annual institute on mineral law

Annual Institute on Mineral Law Annual Institute on Mineral Law

Volume 45 The 45th Annual Institute on Mineral Law Article 8

3-26-1998

Major Differences in Deepwater and Shelf Activity Major Differences in Deepwater and Shelf Activity

Mike Coney

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Repository Citation Repository Citation Coney, Mike (1998) "Major Differences in Deepwater and Shelf Activity," Annual Institute on Mineral Law: Vol. 45 , Article 8. Available at: https://digitalcommons.law.lsu.edu/mli_proceedings/vol45/iss1/8

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Major Differences in Deepwater and Shelf Activity Mike Coney

Shell Offshore, Inc. New Orleans, Louisiana

I. Joint Operating Agreement A. Strong Acreage Forfeiture

1.

Non-consent of initial exploratory well for area

2. Initial production system non-consent to participate

B. Three Major Phases

-

very clearly delineated

1. Exploratory Well -any party, termination of exploration

2. Appraisal Well

-any party, termination of appraisal

3. Development Plan -a. Only operator for specified time

-time clock

b. Content includes the: - Initial production system

-Producible reservoirs

-Pre-drilling operation(s)

-Recoverable reserve

-Development well(s)

C. Integrated Project Teams

1. What are they? Why have them?

2. Work of the Team

-Initial development

3. Subsurface Team

4. Needs of Agreement

a. Confidentiality own proprietary data

b. Confidentiality of joint data and its use restrictions c. Antitrust concerns

D. Shelf Jump Off

Point

1.

What is it and why?

2. Who owns or builds it?

3.

Where will royalty settlement point be fixed? II. Construction and Installation of Deepwater Production System

A. Who signs the contract?

B. Filing of Memorandum of Joint Operating Agreement under UCC

C. Builder's all risk insurance - to buy or not

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1

Coney: Major Differences in Deepwater and Shelf Activity

Published by LSU Law Digital Commons, 1996

D. Contractor's warranty of fitness for intended purpose -remedies for defect

E. TLPs - mating of deck and hull

F. Transportation to Gulf of Mexico of hull or deck and movement to offshore to install

G. Pre-drilled Well

-

risk of loss H. Right of way to place anchors

III. Royalty Considerations A. Transportation to shelf jump off point and on to shore

1. Cost of pipeline installation

2. What transportation related expenses are deductible

a. Dehydration

b. Compression

c. Portion of platform itself

d. Related equipment

B. Where will royalty settlement point be established -Definition ofGathering and Allowance (Transportation)

30 CFR 206.150

30 CFR 206.101

C. Deepwater Royalty Relief 1. 1995 statute expanded statutory basis for relief -43 USC '1337(3)(A)

& (B)

2. Amount of relief varies according to water depth

17.5 MBOE - 200 to 400 meters

52.5 MBOE

-

400 to 800 meters

87.5 MBOE - depths greater than 800 meters

3. Distinction between Eligible Lease and Pre-Act Leases -November 28, 1995

4. Where leases must be located

Western and Central Planning Areas

Eastern Planning Area lying west of87 degrees, 30 minutes west longitude

5.

Secretary must rule on application within 180 days after application complete

6. Denial ofapplication goes directly to court on appeal

-

Final agency action

D. Newly Issued

Leases -

30 CFR 260.102 or Eligible Lease

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Annual Institute on Mineral Law, Vol. 45 [1996], Art. 8


1. Leases granted after November 28, 1995 at lease sales occurring within

5 years after November 28, 1995

63 FR 2626 (January 16, 1998) 2. No need to demonstrate economics

-

automatic

3. Water depth and volume determined with finality at Notice ofSale '260.110(d)(3) 4. Definition of Field

-

30 CFR 260.102

a. Reservoir(s) grouped on or related to same general geologic structural feature and/or stratigraphic trapping condition

5.

