Commentary: Plenty Of Oil—Just Drill Deeper

The discovery of reserves in the Gulf of Mexico means supply isn't topping out

You can tune out all the scare talk about Peak Oil for a while -- probably a long while. Peak Oil is the theory, on the verge of becoming conventional wisdom, that the world's petroleum supply is topping out and will not be able to meet global demand soaring along with the economies of China and India. But a successful test in a mammoth field deep beneath the Gulf of Mexico, announced on Sept. 5 by Chevron (CVX ), Devon Energy (DVN ), and Norway's Statoil (STO ), should help put that scary scenario on hold for decades.

One huge oil reserve, even if it could rival the 1968 discovery of Prudhoe Bay and increase U.S. reserves by up to 50%, will not turn around the world's tight energy markets, of course. It won't even bring the U.S. close to energy independence when oil and gas get into full-fledged production four or five years from now.

But the capability to find and recover petroleum at extreme depths, temperatures, and pressures, as demonstrated by the Chevron team, may indeed tip the balance of supply and demand in the long term. There will be a new frenzy of drilling at these depths in the Gulf of Mexico, where about a dozen promising exploration wells have already been drilled.

Other parts of the world that once appeared beyond the pale may also come into play. Areas believed to have oil deposits extremely deep beneath the ocean floor, which could now become commercially recoverable, include the North Sea off the coast of Britain, the Nile River Delta off the coast of Egypt, and possibly coastal Brazil, says Andrew Latham, a vice-president at energy consultancy Wood Mackenzie in Edinburgh, Scotland. Other analysts say West Africa could harbor lots of ultra-deep deposits. The areas have produced oil before but never from these depths.

The record-setting Chevron well, called Jack 2, which is 175 miles off the Louisiana coast, is more than five miles deep, including more than a mile of ocean depth. Modern 3-D seismic gear enabled the team to know where to drill to have a chance to make their $100 million-plus bet that oil would flow from such a deep formation. The drilling was the work of an advanced deep-sea rig -- Transocean Inc.'s (RIG ) Cajun Express -- one of 13 the company has launched since 1998 capable of drilling to depths of 35,000 feet, about double what the previous generation could do. Earlier drilling had established promising reserves in an area of the Gulf 300 miles long and 80 miles wide, but the Chevron project found a flow rate of more than 6,000 bbl. a day of light, sweet crude. The discovery confirmed the area's commercial viability, strengthening hopes that as much as 15 billion barrels of oil could be recovered in the vicinity.

Pioneering isn't cheap. Steel and skilled labor rates are going through the roof, as are rental rates for state-of-the-art offshore rigs. BP (BP ), for example, will be paying $520,000 per day starting late next year for the same rig it is now getting for $190,000 per day. That's because these fancy rigs, which house 200 people and rise 415 feet into the air, are in short supply with drilling picking up. Still, energy experts believe that producing oil from ultra-deep wells can be profitable as long as oil, selling for $67 per barrel today, stays at or above $40 to $45..

Matthew R. Simmons, chairman of an energy investment bank bearing his name and one of the leading proponents of Peak Oil, is sticking to his guns. "One well tells you almost nothing," he says. Simmons says the deep wells are "unbelievably expensive" and often fall short of expectations. "The history of the industry is full of disappointment."

But given the powerful combination of high oil prices and new technology, the industry is gaining confidence that supplies will grow. It's pushing hard to produce oil and gas from difficult tar sand and shale fields as well as rejuvenating older fields with enhanced recovery methods. Cambridge Energy Research Associates predicts world oil and natural gas liquids capacity could increase as much as 25% by 2015. Says Robert W. Esser, a director of CERA: "Peak Oil theory is garbage as far as we're concerned."

By Mark Morrison, with Stanley Reed in London and Chris Palmeri in Los Angeles

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