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Chevron conquers the rock

Greg's Note [from Whiskey & Gunpowder]: In this article, our Peak Oil correspondent Byron King discusses the recent announcement by Chevron Corp. that it, and its partners Statoil ASA and Devon Energy Corp., have confirmed a major oil discovery in the Gulf of Mexico. What are the implications? Here is Byron's historical and geological take on the matter. And if you have something to say on the subject, dear readers, send it to your managing editor, greg@whiskeyandgunpowder.com.

ON SEPTEMBER 5, 2006, Chevron Corp. announced:

That it successfully completed a record-setting production test on the Jack #2 well at Walker Ridge Block 758 in the U.S. Gulf of Mexico. The Jack well was completed and tested in 7,000 feet of water, and more than 20,000 feet under the seafloor.

It is the deepest successful well test drilled to date in the Gulf, at a total depth of 28,175 feet. The Chevron announcement went on to state:

During the test, the well sustained a flow rate of more than 6,000 barrels of crude oil per day with the test representing approximately 40% of the total net pay measured in the Jack #2 well...

More than half a dozen world records for test equipment pressure, depth, and duration in deep water were set during the Jack well test. For example, the perforating guns were fired at world record depths and pressures. Additionally, the test tree and other drill stem test tools set world records, helping Chevron and co-owners conduct the deepest extended drill stem test in deep-water Gulf of Mexico history.

A Historic Achievement, Last Year

Yes, absolutely, this is historic. Chevron has accomplished what until recently many observers thought was all but impossible. Chevron's success in the deep water of the Gulf of Mexico was not, to be sure, "the first" deep well ever drilled in deep water. There have been other deep holes drilled in the Gulf and in other parts of the world. And there are similar efforts being conducted in the Gulf, and planned elsewhere, by other oil companies.

Furthermore, the Chevron announcement is not exactly "new" news. The Jack #2 well was drilled in 2004, and Chevron and its partners spent much of the past two years evaluating and testing the prospect. According to public accounts, the Jack well penetrated more than 350 feet of "oil pay," which is a very respectable and auspicious encounter with the relatively unfamiliar rocks of the geological target formations. But Chevron's technical teams apparently required a large amount of additional testing, data gathering, and analysis in order to determine future development plans. Thus, Chevron kept its information "tight" until last week.

Looking back one year, in August 2005, Petroleum News reported:

Chevron plans to conduct a rare and no doubt expensive production test on one of its lower Tertiary oil discoveries in the 'ultra-deep-water' Gulf of Mexico, evidently to better understand the commercial viability of the promising but financially risky play...

Explorers hardly ever resort to deep-water flow testing to determine a reservoir's productivity, largely because of the expense and the time required to prepare for one. A full-scale production test, such as the one planned for Jack, could run $30 million or more.

Among other things, the Los Angeles Times has reported that to drill the Jack #2 well and conduct the follow-up testing, Chevron paid $216,000 a day to lease Transocean Inc.'s Cajun Express drilling rig. Do the math: That is almost $80 million per year just to rent the rig. Geologists, geophysicists, petroleum engineers, drill bits, pipe, mud, wireline services, helicopter rides and all the rest come extra. And that is if you can obtain the necessary equipment and skilled personnel in an industry that is experiencing critical shortages of both. Looking forward, the rental rate for the Transocean rig will rise to $460,000 a day from 2007-2010 (not quite $170 million per year). In essence, the bigger the rig, the higher the day rate. So this deep-water drilling effort takes some serious money. Only deep pockets need apply.

The Oil, the Money, the Sticker Shock

Neither Chevron nor its partner companies have yet publicized detailed information on the oil quality or reservoir parameters of Jack #2. These data are considered proprietary, and certainly cost a lot of money for Chevron et al. to acquire. According to Oil & Gas Journal, however, one insider at Devon stated that while the oil-bearing rocks at Jack #2 do not pose any "undue complexity," the producing reservoirs are very different from one another. This probably has to do with fracture systems within the rock formations and the intrusion of the lower and older salt beds into the rock formations above (another discussion for another article). Salt is a prominent feature in the play, and in most respects, the salt formations control the location and entrapment of petroleum. (Yes, we are discussing some rock formations composed mostly of salt, like what you put on the ice on your driveway in the wintertime.)