Only one suspension volume per Field -lease(s) assigned to a Field

a. At first production from Eligible Lease MMS determines volume ofrelief to leases in a Field

b. How Relief Volume is Shared

(i)

First lease production sets relief volume and get benefit

(ii) Later added leases

-

no volume change

(iii) Multiple leases in a unit at first production (iv) Pre-act Lease and Eligible Lease share largest field volume for which either qualifies

(v) Reassignment of Eligible Lease to new field reduces field volume

(vi) Whole lease (not just part) must lie within the eligible suspension area

Relief continues to the end ofproduction month (vii) Lease with portion in two fields may qualify for two relief volumes

6. New Production

-

30 CFR 203 et seq.

a. Two Types

-Pre-Act Lease with no production prior

November 28, 1995, or Pre-Act Lease already producing with new substantial capital investment

b. Economic Hurdle Test

-

Non-Binding Alternative Production not economic without relief c. Application Content and Fee See 30 CFR 203.62 d. Loss or Withdrawal of

Relief -

30 CFR 203.76 (i) Change in development plan -type of structure,

start data delayed more than 1

year

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3



(ii) Development costs lower than 80% -tell and don't tell Prices rise dramatically OIL $28 arithmetic NYMEX light Precede year GAS $3.50 arithmetic NYMEX Relief loss but volume counts

- 70 -

4



Deepwater Gulf of Mexico:

Technical, Regulatory, and Legal Issues

45th Mineral Law Institute Louisiana State University

Michael E Coney Peter K. Velez Shell Offshore Inc. March 26,1998

-71 -

5



Deepwater Lease Activity 100% Water

Depth

80%

60%

U4500 550 40%

& 03500-45M 20%

U2500"500

g is5o25000% 1990 1991 1992 1993 1994 1995 1996 1997

Year Lease Acquired

- 72 -

6



Deepwater Lease Sale Participants Number of Companies Bidding

9S.1llaDlllilll Sale Date

Central Gulf of Mexico Sales Comparison of Blocks Receiving Bids

Before and After Royalty Relief

Water 1994 1995 1996 1997 Depth Sale 147* Sale 152* Sale 157** Sale 166**

0.200m 313 387 453 412

200-400m

7

23 29 33

400-800m is 38 41

52 800+m 40 140 401 53S

* No Royalty Relief

** Royalty Relief

- 73 -

7



Western Gulf of Mexico Sales Comparison of Blocks Receiving Bids

Before and After Royalty Relief

Water 1994 1995 1996 1997 Depth Sale 150* Sale I5S* Sale 161** Sale 168**

0-200m 177 129 184 130

200-400m 11 27 40 19

400-00m 13 45 72 52

800+m 9 74 321 603

No Royalty Relief ** Royalty Relief

Development Milestones 78 '89 '89 '93 '94 '96 '97 '94 97 '97 '9 00 000 O 0

- 74 -

-1

8



Deepwater Discoveries *

IF

Deepwater Developments w

- 75 -

9



Shell Deepwater Activity W

Offshore Development Systems 0 Fixed Compliant Floating Production Tension Leg

Platform Subsea Tower Systems Platform

Il -P 46 -- . R 4

TechnicalFeasibilityFixed Platform

IComIlant Tower gil lll I FtngSystem m

0 3,000 6,000 Water Depth (t

-76-

10



Auqer Summary meam Oil Production

* 11 Wells Producing - Actual

* Highest Rates Achieved: 109,850 BBL/Day 50

327A MMCFIDay 25 oi

* Record GOM Oil Well Rate 0

21,752 BBLJDay o1" 01195

om oim oW

WMCFIO*Total Production to Date: Gas Production 87 MMBO

212 BCFG 100

Auger Out-Step Program Underway In-field Additions Satellite Tie-back Developments 01

0

os19 oum ofs olm 011m

J I] ~MCfl nca~on,

TLP Hull in Transit

- 77 -

11



MARS on Location

Mars Summary

* Facility Capacity 140 MBO/D and 140 MMCFlD (Original Design Capacity 100 MBOID and 110 MMCFID)

* 11 Wells Producing 10 TLP Wells & 1Subsea Well

* Highest Rates to Date: 125,225 BOLJDay

125.2 MMCF/Day

MI0D 12S

100 Ta

715 so 25

07196

Oil Production

01/97 07/97 01/98

* Well Rates In Excess of 17,000 BBL/D

* Drilling Program Continues orM 017 0797 0198

.'6

-78-

12



0

Mensa Schematic

- 79 -

13



Deepwater GOM Production Total ProductionMBIDD

from Annauncewd Developments 1200

Operator

1000 g Oter

800 -HC Mx

Gas

-

35%

4001

200

0 94 95 96 97 98 99 00

am ani Smeen.hAMe o7O

- 80 -

/9

14



Forces Changinq the Future Intensified New

Competition Technology

SocietalGlobalization Expectations

Key Considerations for Deepwater Operators

* Engineering and Operational Competence - Prerequisite engineering and technological expertise for safe design.

