, given all the considerations mentioned here, that the Jack discovery alone could produce 3 to 5 hundred thousand barrels per day.

The Big Picture

In a July 22, 2002 press release, the US Minerals Management Service (MMS) forecasted a daily oil production rate of between 2.00 and 2.47 million barrels by the end of 2006. Current Gulf of Mexico OCS production is approximately 1.5/mbd, down 25% from the MMS "low case" estimate of 2.0/mbd for 2006. It has yet to fully recover from the 2005 hurricanes. BP's Thunder Horse platform is still not operating and is delayed until 2008. Did we fail to mention that the LTGOM deepwater play is prone to hurricanes?

The problem is bigger than that. US petroleum production averaged 5.093/mbd in the first 7 months of 2006 and continues declining. In the best case, in six to eight years the increases from the LTGOM—assume 0.500/mbd—and other fields will only offset normal declines, meaning that Gulf of Mexico production will be a wash.

Business Week's assertion that ultra-deepwater production from offshore regions like the LTGOM will "tip the balance of supply and demand in the long term" globally is unwarranted speculation. Believing that statement requires a large leap of faith and depends on optimistic outcomes: possible declines in the world's old elephant fields like Ghawar don’t occur; declines in fields like Cantarell are modest; commercial development in similar deepwater areas in other regions like West Africa's Gulf of Guinea proceeds; etc.

The current "peak oil" bashing going on in the media is more an indication of underlying concerns about the long-term supply situation, not a refutation of peak oil theories. Those concerned about global oil depletion have never said that the world is running out of oil in the near-term or denied that advanced technology can increase recoverable reserves.

Regarding the big picture, how people interpret these reserves estimates matters. Typically, there is a knee-jerk response that greets any large discovery because many equate reserves and production flows. That is not the case. Additionally, drilling in ever-deeper and more complex offshore situations should be viewed not as a sign of continuing abundance but rather as a sign of the great lengths that oil producers must go to in order to find more oil to meet growing demand. The "low-hanging fruit" is gone and so is the era of cheap oil. Ultimately, this is the meaning of the Jack-2 test well and hopes for production from the Lower Tertiary of the Gulf of Mexico.

Dave Cohen, a senior contributor at The Oil Drum (www.theoildrum.com), spent time in academia and as a software engineer and entrepreneur; for the last few years he has been covering the energy and climate change stories for various publications. “Bubba,” an oil-industry participant, collaborated with Dave on this article and is a Contributor at The Oil Drum.