Neither Chevron nor its partners have described the quality of the oil or gas, sulfur content, or the oil-to-gas ratio of the reservoirs. However, the implication is that the reservoirs are oil-dominant. Oil from other deep Tertiary formations in the Gulf has tended to be of heavy grade, with up to about 4% sulfur content. Not terrible, but not so great, either.

The Jack #2 well is remote from all existing subsea oil-gathering pipelines, so moving any oil to shore poses a major logistic problem. Chevron and Devon have held discussions with the U.S. Minerals Management Service concerning the possibility of using floating production, storage, and offloading (FPSO) vessels. If the facility, when productive, produces associated natural gas, then that too will present a handling problem. MMS frowns on "flaring" natural gas (just burning it off at the end of a long boom), so any production-associated gas could be used to power the production platform, or it might have to be reinjected into the rock formations.

Early-stage figures on field development in the vicinity of Jack #2 are yielding cost estimates of $80-120 million per well drilled, plus as much as $1.3-1.5 billion for subsea facilities. Again, only deep pockets need apply.

By way of comparison, Chevron's Tahiti project, located elsewhere in the deep water of the Gulf of Mexico, will begin producing in 2008 and carries a $3.5 billion price tag. Tahiti will produce an estimated 125,000 barrels per day, thus carrying an up-front price tag of $28,000 of capital expenditure per barrel of oil equivalent produced per day. In another Gulf of Mexico project, Chevron's Blind Faith project will cost an estimated $1 billion and yield an estimated 30,000 barrels per day, for a capital expenditure of $33,000 per barrel of oil equivalent produced per day.

This is quite a contrast to the historically adjusted cost of capital expenditure for shallow-water, shelf development in the Gulf of Mexico, which is about $1,000 per barrel of oil equivalent produced per day. In other words, deep-water development may be 30 times as expensive as shallow-water offshore development. That is what I call "oil patch sticker shock."

Some estimates place deep-water Gulf of Mexico oil resources, from lower Tertiary formations beneath the "allochthonous salts," in the range of 15 billion barrels, and possibly more. Allochthonous salts are beds of salt that overlay stratigraphically "younger" formations. (I will address the geology of the deep-water Gulf in future articles about the Chevron discovery.) These subsalt formations are the targets at which Chevron, its partners, and many other oil-exploring firms are aiming. Oil might be, as goes the old saying, where you find it. There might even be a lot of oil. But it is not at all cheap to get there. In fact, it is cheaper to send space probes to Mars or Saturn than to drill beneath the deep salt. You can look it up.

An Immense Achievement and Cultural Milestone

All things considered, the Chevron flow test was outstanding. And timing or no, Chevron's well is an immense achievement by the company, its partners, and the many other vendors, subtier vendors and members of the team who contributed to bringing Jack #2 to fruition.

There will be other deep-water wells, of course. In all likelihood, there will be many others. Some of these future deep-water wells will no doubt break the records set at Jack #2. But Jack #2 stands alone in one respect. Its announcement is a milestone on the pioneering trail of applying immense measures of resources to solve a great problem. Chevron's is among the first confirmations of a significant oil discovery in a frontier exploration area, the deep-water Gulf, now that mankind has moved onto the backside of Hubbert's curve.

The Chevron well is emblematic of the culture and industry of our modern, industrial, immensely complex, and interrelated world. Jack #2 is not just another oil well, but is instead the culmination of literally decades' worth of fundamental research and development work by industry, academe, and government. And the Chevron well has been made possible only due to a vast array of utterly spectacular, and fairly recent, developments in numerous scientific and engineering fields, coupled with people who are willing to place big bets on very risky plays.