construction, installation and operation

-Prerequisite operational skills, knowledge, and resources for safe exploration, development and production

-Understand diverse and complex deep water systems in an environment of increased risk exposure

* Emergency Management Capability

-

Demonstrated ability to conduct effective emergency management of a mishap in deep water operations

-Ability to direct and commit resources to prevention, mitigation and recovery

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15



Key Considerations of Deepwater Operators (cont'd.)

Regulatory Oversight - Deepwater technology, equipment and advancements well suited for

performance-based, goal-oriented regulatory climate

-Floating OCS Facilities (TLPs. SPARs. FPSOs) have introduced new challenges and expanded the role of the USCO

* USCO tnspectionfApprovals of Hulls and Systems

* Licensue of Operating Marine Personnel * Ughtering & Transpot ofPmrduced Hydrocarbons

Financial Capabilities - Ability to fulfill all lease requirements (pre-exploration through

abandonment) and financially manage any unforeseen situation

-

This capability is as important as engineering, operations and emergency management capabilities

Technical and Operational Challenges * Ultra-Deepwater Drilling

* Long Term Performance of High Rate / High Ultimate Wells

* High Pressure Subsea Systems (10 -15k psi)

* Cold Flow, Long Offset Subsea Wells * Intervention Frequency and Vessels

* Shallow Water Flow Problems * Changing Environmental Design Criteria

* Logistics * Adequately Trained Staff

- 82 -

16



Unique Challenges in Deepwater

* Unitization -Larger and complex fields. Phased and Co- Development

* Conservation -Larger Reserviors, high flow rates, flaring

* Product Measurement -Multiple Ownership/Complex Allocation

- Commingling

* Subsea Systems -Large offsets (50+ miles)

-Fluid Property/Flow Assurance Challenges

* Floating Systems -Motion Compensation

-Storage &Lightering -Collision Avoidance

Issues and Concerns * Anticipated Low Price Environment

* Impact of Increasing Cost of Materials and Services

* Availability of Industry Resources

* Subsea Operability

* Need for Continued Technology Development

* Governmental Impact

* Health, Safety, and Environmental Performance

- 83 -

17



Cost Overview (Shelf vs Deep Water)

Estimated Costs ($ in millions)

Item Water Depth Wells (Based on Gen III Semi)

Explomtory Development (Subsea) Development (Surface)

Systems TLP SPAR Subsea Fixed Platform

Pineline (Nominal 12")

Shelf 200'

$4 $16

$3 NIA N/A $32 $15

$10 (H12 miles)

Deep Water 3000'

$22 $65 $20

$500 $500 $250 N/A

$80 (40.60 Miles)

Deepwater GOM Rig Utilization * Utilization (%) 100%

Semisubmesble 80%

*a

Drllship

60%-

40%-

20%--

0% a 01/94 01/95 01/96 01/97 08/97

Some: onanor oaswens

- 84 -

18



Changes in Agency Jurisdiction

Excerpts from the USCG/MMS Memorandum of Understanding and Revisions to 33 CFR Subchapter N

System/Component

Fire Fighting Systems

Lifesaving Systems and Equipment

Drilling Systems

Pollution Prevention & Incident Reporting

Occupational Safety

&

Health

Deepwater (Floaters)

USCG

USCO

MMS

MMS

USCG

Shelf (and other Bottom Founded)

MMS

&

USCG

USCG

MMS

MMS

USCG

Changes in Agency Jurisdiction (cont'd.)

Excerpts from the USCG/MMS Memorandum of Understanding and Revisions to 33 CFR Subehapter N

System/Component

Structural Integrity

Utility Systems (non-Marine)

Utility Systems (Marine)

Quarters - Permanent & Temporary

Transfers of Oil

Deepwater (Floaters)

MMS

&

USCO

MMS

USCG

USCG

USCG

£o*~rr1 - GCQCQC

-

85 -

Shelf (and other Bottom Founded)

MMS

MMS

MMS

USCG

MMS

19



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