New oil find tests drilling's watery limits

Evidence this week of a major new oil find is a tantalizing reminder of the importance of deep-water drilling to America's energy future. The field found deep below the Gulf of Mexico could boost the nation's proven oil reserves by as much as 50 percent, Chevron Corp. announced Tuesday.

But amid the exuberant claims of a new era for domestic oil drilling, some energy industry insiders could be forgiven for their subdued responses. The sheer depth of Chevron's discovery reinforces a well-known truth: the world's much-needed petroleum reserves are harder and more expensive to find than ever.

"They've learned that it's feasible" to produce at great depths, says Jim Bushnell, research director at the University of California Energy Institute in Berkeley. But the total potential supply of oil there represents "about two years' worth of consumption. It's not a long-term solution to America's energy future by any means."

To drill the test well, called "Jack 2," Chevron and two other companies had to plunge 7,000 feet below the warm surface waters of the Gulf, and then pierce several miles below the sea floor for a total depth of 28,175 feet.

Nearly 150 years ago, when petroleum first intruded on the era of whale oil and candles, the first well in Titusville, Pa. was only 69 feet deep.

Chevron estimates that the 300-square-mile region surrounding Jack 2 could hold between 3 billion and 15 billion barrels of oil and natural gas.

The upper end of that range would rival the discoveries on Alaska's North Slope a generation ago. The successful test comes as America's land-based oil wells are yielding diminishing returns. The nation's known total reserves are 29 billion barrels. Americans consume more than 7.5 billion barrels of oil each year.

"The deep-water play ... is going to be very important in the growth of non-OPEC production," says Michael Rodgers, an industry analyst at PFC Energy in Washington. "You have an emerging trend in the Gulf of Mexico that appears to have a lot of oil in it. But nobody knows how much."

The bulk of today's easy-to-get oil lies below the nations of the Organization of Petroleum Exporting Countries (OPEC), notably Saudi Arabia, Kuwait, Iran, and Iraq. Saudi reserves alone are considered to be nearly 10 times that of America's proven supplies.

Mr. Rodgers says he expects the OPEC nations to boost their output in the years ahead, but "it's really hard to tell." Cartel nations tend to have little transparency about their reserves or production plans.

Until alternative fuel prices can compete with oil, the quest by Western corporations to find and tap new oil fields will continue – however great the difficulty.

"Of new production outside OPEC, a very large percentage of it is deep water" already, Rodgers says. Without those reserves, "non-OPEC production would be falling right now."

Indeed, finds like the area near Jack 2 do little to relieve the urgency to develop alternative fuels, given America's giant demand for oil, as well as growing demand worldwide.

Moreover, it will take several years before any of the Jack 2 oil reaches consumers.

Still, any find this big is significant – and in this case, so are the technological implications for the future.

Chevron and partners Devon Energy and Statoil of Norway set a new record for the overall depth of this test well, which they said sustained a flow rate of more than 6,000 barrels per day.

The success was a testament to the notion that if there's oil somewhere, companies large and small will find a way to get at it.

That's what is happening in deep water off places such as Nigeria and Brazil as well as the Gulf of Mexico. The Jack 2 well lies 175 miles off the Louisiana coast. Where the limit not so long ago was 1,000 feet of water, now it's 5,000 or more.

New methods of seismic data analysis allow geologists to peer through once-murky salt deposits as they decide where to explore. A new generation of floating rigs also makes it possible to drill ever deeper holes.

"As the price [of oil] goes up, more and more things that were unthinkable become real possibilities," says Mr. Bushnell.

But the improved technology comes at a steep cost. Setting up a well in mile-deep water can run $100 million, analysts say.

Nevertheless, today's high oil prices make even high cost projects viable.

Crude oil prices have fallen below $70 a barrel from their recent peaks, thanks in part to the end of the summer driving season, rising stockpiles, and a quiet hurricane season so far.

But many analysts believe that even if prices continue to retreat, they will never drop to the $20 or $30 per barrel range of the past decade.

Offshore discoveries could add political pressure for states such as Florida to open their waters to drilling, despite the environmental risks involved.

Some analysts say that, at best, offshore resources are a substitute for dwindling supplies on land.

"If we have any hope ... of keeping the [production] base flat for a while, then it's really likely that it's going to be from offshore," says Matthew Simmons, a Simmons & Co. analyst in Houston.