Among the indispensable scientific and engineering developments behind the Jack #2 well are those in geology, oceanography, geophysics, cartography, mathematics, signal processing, and numerical computing. Add to this developments in global positioning, telecommunications, petroleum engineering, mechanical and electrical engineering, naval architecture, metallurgy, drill bit design, drilling rig design and management, down-hole logging and completion, and human factors such as study and management. And do not forget that this is a far-offshore well, on a federal lease issued and administered by the U.S. Department of the Interior Minerals Management Service. I am sure that I am neglecting to mention other equally worthy fields of human study and endeavor (Cajun-style cooking, perhaps?), and for that I apologize and say that my editor has so only much space in which I can write.

But make no mistake: Chevron's accomplishment is emblematic of our era. Chevron utilized the most advanced scientific and engineering assets of the world in which we all dwell, brought them all together, and did what otherwise could not be done. That is, Chevron located and drilled a well in deep water, based almost entirely on information gained from remote sensing, and with nary a use of traditional, "rock-kicking" geological exploration methods. (I will discuss this in another article, as well.) The Chevron effort marks a leap ahead in using advanced technology to find oil, but it should not be confused with the "technology will save us" line of thinking. Like Oprah says, "Don't go there."

The Solution of a Great Mining Problem

Chevron's accomplishment is entirely impressive, and certainly of historic proportions comparable even to that of Col. Edwin Drake. I have written much about Col. Drake and his oil well at Titusville, Pa., completed on Aug. 27, 1859. The Titusville well was no Jack #2, in that Drake's well produced only 25 barrels of oil per day from Devonian age sandstone at a depth of about 70 feet below ground level. But it was the best that anyone could do at the time with what was available. Drake's great accomplishment was to demonstrate that it could be done. The rest is history.

Drake's well, the first of many wells drilled by many others, ushered in an era of relatively abundant, relatively affordable, conventional petroleum. And that petroleum has illuminated, lubricated, motorized, mechanized, fertilized, and plasticized the world ever since. Absent Col. Drake, we would probably live in a different world, if we were around to live on this world at all.

In an early article in Whiskey & Gunpowder entitled "The Ghost of Colonel Drake," published Nov. 27, 2004, I noted that Drake's impressive neoclassical grave monument is built of granite to form a high wall, under which the deceased colonel (OK, he was not really a colonel, but that is what people called him) and his wife lie in eternal repose. Overseeing the colonel's place of rest is a very handsome bronze sculpture of a muscular man pounding and dressing a drill bit with a massive hammer. Drake's monument reads in part:

Col. Edwin L. Drake...

Founder of the Petroleum Industry, the Friend of Man.

Called by Circumstances to the Solution of a Great Mining Problem...He laid the Foundations of an Industry that has Enriched the State, Benefited Mankind, Stimulated the Mechanical Arts...and has Attained Worldwide Proportions.

His highest Ambition was the Successful Accomplishment of his Task. His Noble Victory the Conquest of the Rock, Bequeathing to Posterity the Fruits of his Labor and of his Industry.

In its own Big Oil sort of way, Chevron has also solved a great mining problem and successfully accomplished its task. Chevron has "stimulated the mechanical arts," and scored a noble victory. Chevron has gone offshore, into deep water, and conquered the rock. Like Col. Drake's grave, this also is definitely worth a statue one of these days.

Chevron, Babe Ruth, and the Backside of Hubbert's Curve

And it is critical that Chevron has conquered the rock just now, because mankind is in the process of crossing its own significant peak. The rock is fighting back.

