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Chevron and Cnooc Covet Unocal For Its Leases in Gulf of Mexico, Deep-Water Drilling Technology

By RUSSELL GOLD Staff Reporter of THE WALL STREET JOURNAL July 21, 2005

Underlying the bidding war between U.S. and Chinese oil companies for Unocal Corp. is competition for access to a tantalizing new oil play in the deepest waters off the Gulf of Mexico.
Much attention has been paid to the value of Unocal's vast Asian oil and natural-gas fields. But Unocal's position in the Gulf of Mexico -- and its growing mastery of deep-water drilling -- is another valuable prize.
The El Segundo, Calif., oil company's exploration in the deep waters off the Gulf Coast could yield as much as 15 billion barrels of oil in the future, experts say. That would be enough to feed demand in the U.S. for two years.
Unocal is known as an expert at drilling wells as deep as nearly six miles under the crust of the Earth while floating in 10,000 feet of water. That, along with its portfolio of prime deep-water-drilling leases, helps explain why both Cnooc Ltd. and Chevron Corp. are willing to spend billions of dollars for the company. Cnooc has offered to divest itself of U.S. assets if needed to obtain regulatory approval, but the Chinese company clearly wants the deep-water assets and would sell them only if required.
Unocal's board Tuesday accepted an increased bid from Chevron, which raised its offer to about $17 billion in cash and stock -- a move it hopes will put to rest Cnooc's ambitions to acquire Unocal. Cnooc, which is 70%-owned by the Chinese government's China National Offshore Oil Corp., could still counter by raising its all-cash offer, which stands at $18.5 billion. The prospect of China owning Unocal set off alarms in Congress, where members of both chambers have unsuccessfully opposed the deal on fears of China's economic clout. This legislative backlash, encouraged by a Chevron lobbying effort, has created substantial political barriers to Cnooc's bid.
In 4 p.m. New York Stock Exchange composite trading yesterday, Unocal shares were down three cents to $64.96, giving the company a market value of about $17.7 billion.
A winning bid would be a step forward for Cnooc's deep-water ambitions, giving it valuable technology and experience it could spin out to other deep-water prospects around the globe, said Andrew Strachan, an energy analyst for Wood MacKenzie.
The Gulf of Mexico has long been one of the world's most prolific energy-producing regions and a testing ground for cutting-edge drilling and production technologies. Deep-water exploration is a crucial growth area for the oil industry, which is dependent on more complex and risky projects to boost production.
Chevron has struggled recently to find enough new oil and gas to replace what it is pumping each year, even as it generates record profit and adds to its $10.7 billion cash reserve. Unocal would provide numerous opportunities, in the Gulf and elsewhere, for Chevron to add to its reserves and production in coming years.
Chevron's chairman and chief executive, David O'Reilly, has called Unocal's deep-water portfolio one of the "key drivers" of Chevron's pursuit of the company. Winning Unocal would help secure the company's strong position in the deep-water Gulf against rivals including Exxon Mobil Corp. and BP PLC, making it the largest holder of acreage there, according to Wood MacKenzie.
Though Chevron declined to discuss its interest in the Unocal Gulf assets further, geologist Dave Meyer, who leads Chevron's exploration efforts in the Gulf, suggested at an industry meeting last year that the old rocks the industry is beginning to explore in the deep waters could be "the most prolific petroleum system in the Gulf of Mexico."
Two-thirds of the oil-and-gas reserves discovered globally in 2002 and 2003 were in water 1,200 feet or deeper, according to a joint study by energy consultancies Wood MacKenzie and Fugro Robertson, underscoring the intense competition to lock up acreage and develop technology to tap into these new fields.
But the risks in going after oil in deep water are huge. Oil companies are spending tens of millions of dollars on unproven fields. Unocal's Trident well, which hit oil-soaked rocks 20,000 feet below the seafloor, took 66 days to drill and cost $34 million; other wells can cost considerably more.
Drilling at record depths in the Gulf of Mexico is one of the most promising emerging offshore exploration efforts. In decades of Gulf exploration, 99% of the hydrocarbons have come from rocks that are 24 million years old or younger. Now oil companies are looking for potentially mammoth new crude-oil and natural-gas fields by chewing into untested rocks formed as long as 65 million years ago and so deep that it can take a year to drill the well. In the Gulf, the newest exploration is focusing on a 300-mile-long rock formation known as the lower tertiary.
"To go deeper is a tried-and-true method of finding older oil-and-gas reserves," said Steve Bell, president of exploration for BHP Billiton Petroleum, part of Australia's BHP Billiton Ltd., which is teaming up with both Chevron and Unocal on wells in the Gulf.
It has only been in recent years that oil-field engineers have refined the technology needed to peek beneath a giant underground canopy of salt that spreads out across the deep waters of the Gulf. A number of companies, including BP, Chevron, Royal Dutch Shell PLC, Devon Energy Corp. and BHP Billiton, are pursuing this deep vein of oil, but it is Unocal that has made among the most significant finds.

posted by Henry @ 12:18 PM