Graphically Speaking: Producing Oil Offshore

Mark Green
Posted January 25, 2012

Yesterday, we looked at the time it takes to produce oil on federal lands, now let’s look at offshore.  As you can see from the chart below, just like on land, it takes time.  In general, from purchase of the lease to first production can take anywhere from 7 to 10 years in areas that have existing infrastructure. In this context, the timeline for OCS exploration and production can include:

• Six months to a year for MMS administration and execution of lease sales in unleased areas.
• One year for preliminary geological investigation and selection of areas of interest for additional seismic data acquisition.
• One year to two years to acquire and to process 3D (and new wide azimuth) seismic data, and to identify drillable prospects from this data.
• As much as a year or more to contract and schedule a drilling rig.
• Six to 10 months for drilling and completion of an exploratory well.
• Six months to a year for follow up evaluation of drilling results, which can include drilling a sidetrack well.
• Another two to three years for additional delineation drilling, and formulation of a plan for reservoir development if the exploratory well proves successful. During this time, the company also is working on pre-permit studies, permitting, and design and procurement for production facilities, including surface and subsurface equipment and systems.
• One year or more for facilities installation, followed by development drilling, which may take from one to two additional years. During this period, the company is involved in design, permitting, engineering, procurement and installation of a pipeline or offshore mooring system to bring the production to market.

It is also worth noting that a lease is only a rental agreement with no guarantee that the leased area contains any oil or natural gas. In fact, most leased areas do not contain oil and gas in commercial quantities.  Capital costs can be considerable for OCS projects, particularly those in deepwater. Marine seismic surveys can cost upwards of $200,000 per day. The cost of offshore exploratory wells can range from $25 million to more than $100 million for some deepwater prospects. It is not unusual for a company to spend more than $100 million on an exploratory well only to come up empty with a “dry hole.”  In general, leases not producing by the end of their term are relinquished back to the government, which can then re-lease them. All the capital spent by the company to acquire and keep the lease is lost if the lease is returned to the government.

This is a long expensive process and the decisions, or rather the decisions to delay, made today, have long-term consequences.