DRILLING THE LEASE INVENTORY

The combination of huge deepwater lease inventories and a limited rig fleet dedicated to the GOM means that the vast majority of today�s leases will remain untested when their terms expire.

Figure 75 shows historical lease activity trends.

Figure 75. Activity on deepwater leases. (Click the image to enlarge)

As mentioned previously, these data are complete only through 1993, since most deepwater leases beyond that time are still under their primary terms and still under evaluation.

Similar to today�s large lease inventory is the period from 1988 to 1989, during which large numbers of new leases were acquired.

The percentage of leases drilled decreased as lease inventory swelled, because of a limited number of available rigs.

During times of high lease inventory, fewer than 10 percent of deepwater leases were drilled and fewer than 5 percent were produced.

Figures 76a-b show that the reduction in drilling (figure 33) is not related to a lack of success in finding hydrocarbons.

Figure 76a. Leases drilled and barrels found. (Click the image to enlarge)

Figure 76b. Exploration effort and reward: number of leases drilled in a year and BOE discovered per lease. (Click the image to enlarge)

Exploratory drilling is arguably the most important indicator of exploration effort.

Figures 76a-b use the number of newly drilled leases as the measure of this effort. The general relationship between exploration effort and amount of hydrocarbons discovered is shown in figure 76a.

The amount discovered includes reserves, resources, and industry-announced discoveries (same data as figure 56).

Notice that, in the last two years there has been a decline in the number of new leases tested and in the amount of hydrocarbons discovered.

Much of the drop in the amount discovered is caused by the 24-month delay in industry�s release of proprietary drilling results. Volumes in 2002 and 2003 are, therefore, significantly understated.

Figure 76b shows the average volume of hydrocarbons added for a tested lease. Although the scatter of data points is wide, the trend shows an increasing volume discovered per lease drilled. The figure shows that there is no decline in exploration rewards in the deepwater GOM. With the addition of complete discovery results for years 2002 and 2003, the trend will continue to increase.

Although the percentage of leases drilled decreased during the late 1980�s, the actual number of leases issued and drilled generally increased, resulting in higher numbers of discoveries and producing leases.

These relationships among leasing, drilling, and production of offshore deepwater blocks are shown in figures 77a-c. There is only a general correlation between the number of leases issued and those drilled and produced (figures 77a-b).

Figure 77a. Relationship between number of leases issued and number of leases drilled, 1974-1993. (Click the image to enlarge)

Figure 77b. Relationship between number of leases issued and number of resulting producing leases, 1974-1993. (Click the image to enlarge)

In contrast, the number of deepwater leases drilled correlates strongly with the number of those leases that later produced (figure 77c).

Figure 77c. Relationship between number of leases drilled and number of resulting producing leases, 1974-1993. (Click the image to enlarge)

Figure 78 illustrates the magnitude of the deepwater lease inventory and industry�s ability to evaluate this large number of leases.

Figure 78. The challenge of deepwater lease evaluation. (Click the image to enlarge)

The annual historic lease data from 1984 through 2003 are in the solid colored lines and depict the number of primary term leases, number of leases tested, and the number of leases expiring untested.

The large increase in lease inventory from 1996 through 2000 is very evident and propagates through to 2010. Future values for primary term leases, lease expirations, and leases drilled are in the dotted lines.

These values assume that, after the year 2004, all leases will expire unless drilled and that 60 untested deepwater leases will be drilled each year.

A historic review of GOM exploration activity indicates that, on average, about 10 percent of the deepwater leases acquired in the large sales are drilled.

Of the approximately 3,200 deepwater leases issued from 1996 through 2000, however, only 6.5 percent have been drilled to date.

There are over 2,400 leases from these sales still in their primary lease term, with more than 750 of these leases in water depths of greater than 7,000 ft (2,134 m).

Only 34 wells have been drilled on the ultra-deepwater leases from these sales, 11 of these wells resulted in announced discoveries.

Figure 78 shows a steep decline in active leases as the large number of leases acquired in 1996 through 1998 start to expire.

Note that this graph does not include the hundreds of new leases that will be added to the inventory each year from upcoming lease sales.

The available deepwater rig fleet will challenge industry�s ability to evaluate their lease inventory, both current and future additions.

Other factors play a significant role in the industry�s ability to evaluate their GOM lease inventory, including alternative deepwater exploration and development targets throughout the world, capital limitations, and limited qualified personnel.