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Wildcatter Hunch Unlocks $1.5 Trillion Oil Offshore U.S.

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September 12, 2013

Texaco Inc. geologist Robert Ryan didn’t suspect he was helping change the energy future of the Gulf of Mexico when he gave the go-ahead for a well that would break the world record for deep-water drilling.

The project known as BAHA, undertaken in 1996 by Texaco and its partners, Royal Dutch Shell Plc (RDSA), Amoco Corp. and Mobil Corp., was a dry hole. That normally would’ve made it a flop. Instead, BAHA’s discovery of oil-rich sands where none were thought to exist was the first step in unlocking a $1.5 trillion trove of crude that’s revived the prospects of a body of water many thought had long ago given up most of its fossil-fuel riches.

Just as technology has allowed explorers to tap vast new oil and natural gas supplies in onshore shale fields, it’s now reinventing the Gulf. BAHA was the first deep-water well to try plumbing the Lower Tertiary, a layer of the earth’s crust formed more than 25 million years ago after mammals had replaced dinosaurs as the dominant life form.

A series of recent finds in the ultra-deep has profoundly changed the thinking on U.S. offshore geology, with 2013 seeing the Gulf of Mexico become one of the most promising frontier oil plays in the world and the fastest-growing offshore market.

New seismic equipment and computer power has allowed explorers to see into once-invisible layers of rock. Engineering innovations enable them to drill five miles into the earth through waters more than 10,000 feet deep, where temperatures are more than hot enough to boil water and high pressures approach the weight of four cars resting on one square inch.

Record Output

The Gulf is heading for record deep-water output equivalent to almost 2 million barrels of oil a day in 2020, according to industry researchers Wood Mackenzie Ltd. The U.S. estimates about 15 billion barrels of recoverable oil remain to be found in the Lower Tertiary.

While most U.S. shale fields have now been identified and mapped, the Gulf is seen as having much bigger yet-to-be-discovered potential — 48 billion barrels of oil compared to the 13 billion barrels estimated for onshore and coastal oilfields, according to U.S. data.

Investment is pouring in, with 42 drilling rigs operating in 1,000 or more feet of water as of Sept. 9 — 35 percent more than four years earlier, according to U.S. data on the Gulf. By the end of 2015, 60 rigs are slated to be working in the deep water off U.S. shores, estimates Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston.

Regaining Interest

It’s a dramatic turnaround for the Gulf, which saw interest wane in the previous decades as old wells dried up and explorers shifted their attention to search Africa, Latin America and Asia. By October 1989, offshore crude output had dwindled to 678,000 barrels a day, down 28 percent from 943,000 barrels five years earlier, according to Energy Department data.

Attempts by producers such as Chevron Corp. (CVX:US) and Exxon Mobil Corp. (XOM:US) to move from the Gulf’s shallower depths to look for oil in deeper waters farther offshore had proved disappointing.

“Deep water wasn’t working for us,” said Ryan, now Chevron’s chief of global exploration, who worked for Texaco in the 1990s before it was acquired by Chevron. Yet they still weren’t ready to walk away.

In 1995, geologists and engineers from four of the world’s biggest oil companies — Texaco, Amoco, Shell (RDSA) and Mobil — packed into a Houston conference room to discuss what was described as the biggest undrilled geologic structure left in the continental U.S.

The companies had joined together a block of leases in the Gulf of Mexico that had languished for about 10 years. They were excited by the massive up swell of rock that formed the subterranean structure — the type of dome that in other places had yielded abundant oil and gas. But doubts ran high about drilling.

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