[Nasional-m] U.S. oil sources: a deeper risk

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U.S. oil sources: a deeper risk
  Neela Banerjee The New York Times Tuesday, August 13, 2002



Gulf of Mexico waters hold vast reserves and challenges

About 100 miles (160 kilometers) southeast of the Louisiana coast, the BP
Marlin platform rises like a fortress from the Gulf of Mexico, a gas flare
fluttering like a banner.
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Marlin is BP PLC's most profitable deep-water platform in the region,
producing enough natural gas and oil to power a city of 1 million people.
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But as solid and steady as it looks, Marlin is not rooted to the ocean
floor. Instead, the whole platform, the width of two football fields, floats
in 3,400 feet (1,040 meters) of water on four thick columns linked by
pontoons and tethered to the ocean floor with steel cables.
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That is the kind of engineering and care needed to get oil from the deep
waters of the Gulf of Mexico, which holds some of the most promising oil
reserves in the world. BP, the third-largest oil company and the owner of
the biggest reserves in the depths of the Gulf of Mexico, estimates that the
region contains 40 billion barrels of oil equivalents, a unit that includes
crude oil and natural gas. By comparison, an estimated 20 billion barrels
has been found so far in the North Slope of Alaska.
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With U.S. politicians calling for a reduction in oil imports, especially
from the volatile Middle East, the best source of increased domestic
production would be there, in waters as deep as 7,000 feet. Already, oil
from the deep Gulf of Mexico accounts for 16 percent of domestic oil
production, and it will claim a greater share over time.
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But the vast opportunities in the deep gulf are accompanied by profound
challenges.
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The process of extracting oil and gas through thousands of feet of water and
seabed costs much more than producing the same resources on land. Yet the
projects have to remain competitive with other fields.
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For BP, the cost to find, develop, lift and transport a barrel of oil from
the deep waters of the gulf is $5 to $6. The price is declining, mainly
because of economies of scale. But elsewhere in the world, the industry
average is $3 to $4 a barrel. As long as the price of oil stays near or
above its current levels of about $25 a barrel, though, that difference is
minimal.
.
Those economics, far more than political considerations, have driven oil
companies to stake out the Gulf of Mexico, and BP is eager to lead the pack.
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Two weeks ago, the chief executive, Lord John Browne, announced that BP
planned to spend $15 billion in the deep-water gulf from 2001 to 2010, much
of which will go to bringing its reserves onstream. If successful, BP could
overtake Royal Dutch/Shell Group as the largest producer of oil and gas from
the area. BP now produces 340,000 barrels of oil equivalents a day but
expects to increase that to 700,000 by 2007.
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Analysts have generally been impressed with the kind of deep-water reserves
BP has amassed. The challenge, they said, is to bring that oil and gas to
market.
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"The question is how they will manage the embarrassment of riches they
have," said Michael Rodgers, a senior director at Petroleum Finance Co., a
Washington-based consulting firm. "They have a bunch of projects, and they
need to coordinate people and contractors. There is the sheer scale of the
facilities and the size of the investment required - all this before a drop
of oil ever comes out of the ground."
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Oil production is an inherently difficult and dangerous undertaking
anywhere, and seas magnify the hazards. Offshore oil production requires
more equipment, but everything is confined to a smaller space, which, in
turn, has to stay afloat.
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At its Horn Mountain platform 15 miles west of Marlin, for example, BP had
to figure out how to keep risers that extend 5,400 feet down to the sea
floor from being whipped about by the current. The Gulf of Mexico is free of
many of the financial risks that bedevil fields in places such as the deep
waters off West Africa or Brazil, where some other large new reserves are
being developed. The U.S. government, for starters, takes a smaller portion
of income in royalties and taxes than other countries, and its tax regime
and other laws remain fairly constant.
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The United States also has a well-trained work force with every expertise
from roustabout to geophysicist.
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BP can easily turn to contractors in the United States to build components
and service its operations. In places such as Africa, the company might have
to start an industrial yard on land to service its platforms offshore.
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Finally, the cost of transporting oil from the Gulf of Mexico is lower
because of existing undersea pipelines.
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But the cost of starting these projects remains staggering. "In 400 feet of
water, you can drill a well for $3 million," said Kenny Lang, vice president
of BP for Gulf of Mexico deep-water production. "In deep water, it's a
factor of 10 higher."
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Although driven by the demands of the bottom line, BP and other oil
companies realize that these projects could mitigate U.S. dependence on
imported oil.
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But much of the oil in the United States has already been developed, and its
geology affords only 3 percent of the world's known oil reserves. That makes
it unlikely that the United States could ever completely end its reliance on
foreign oil.