A Question of Rigs, of Rules, Or of Rigging the Rules?

A Question of Rigs, of Rules, or of Rigging the Rules? A Question of Rigs, of Rules, or of Rigging the Rules? Upstream Profits and Taxes in US Gulf Offshore Oil and Gas JUAN CARLOS BOUÉ With EDGAR JONES Published by the Oxford University Press For the Oxford Institute for Energy Studies 2006 OXFORD UNIVERSITY PRESS Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Delhi Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Oxford Institute for Energy Studies 2006 The moral rights of the author have been asserted Database right Oxford Institute for Energy Studies (maker) First published 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of the Oxford Institute for Energy Studies, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to Oxford Institute for Energy Studies, 57 Woodstock Road, Oxford OX2 6FA You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloguing in Publication Data Data available Cover designed by Clare Hofmann Typeset by Philip Armstrong, Sheffield Printed by The Alden Group, Oxford ISBN 0-19-920575-2 978-0-19-920575-2 1 3 5 7 9 10 8 6 4 2 CONTENTS List of Figures viii List of Tables xv Abbreviations xvii Acknowledgements xx 1 INTRODUCTION 1 2 THE US GULF OF MEXICO: A GEOGRAPHICAL PRIMER 13 2.1 Political and Administrative Division 14 2.2 Key Producing Areas 21 3 THE SHALLOW WATER SUPRASALT 30 3.1 From Tidelands to ‘Dead Sea’ 31 3.2 Trends in Hydrocarbons Production and Major Producing Fields 47 3.3 Outlook 57 4 THE SHALLOW WATER SUBSALT 67 4.1 Antecedents 67 4.2 Breakthrough? 69 4.3 A False Dawn 73 5 THE DEEP GAS PROVINCE 78 5.1 Antecedents 78 5.2 First Taste of Difficult Deep Gas: the Offshore Norphlet Formation 81 5.3 A Predictable Policy Response 83 5.4 The Rationale for Deep Gas Royalty Relief 85 5.5 Can Deep Gas Royalty Relief Deliver? 89 5.6 Whither the US Natural Gas Market? 94 v 6 HISTORICAL OVERVIEW OF THE DEEP WATER 111 6.1 The Deep Frontier: Chronicle of a Conquest Foretold 113 6.2 Bullwinkle and the Transformation of Deepwater Economics 117 6.3 Conclusions 121 7 DEEPWATER OIL AND GAS PRODUCTION 130 7.1 Deepwater Field Profiles 131 7.2 The Deepwater Gas Problem 139 7.3 Deepwater Oil Prospects: Local Surpluses? 143 7.4 Future Deepwater Oil Growth: How Fast? 152 8 HOW LONG CAN THE DEEPWATER BOOM LAST? 163 8.1 The Promise of the Ultradeepwater 165 8.2 Will FPSOs Do the Trick? 173 8.3 Maximising Subsea Recovery 181 8.4 Can Fiscal Incentives Sustain the Deepwater Boom? 185 8.4.1 Deepwater Royalty Relief 188 8.4.2 Can Royalty Relief Succeed Where Areawide Leasing Failed? 193 9 DEEPWATER ECONOMICS 212 9.1 Finding and Development Costs 213 9.2 Lifting Costs 222 9.3 The Income Dimension 225 9.4 Just How Generous Is the GOM Fiscal Regime? 236 9.5 The Most Profitable Petroleum Province in the World? Only for Colossi… 240 10 COMPETITION IN THE MARKET FOR GOM LEASES: THE GREAT CASUALTY OF AREAWIDE LEASING 249 10.1 The Official Verdict on AWL and Competition: a Critique 249 10.2 The Market for OCS Acreage: from Functional to Genuinely Cursed? 256 10.3 The Relationship between Signalling Devices and High Upfront Costs 269 vi 10.4 Effects of AWL on Lease Inventory Turnover 281 10.5 Effects of the Ownership of Pipelines and Processing Hubs on Access to Infrastructure and on Ultimate Recovery 289 10.6 No Outright Collusion. The One Bright Spot for AWL? 294 10.7 By Way of Conclusion 299 11 CONCLUSIONS: WHAT SHOULD THE WORLD LEARN FROM THE SUCCESS STORY OF THE DEEPWATER GOM? 321 11.1 Basin Mastery: Adding Value in Global E&P Activities 323 11.2 The Political Economy (and Costs) of Basin Mastery 329 11.3 The Issue of Tax Breaks 339 11.4 Final Reflections 342 APPENDIX I: CALCULATING FEDERAL TAX LIABILITIES ON INCOME FROM UPSTREAM ACTIVITIES IN THE GOM FEDERAL OCS 364 BIBLIOGRAPHY 372 INDEX 390 vii LIST OF FIGURES 2.1 Gulf of Mexico Federal OCS Planning Areas and Administrative Subdivisions 15 2.2 Central Gulf of Mexico Planning Area Distribution by Depth 17 2.3 Western Gulf of Mexico Planning Area Distribution by Depth 17 2.4 Central Gulf of Mexico Planning Area, Extension under Lease by Depth 18 2.5 Western Gulf of Mexico Planning Area, Extension under Lease by Depth 18 2.6 Gulf of Mexico Western Gap 19 2.7 Average Size of Deepwater Fields in Selected Oil Provinces 23 2.8 