U.S. Market Stability Spurs Shell's Gulf of Mexico Push

Shell Oil Co.'s eye-catching purchase of Gulf of Mexico leases last week flows from the company's confidence in the region's resources and stability, a top Shell executive said.

The company spent more than $554 million dollars in the central gulf lease sale 205 (Greenwire, Oct. 4). Shell is already a major gulf producer, pumping roughly 390,000 barrels per day worth of oil.

Marvin Odum, who heads the company's Western Hemisphere exploration and production operations, told reporters Friday that the company undertook extensive preparation for the sale.

"We put in the up front work to understand the subsurface, to tie that to the leases that were coming up for sale, to build the geologic models to give us the confidence to go in at the level we did," said Odum, executive vice president for the Americas for Shell Exploration & Production.

Odum also said the company is confident that it has the necessary equipment available to seek oil in the challenging deepwater areas, noting that it has options to extend current rig contracts to explore the tracts. "There are a certain number of rigs in the industry that are capable of drilling these and available, a lot of which we have under contract, so we are comfortable with where we are," he said.

He estimated production from the leases would not start for at least six years.

During a wide-ranging briefing, Odum also said the stability of the U.S. market is a draw for the company. Key producing nations including Russia and Venezuela have in recent years been exerting stronger state control over foreign oil company operations.

"It is a market that has been very stable. It is predictable," he said. "We like this part of the world, and it is pretty obvious that we are going to be drawn to areas that exhibit those characteristics."

Greg Priddy, an analyst with the Eurasia Group, said the reassertion of strong state control in several major producing nations is prompting oil companies to ramp up efforts elsewhere.

"That's driving capital into safe markets like the U.S. gulf, and also into frontier markets where the governments have to offer very good terms," including some African countries, he said in an interview Friday.

Sands, shale, Alaska

Odum also said a recent proposal to increase royalties from oil sands projects in Alberta, Canada, could affect investment decisions but declined to provide specifics.

A study commissioned by the provincial government recommended sharply increasing the government's take of oil sands revenues, along with smaller increases in natural gas and conventional oil.

Companies including Encana, Petro-Canada and others said they would cut investment if the proposal -- currently under review by the government -- is enacted. Odum did not say how or whether it would affect specific projects but added "it would pretty clearly have a big impact."

"We are trying to understand the impact," he said. Unconventional oil -- like sands and gas-to-liquids -- currently accounts for 5 percent of Shell's production, but this is forecast to increase to the 10 to 15 percent range by 2015, he said.

Elsewhere, Shell has backed away from plans to make a decision in roughly 2010 about whether to pursue commercial investment in producing oil shale in Western states.

The company has long been experimenting with a in-situ technology for developing abundant but hard-to-produce shale oil. The research and development also includes use of "freeze walls" around production to protect groundwater supplies.

"How quickly it will come out of that [research and development] phase, I don't know," he said.

In Alaska, the company remains highly confident in offshore areas, where Shell has invested in Beaufort Sea leases, and is committed to working with local communities to address environmental issues, Odum said.

Shell suffered a setback in August when a federal court blocked the company's exploratory drilling plan (Greenwire, August 16). The company is still moving ahead with seismic work, he said, noting the company is testing use of technology that will allow testing from above the sea ice in winter.

"Has our enthusiasm waned?" he said. "No, it hasn't."

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