Gulf Oil Discovery Lifts Hopes for New Geological Play

HOUSTON Aug 31, 2006 (Dow Jones Newswires)

A deepwater discovery reported Thursday underscores the growing importance of a geological formation in the U.S. Gulf of Mexico that's only recently become accessible to crude oil and natural gas producers.

A consortium led by BP PLC (BP) found hydrocarbons at the Kaskida well, right in the middle of the Keathley Canyon offshore area, 250 miles southwest of New Orleans. Other prospects in these kinds of formations - known as the "lower tertiary" - have been found in Walker Ridge and Alaminos Canyon, to the east and the west of Keathley Canyon.

While companies have been exploring and producing in the Gulf for decades, the advent of more sophisticated drilling technology over the past five years has allowed them to probe further into the Earth's crust in deeper waters in order to reach previously inaccessible reserves. This year's relatively mild hurricane season in the Atlantic and sustained high energy prices have also raised the chances for these ventures to turn a hefty profit once commercial production begins.

Kaskida is the first such discovery in Keathley Canyon, one of the southernmost provinces of the U.S. side of the Gulf. BP holds a 55% stake of the project. Other partners are Devon Energy Corp. (DVN) with 20% and Anadarko Petroleum Corp. (APC) with 25%.

The Kaskida discovery "is going to be very meaningful for Devon and Anadarko," which are the second- and third-largest holders of lower tertiary leases, after Chevron Corp. (CVX) said David Heikkinen, an analyst with Houston-based energy research firm Pickering Energy Partners.

Devon believes that the Kaskida discovery is the "largest to date" in the Gulf's lower tertiary, said senior exploration and production vice-president Stephen Hadden in a release.

Anadarko was also optimistic about its first lower tertiary exploration success.

"Kaskida significantly enhances the prospectivity of Anadarko's acreage position," said Bob Daniels, Anadarko's senior vice-president of worldwide exploration in a press release.

Squeezing Oil From Older Rocks

Most of the Gulf of Mexico's oil found so far is trapped in rocks dating from the Miocene period, between 5 million and 23 million years ago. But lower tertiary rocks are older and deeper and promise to be even more bountiful in hydrocarbons, Heikkinen said.

Although many such discoveries are large, ranging in the 350 million-500 million-barrel range, companies have yet to determine whether the hydrocarbons will flow at economic rates. That's why Gulf watchers are eagerly awaiting the public release of the results of a recently completed flow test at the Chevron-operated Jack discovery.

The "body language" from Devon - which also has a stake in Jack - means the "flow test is encouraging enough that companies want to invest in the lower tertiary," Heikkinen said.

Appraisal of the Kaskida well, which lies in 5,860 feet of water, will begin later this year, BP said. It was drilled to a depth of nearly 32,500 feet. Prospectors found 800 net feet of hydrocarbon-bearing sands, or "pay." By contrast, the first Jack well found 350 feet of net pay in 2004.

The large amount of net pay indicates that Kaskida's estimated reserves could come in at the higher end of the 350 million-500 million-barrel range.

Copyright (c) 2006 Dow Jones & Company, Inc.

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