The deepwater area of the Gulf of Mexico contains a large prospective inventory for the energy industry to explore. In addition, it remains one of the best hopes for the United States to reduce its dependence on foreign oil and gas. The Lower Tertiary trend, an area that has yielded several recent discoveries, has excited the industry. However, the extent of the trend is unknown due to lack of data. Furthermore, development requires a much higher oil price due to the presence of geological and other conditions. (To learn about this industry, read our Oil and Gas Industry Primer.)
In order to understand more about the Lower Tertiary, an outline of the geology of the deepwater must be explained. Geologists divide the deepwater into four systems based on the ages of the reservoirs These four, in order from oldest to youngest, are: Jurassic, Cretaceous, Tertiary and Quaternary. These divisions are separated further into lower and upper sections. Currently, 98.9% of all proved reserves in the deepwater are from the Upper Tertiary or younger.

It is difficult to get an exact estimate on how many reserves are located in this trend. The U.S. Minerals and Management Service (MMS) estimates that it could contain anywhere from three billion to 15 billion barrels of recoverable reserves. Although this is not a significant amount compared to the giant fields in the Middle East, it a large amount for a domestic source. The wide range of the estimate demonstrates the uncertainty related to the lack of data. (To learn about the factors that govern this hot commodity, read A Guide to Investing in Oil Markets.)

Formidable Challenges
One problem with developing the resource is the high cost associated with offshore drilling. These wells are located far offshore in the Gulf of Mexico. The dearth of drilling and production infrastructure available to handle these wells presents a formidable challenge. Specifically, rigs for drilling at those great depths can cost hundreds of thousands of dollars per day to lease.

KBR (NYSE:KBR) is an oil services company heavily involved in offshore construction of drilling and production facilities. A recent estimate from one of its speakers at an industry conference said that an oil price between $50 and $70 is needed to make development economically feasible. In addition, the speaker cited other problems like "low rock permeability, high pressure and temperature (and) deep reservoirs in deepwater." He also mentioned the need for some form of artificial lift.

Promising Discoveries
One of the first discoveries in the Lower Tertiary trend occurred in 2002, when Royal Dutch Shell (NYSE:RDS-B) discovered oil on its Great White prospect. The company has plans to develop the field and others nearby with up to 35 wells.

The most recent discovery came from Chevron (NYSE:CVX), which drilled a successful well at its Buckskin prospect in the Lower Tertiary trend. The well was drilled in almost 7,000 feet of water to a depth of 29,000 feet. However, Chevron did not give out many details on the find, as is normal practice in the industry.

Although the cost of developing the Lower Tertiary trend restricts it mostly to large international oil companies, a few large independents are exploring these days. Devon Energy (NYSE:DVN) is very active with four projects underway. The company has drilled 11 wells to date in the Lower Tertiary and expects first production to occur in 2010.

Bottom Line
The industry is very excited about the development potential of the Lower Tertiary trend in the deepwater Gulf of Mexico. However, the exact production amounts are yet to be seen due to the costliness and difficulty of drilling there. In addition, the sharply lower price of oil has reduced the economic incentive to drill this area. (Dig deeper into this industry at Unearth Profits in Oil Exploration and Production.)

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Tickers in this Article: CVX, RDS-B, DVN, KBR

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