Chevron's Tahiti Offers Clues to Stamina of Gulf Oil Boom

INGLESIDE, Texas (Dow Jones)

On an oil platform, machinery is typically crammed into every inch of deck space, to the point where crews live two to a closet-sized room.

But Chevron Corp. (CVX) has left precious deck space clear as it puts the finishing touches on Tahiti, a skyscraper-sized offshore production facility, illustrating the uncertainty about what will follow the current production boom in the U.S. Gulf of Mexico.

Tahiti, which is scheduled to produce first commercial oil in mid-2008, is one of several new, multibillion-dollar energy projects in the deepwater Gulf. Taken together, they are expected to temporarily halt a 20-year decline in U.S. oil production by the end of the decade.

"Tahiti is one of Chevron's five big projects," said Peter Robertson, vice chairman of the San Ramon, Calif.-based company's board. "It's going to be extremely important to our growth prospects in the future."

Chevron expects output from the $3.5-billion Tahiti platform to increase to 125,000 barrels a day of high-quality oil within seven months of the start of production. Other companies will be scrutinizing how Chevron, the second-largest U.S. oil company by market capitalization, uses the empty patch on Tahiti's top production deck as much as the initial production figures.

The space is marked off for whatever equipment will be needed to slow the decline that will come a few years, or perhaps even months, after Tahiti hits its peak. All fields decline at some point, but other projects in the deepwater Gulf have seen unexpectedly rapid dropoffs in production. If successful, Tahiti and its peers in the classes of 2007 and 2008 will offer the best confirmation yet that the Gulf can live up to its promise.

Chevron's launch of Tahiti and its big bet on the U.S. Gulf come at a time when international energy majors are facing multiple challenges to their long-term prospects, ranging from restricted access to hydrocarbons in resource-rich countries to escalating labor and equipment costs.

"It will be closely watched," said Julie Wilson, senior Gulf of Mexico analyst with Wood Mackenzie in Houston. "People will be very interested to see how those wells perform."

Mystery Under The Salt Canopy

Tahiti, like nearly every other major deepwater field under development, lies beneath the "salt canopy," a layer of minerals that begins about 100 miles off the easternmost tip of Louisiana and extends to the Texas coast. The salt hides crucial details about oil reservoirs from even the most advanced imaging techniques, meaning Chevron won't know how difficult it will be to maintain the flow of oil once production begins next year.

But Chevron and its competitors are eager to take on the risk of drilling into the salt. With earlier hotspots ranging from the shallower end of the Gulf to the north slope of Alaska seen in irreversible decline, deepwater also represents a last surge for U.S. oil production. A wave of discoveries, some in development since the late 1990s, are expected to boost deepwater production from 896,000 barrels a day in 2006 to 1.5 million barrels a day in 2010, according to the U.S. Minerals Management Service, an agency that oversees oil and gas production in federal waters.

"Over a five-year period the operators have been fairly good about predicting what they are capable of producing," though forecasting more than five years forward is considerably more difficult, said Richie Baud, who co-wrote the MMS deepwater forecast.

For Tahiti, Chevron outlines three possible scenarios, each of which could apply to other projects counted on to boost production in the region. Chevron owns a 58% stake in the field, with Norway's Statoil (STO) controlling 25% and France's Total SA (TOT) with 17%. Recoverable reserves are estimated at 400 million-500 million barrels.

Chevron's field in particular will be observed for how the strong flow of oil seen in early well tests will hold up over time. Tahiti will start with just six production wells, producing an average 20,000 barrels a day, double the flow at other similar projects.

In the most optimistic scenario, Tahiti's oil is sitting in one giant, easily accessible reservoir, which would allow the platform to produce at maximum capacity for five years with little interference. A more likely, though still rosy, situation would have Chevron drill three more wells to boost production once the decline begins.

The least-desired path would involve extracting oil tucked away in many small reservoirs, known as compartments. With most of the crude isolated from Tahiti's six initial wells, Chevron would need to drill six new wells, along with extra holes used to inject water into the reservoir, to flush out pockets of oil. Billy Varnado, who manages the Tahiti project, gives water injection 50-50 odds - not good enough to install the equipment on the platform before it ships out, but enough to justify leaving deck space open for the possibility.

Fingers Crossed

Chevron officials tend to avoid comparing Tahiti to other deepwater finds, where the track record so far has been shaky.

"Every deepwater field is unique," Varnado says.

Of the three fields leading the next wave of deepwater production, Tahiti is the only one to come in on time and on budget. BP PLC's (BP) Atlantis, with an expected peak of 200,000 barrels a day, is scheduled to start production sometime this year, delayed from 2006. Thunder Horse, a 250,000 barrel-a-day platform also operated by BP, is due for 2008, a two-year delay.

Smaller fields have had equally spotty luck. Murphy Oil Corp. (MUR) built a 60,000-barrel-a-day platform over its Front Runner field, about 40 miles northeast of Tahiti, in 2005. Production peaked at 20,000 barrels a day; Murphy now says Front Runner will average no more than 9,500 barrels a day this year.

BP-operated Mad Dog, drilled into a similar rock formation same geological age of Tahiti's reserves, is built to handle 12 wells producing 100,000 barrels a day, but currently operates at half its capacity. Drilling the 12 wells has proven slower and more expensive than expected.

Those failures and others have kept Chevron from making long-term predictions about Tahiti, said Wilson of Wood Mackenzie.

"(Chevron) has seen other people burned with news of poor performance," she said. "They're just being very realistic."

Although production has lagged well behind the pace of discovery, the energy majors over the past year have continued to move forward on earlier finds that aren't expected see first oil until 2010.

At the top of the list for Chevron is Jack, a 2004 discovery more than 100 miles southwest of Tahiti. Chevron completed a successful well test last year and will drill a second well later this year. That far offshore, the majors are encountering formations unlike any they have ever exploited before, said Raud of MMS.

"To a large degree, (Jack) is an unknown," Raud said. "It's a different type of rock altogether."

The salt canopy, by comparison, is crystal clear.

Copyright (c) 2007 Dow Jones & Company, Inc.