Gulf drilling near peak 20 months after spill

Two hundred miles off the coast of Texas, ribbons of pipe are reaching for oil and natural gas deeper below the water's surface than ever before.

These pipes, which run nearly 2 miles deep, are connected to a floating platform that is so remote Shell named it Perdido, which means "lost" in Spanish. What attracted Shell to this location is a geologic formation found throughout the Gulf of Mexico that may contain enough oil to satisfy U.S. demand for two years.

Although Perdido is isolated, it isn't alone. Across the Gulf, energy companies are probing dozens of new deep-water fields thanks to high oil prices and technological advances that finally make it possible to tap them.

The newfound oil will not do much to lower global oil prices. But together with increased production from onshore U.S. fields and slowing domestic demand for gasoline, it could help reduce U.S. oil imports by more than half in the next decade.

Eighteen months ago, such a flurry of activity in the Gulf seemed unlikely. The Obama administration halted drilling and stopped issuing new permits after the explosion of a BP well on April 20, 2010, killed 11 workers and caused the largest oil spill in U.S. history.

But the drilling moratorium was eventually lifted, and the administration issued the first new drilling permit in March. Now the Gulf is humming again, and oil executives say it's the world's best place to drill.

"In the short term and the medium term, it's clearly the Gulf of Mexico," said Matthais Bichsel, a Royal Dutch Shell PLC board member who is in charge of all of the company's new projects and technology.

By early 2012, there will be more rigs in the Gulf designed to drill in its "deep water" — defined as 2,000 feet or deeper — than before the spill.

In November, Perdido began pumping oil from a field called Tobago; the well begins 9,627 feet below the surface of the Gulf. No other well on the globe produces oil in deeper water, and that's about as deep as the Gulf gets. For drillers, that means the entire Gulf is now within reach.

"We are at the point where … depth is not the primary issue anymore," said Marvin Odum, the head of Royal Dutch Shell's drilling unit in the Americas. "I do not worry that there is something in the Gulf that we cannot develop … if we can find it."

As global oil demand climbs past 89 million barrels a day and traditional onshore and shallow water fields are depleted, the deep waters of the Gulf and off the coasts of South America, West Africa and Australia are playing an increasingly important role.

In 2000, 1.5 million barrels of oil per day were produced from deep-water fields around the globe, or 2 percent of global production. In 2011, that number grew to 5.5 million barrels, or 6 percent of global production. By 2020, deep-water oil will account for 9 percent, according to IHS CERA.

The Gulf is attractive for many reasons. Its oil fields are enormous; it's tucked into the world's biggest consumer of oil; it's in a politically stable part of the world; and drillers can easily tap into a vast network of pipelines and refineries. Also, despite industry complaints, the cost of royalties, taxes and regulation in the United States are among the lowest in the world.

"Everybody wants to be there," says Mohammad Rahman, the lead Gulf analyst for Wood Mackenzie.

By early 2012, there will be 40 deep-water rigs in the Gulf, up from 37 before the BP spill, according to Cinnamon Odell of ODS-Petrodata. BP received its first permit to drill in late October.

The Gulf produces an average of 1.5 million barrels of oil per day, according to Wood Mackenzie. That's 27 percent of U.S. output and 8 percent of U.S. demand.

Thanks to more accurate imaging technologies, drillers are able to see under geologic formations that used to confound geologists. In June, ExxonMobil Corp. said it found 700 million barrels of oil — one of the biggest discoveries in the Gulf in past decade. In September, Chevron and BP also announced major finds, thought to be in the hundreds of millions of barrels of oil.