Distribution of Crude Oil Families in GOM 25 2.9 Schematic Representation of GOM Sub-provinces 27 3.1 Annual Platform Installations and Removals in the GOM Federal OCS, 1953–2005 40 3.2 Natural Decline Rate in the GOM Federal OCS Shallow Water Gas Fields, and Equivalent Potential Production Loss absent New Drilling, 1992–2001 41 3.3 Oil Well Productivity Indicators for GOM Federal OCS, by Production Rate Bracket, 1947–2004 42 3.4 Percentage of Output for GOM Federal OCS Oil Wells, by Production Rate Bracket, 1947–2015 43 3.5 Percentage of Output for GOM Federal OCS Natural Gas Wells, by Production Rate Bracket, 1952–2015 44 3.6 Combined Monthly Natural Gas Output for all Wells in the GOM Federal OCS, by Drilling Year Vintage, 1972–2000 45 3.7 Total Hydrocarbon Reserves to Production Ratio in the GOM Federal OCS Shallow Water Sub-province, 1970–2000 46 3.8 Hydrocarbons Production in the GOM Federal OCS Shallow Water Sub-province, 1957–2002 47 3.9 GOM Federal OCS Crude Oil Production Profile, by Decade, 1947–2001 51 viii 3.10 GOM Federal OCS Natural Gas Production Profile, by Decade, 1947–2001 51 3.11 Production Profile of VR014 Field, 1960–2004 52 3.12 Production Profile of MP250 Field, 1997–2004 53 3.13 Production Profile of EW910 Field, 1998–2004 53 3.14 Production Profile of WD30 Field, 1955–2004 54 3.15 Production Profile of BM002 Field, 1955–2004 54 3.16 Production Profile of EI330 Field, 1972–2004 55 3.17 Creaming Curve for Fields in the GOM Shallow Water Sub-province, as of 2000 57 3.18 Mean Field Size of New Discoveries in the GOM Federal OCS Shallow Water, 1965–2001 58 4.1 Water Depth and True Vertical Depth for Selected GOM Subsalt Wells, (Shallow and Deep Water) 71 4.2 Monthly Hydrocarbons Production in the GOM Federal OCS Shallow Water Subsalt Province, 1997–2004 73 5.1 Monthly Gross Gas Production from Offshore Deep Wells in the Norphlet Formation, 1988–2004 82 5.2 Natural Gas Output from Deep Wells in the GOM Federal OCS Shallow Water, 1990–2013 89 5.3 Total (Exploratory and Development) Wells Drilled to a TVD of 15,000 Feet or More, in Water Depths of 1000 Feet or Less, in the GOM Federal OCS, 1950–2005 90 5.4 Production Profile of ST204 Field, 2001–2004 91 5.5 Production Profile of HI202 Field, 2001–2004 92 5.6 Production Profiles from Inception of Selected Deep Gas Offshore Fields 93 5.7 Net Additions to US Electricity Generation Capacity by Utilities and Independent Power Producers, by Fuel Type, 1991–2009 97 5.8 Behaviour of Selected US Natural Gas Sector Indicators, 1990–2005 99 5.9 Additional US Coal-fired Electricity Generation Capacity, by Project Status and Estimated Onstream Date, 2006–2015 102 6.1 Deepwater Leases as a Proportion of Total Leases Assigned in the GOM Federal OCS, 1974–2004 111 6.2 Cumulative GOM Deepwater Production by Year of Lease Assignation, 1983–2001 112 ix 6.3 Years Elapsed Between Lease Assignation and First Oil for Successful Deepwater Projects in the GOM Federal OCS, 1983–1993 112 6.4 Location of GOM Deep Sea Drilling Programme Holes that Encountered Hydrocarbon Shows 114 6.5 Progression of Offshore Exploratory and Production Drilling (Worldwide and USA), 1947–2004 115 6.6 Shell Annual Deepwater Lease Acquisitions in the GOM Federal OCS, 1983–2003 119 6.7 Production Profiles of Early Deepwater Development Projects in the GOM Federal OCS, 1979–2004 120 6.8 Distribution of Winning Bids for GOM Deepwater Acreage, 1983–1993 122 6.9 Distribution of Winning Bids for GOM Deepwater Acreage, 1994–2004 123 6.10 Creaming Curves for GOM Shallow Water and Deepwater Sub-provinces, as of 2002 126 6.11 Creaming Curves for Selected Deepwater Provinces, up to 2003 127 7.1 GOM Federal OCS Output of Condensates and Natural Gas Liquids, 1947–2004 131 7.2 Production Profile of Mensa Natural Gas Development, 1997–2004 132 7.3 Production Profile of Mica Natural Gas Development, 2001–2004 132 7.4 Production Profile of the Cognac Development, 1979–2004 133 7.5 Production Profile of the Bullwinkle Development, 1989–2004 134 7.6 Production Profile of the Mars Development, 1996–2019 135 7.7 Forecast Production Profile of the Thunder Horse/ Thunder Horse North Development, 2005–2020 135 7.8 Production Profile of the Brutus Development, 2001–2015 136 7.9 Production Profile of

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