As I mentioned above, and as frequent Whiskey & Gunpowder readers certainly know by now, mankind is entering upon the backside of Hubbert's curve. Global oil production is on the verge of entering the phase of irreversible decline. For many years, cumulative worldwide oil extraction and depletion has exceeded new oil discovery by a wide margin. So the fact that Chevron has drilled, tested, and completed Jack #2 does not nullify Peak Oil. Jack #2, in fact, demonstrates a key element of the Peak Oil thesis. That is, that the "easy" oil is gone. Mankind has been drilling it up, lifting it out of the ground, and burning it into heat and vapor for the past 147 years. The oil that mankind will lift from the earth in the future, on the far side of Peak Oil, will be in faraway places, in harsh climates, under excruciatingly difficult conditions, deep down, heavy, sour, and overall expensive.

So welcome back to the world of Peak Oil, if perchance you ever left. Yes, by all means, break out the champagne for Chevron. Like the famous story of legendary baseball great Babe Ruth, Chevron has walked up to the plate, pointed to the distant bleachers, and smacked the ball right out of the park. And the crowd goes wild!

But remember that Babe Ruth struck out a lot more times than he hit home runs. And understand that the game we are playing, in order to fuel our oil-addicted culture, is far from over. In fact, the game that we are playing never ends.

I will continue this discussion in future articles. Thank you for reading Whiskey & Gunpowder .

Until we meet again... Byron W. King

P.S.: Will I see you at the Peak Oil conference in Boston, Oct. 25-27, 2006?

I want to take the opportunity to let you know that the Association for the Study of Peak Oil-USA (ASPO-USA) and Boston University (BU) will co-sponsor the 2006 World Oil Conference, Time for Action: A Midnight Ride for Peak Oil, on the BU campus, October 26-27, 2006.

The conference will bring together energy experts from around the world to discuss the likely timing, impacts, and intelligent responses to the growing Peak Oil challenge. As you probably know, virtually every sector of our society and economy will be affected by Peak Oil, from transportation, manufacturing, airfreight, and agriculture to homebuilding, city planning, and finance.

"What better place than Boston to hold A Midnight Ride for Peak Oil?" asks Matthew Simmons, chair of ASPO-USA's advisory board. "We are recruiting the best minds in the business -- geologists, industry experts, academics, and environmentalists -- to take up arms with scientific data to meet the historic challenge of Peak Oil." Simmons is author of The Wall Street Journal -listed bestseller Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. For conference details, please see: www.aspousa.org/fall2006/index.cfm

In addition to Matthew Simmons and Robert Kaufmann, conference speakers will include Ali Samsam Bakhtiari of the National Iranian Oil Co. (retired), about whom I have written in Whiskey & Gunpowder; Roscoe Bartlett, U.S. congressional representative from Maryland; and more than 20 others. The full list of speakers may be viewed at the Conference Website.

Conference topics include:

· Oil and Gas Depletion (What's the evidence on Peak Oil? What geologic, political, economic, and technical constraints limit oil production? Why is forecasting a date for Peak Oil an inexact science?)

· Mitigation (What responses are available, and when can they be implemented?)

· Alternative Energy (What unconventional petroleum and nonpetroleum energy sources are available, and can they fill the depletion gap?)

· Economics (What economic challenges do decreasing energy supplies present?)

· Transportation (What is the future direction of personal transportation, its limitations and prospects, and how should planners and fleet managers respond?)

· Net Energy (What's the meaning of energy return on energy invested -- EROEI -- and why is it critical to intelligent responses to the Peak Oil dilemma?)

· Energy Security (Can we achieve energy security in a world of escalating competition for a finite resource?)

· Government Policy (What is the direction of energy policy at the local, state, and federal levels? Do these policies need obvious tweaks, or a massive overhaul?)

I am planning to attend, and I hope that many of you who read Whiskey & Gunpowder will also be there.

Note: Agora Financial, LLC has no financial or other business relationship to ASPO-USA, Boston University, or the World Oil Conference. We are running this promotional piece as a public service, and because we believe that the conference offers our readers the opportunity to improve their understanding of the critical topic of Peak Oil.

What do you think? Leave a comment below.

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