You might count the Gulf of Mexico down, but it is definitely not out. True, it is beset with tremendous infrastructure challenges right now, and over the long haul, its production-decline curve is still steep, while costs are getting higher as operators drill deeper. But hurricane risks aside, the Gulf is still one of the less-risky places in the world in which to make a splash. And activity here could ramp up significantly prior to the expiration of more than 2,800 deepwater leases from 2006 through 2008, points out E&P analyst Frank Bracken with Jefferies & Co. What's more, Bracken, who closely tracks production data and plans for drilling, thinks talk about the Gulf's shelf being played out is wrong. Although shelf output has fallen appreciably since 1997, "there are a number of factors that argue that the shelf declines should abate going forward, [one reason being] that the balance of control of the shelf has shifted away from the majors in favor of independents." For the moment, however, questions abound. Weeks after Hurricane Rita and more than seven weeks after Katrina roared through the heart of the Gulf, more than 1 million barrels per day of crude oil production-about 70% of daily Gulf output-were still offline. Nearly 60% of the gas production was shut in as well. No one can say for certain how long it will take the pipelines, gathering systems and processing plants to get back to 100% capacity, what with most of the shore bases destroyed outright or severely damaged. The call on workers, service boats and helicopters is enormous. Displaced employees need to be housed and fed by the E&P and service companies as they work through a soggy logistical challenge. Houston-based Dynegy Inc. is a minority-interest owner and operator of Venice Energy Services Co. in Plaquemines Parish and the Yscloskey gas-processing facility in St. Bernard Parish, southeast Louisiana. Before Katrina, these plants processed 650 million and 1 billion cubic feet (Bcf) per day, respectively. They received in excess of 10 feet of storm water and some wind damage, and roads were impassible. At press time, State Highway 23 to Venice was open again and water had subsided. "We're currently in a clean-up and detailed assessment mode, followed by a recovery that is expected to be a months-long process-possibly four to six months," says Dynegy spokesman David Byford. In southwestern Louisiana, Hurricane Rita damaged Dynegy's Stingray, Barracuda and Lowry processing plants in Cameron Parish. These process an aggregate 500 million cubic feet of gas a day. Lowry is back online but recovery at the other two plants will take another two months. Until infrastructure is restored, operators cannot ramp up to full production. Experts say the road back will be longer than it was for Hurricane Ivan in 2004. One Gulf-focused independent, Houston-based W&T Offshore Inc., says that of its normal 245 million cubic feet per day, some 91 million will take 60 days or more to bring back. At press time, only about 15% of the company's production was onstream. But setting aside the human and economic devastation that will affect the entire country for months to come, the Gulf of Mexico remains one of the more prospective areas of the world for oil and gas exploration and production going forward. "If you like cash flow, the Gulf is where you ought to be," says W&T chief executive officer Tracy Krohn. "It's hard work, but it can be done." The company has had the same reserve profile and reserves-to-production ratio for 20 years in the Gulf, belying the "production treadmill" problem, he adds. In the past two years, on the heels of ever-higher commodity prices, the Gulf rig count had risen to average about 100 per week-before the two hurricanes. A tight supply has been made worse by the hurricanes and a half-dozen rigs leaving the Gulf for foreign waters. Dayrates have doubled in some cases, reaching historical levels, prompting new-builds. The offshore-rig order book worldwide now consists of 40 jack-ups and seven ultra-deepwater rigs under construction, 14 of which are scheduled for delivery by the end of 2006, according to Jefferies analysts Judson Bailey and Daniel Andersen. Some 213 offshore supply vessels also are on order, with about 70 set to be delivered this year and 118 next year. Houston-based driller Rowan Cos., which lost five jack-ups to the storms, is trying to see how it can speed up its rig-building activity at the LeTourneau shipyard located in Vicksburg, Mississippi. Merger and acquisition activity has heated up, especially as international oil companies seek entry to the Gulf. For every company, such as EnCana Corp., Forest Oil Corp. and Pioneer Natural Resources Co., that departs, another firm wants to get in. "The Gulf of Mexico is one of the premier places in the world in terms of the combination of cash margins you can make and the remaining potential," says Bill Marko, a managing director with Houston-based Randall & Dewey, the M&A advisory unit of Jefferies. "And, it has the most open, competitive environment, between lease rounds, farm-ins and joint ventures, and merger and acquisition opportunities." The lure is still big reserves and fast cash flow. Alan Murray, senior petroleum economist for Wood Mackenzie, the Edinburgh research and consulting firm, says, "From 1995 to 2004, there have consistently been sizable discoveries in the Gulf and a lot of companies have created a lot of value. It has the advantage of good fiscal terms relative to other areas of the world that have similar prospectivity-and it's easy to monetize." Indeed, the Gulf of Mexico deepwater has been the top-performing area, according to WoodMac's recently released study of world exploration results for 1995-2004. "We studied every part of the world except for the Lower 48 and the shallow Gulf, where the top 28 companies are active. The deepwater Gulf of Mexico ranked No. 1." Kazakhstan and Angola ranked a bit higher in terms of absolute reserves found in the period, but the value of the reserves was greater in the Gulf. The database was built from the field level up, in consultation with the 28 companies. Operators are still interested in shallow Gulf plays as well. The Minerals Management Service's Central Gulf Sale 194 held in March saw $342 million in high bids, the highest dollar total for the sale in seven years. "Results indicate a continuing interest in shallow-water areas, with 57% of the tracts receiving bids in less than 200 meters of water," says MMS regional director Chris Oynes. Bidders see potential. How much? In November 2004, the MMS issued its 10-year production projections. In 1995, total gas production was 13.09 Bcf per day. MMS projects that by 2011, production will be 13.24 Bcf per day, so essentially it will remain flat, with a slight dip between these years. (Production fell slightly in 2004 and will be down this year due to the hurricanes.) To the east in the Lease Sale 181 area, one of the Gulf's newer plays, there have been seven discoveries out of 11 wells drilled, and none are in less than 7,500 feet of water. Oil is the big story. In 1995, the Gulf produced 940,000 barrels of oil daily but by 2011, it is projected to produce 2.25 million a day. That growth will come mainly from the new Paleogene Foldbelt in deep water and from the Sale 181 area. By 2010, the MMS projects, 75% of the Gulf's oil production will be from deep water. "Some 800 to 900 tracts are bid on every year, so activity is robust, especially with $50 oil," Oynes said at the Offshore E&P conference in Houston earlier this year, sponsored by the IPAA and Hart Energy Publishing. There were 15 publicly announced deepwater discoveries in 2004 and 12 were in more than 5,000 feet of water. "In the ultradeep shelf, where the gas targets are below 25,000 feet, people are starting to nibble. We have approved five wells there since January 2003," Oynes added. Here is a look at what a few key players plan on the shelf and in deep water. Independence Hub When Houston-based independent Anadarko Petroleum Corp. rolled out its new business strategy in 2004, it emphasized exploration, and in deep water in particular. In line with that change, it sold its Gulf shelf properties in deals with Apache Corp. and Morgan Stanley for more than $1 billion. It remains sold on the merits of the Gulf, however. "Our belief is that the Gulf is a world-class province, and it fits with the fact that we'll focus on provinces with greater than 100-million-barrel-type prospects," says Stuart Strife, Anadarko exploration manager, Gulf of Mexico. The company's deepwater Marco Polo facility is producing 20,000 barrels a day now but will do much more when additional wells come online. Anadarko's attention is focused in two areas: the eastern Gulf/Sale 181 area, where it will operate the Independence Hub gas production facility, and the ultradeep waters of the western and central Gulf. Independence Hub, operated by Anadarko but owned by pipeline operator Enterprise Products Partners LP and offshore service company Cal Dive International Inc., will be the largest single deepwater gas development in the Gulf. Its capacity is somewhat akin to that of a new liquefied natural gas (LNG) import facility, as it will produce 850 million cubic feet of gas per day. Strife says that, in aggregate, between 1- and 1.5 trillion cubic feet (Tcf) of gas has been found in the vicinity of the hub in 10 discoveries. Anadarko participates in seven of the 10, and nine are going to be tied into the hub. Negotiations are under way for the 10th-Houston-based, Gulf-focused Spinnaker Exploration Co.'s "Q" discovery. Anadarko is drilling four wells in the Gulf today, including Genghis Khan No. 2 and the Spiderman appraisal. "The eastern Gulf is a nice project for us, very economic, and it will create significant volumes for us," says Strife. "But our focus is also on the Mississippi Fan Foldbelt in the area from Green Canyon to Walker Ridge, where our K-2, K-2 North and Genghis Khan discoveries are. We have a significant project inventory there." Anadarko plans to drill 10 to 20 wells there in 2005 and 2006, and three to five in the ultradeep Keathley Canyon area. At the 2005 western Gulf lease sale, Anadarko was the high bidder on 20 blocks over 10 prospects, 100% without partners. "We spent $23 million on just two blocks, 39 and 40, in the Sigsbee Escarpment-that's the last slice of the Gulf before you get to Mexico-so obviously we like that area very much," Strife says. The strategy is to be in eight to 10 gross wildcat wells with between a quarter- and a third-interest, to find big deepwater fields. "That ties to our belief there is a lot of oil and gas still to be found, from the Miocene to the Paleogene or Lower Tertiary Wilcox." For its overall deepwater program, the company figures an average of $60- to $100 million per well, which is why it takes on partners. To ensure rig availability, Anadarko, Dominion E&P and Kerr-McGee Corp. recently hired Dallas-based driller Ensco International Inc. to build a new semisubmersible, the Ensco 8500, which will be able to drill in 8,500 feet of water. They agreed to a four-year primary term with options for four more years. Construction of the semisub will cost $312 million. Acreage-holding Houston-based independent Apache Corp. has the largest amount of acreage held by production on the Gulf shelf. Its 525 leases in less than 1,200 feet of water rank it ahead of the majors and other large independents, and it ranks second in annual production with about 51.4 million barrels of oil equivalent (BOE) in that water depth. In the past five years, the company's onshore and offshore Gulf Coast assets have generated $4.7 billion of operating income, which is why president and chief executive officer G. Steven Farris likes the Gulf. "If you look at our profile and what Egypt brings us, what Australia, Canada and the North Sea bring us, the Gulf is about 20% of our production," Farris says. "But it is a very big cash flow generator. We put that money to use in our high-growth areas. We don't try to grow the Gulf of Mexico so much as we take what it gives us. It's a great fit in our portfolio." Gulf acquisitions, of which there have been several, maintain Apache's strong domestic drilling inventory, which in turn feeds cash to the company's efforts elsewhere. Last summer it bought out Anadarko's Gulf shelf position, where it is now completing a step-out to the four-well Tarantula Field in South Timbalier 308. The field already produces 10,000 barrels of oil and 20 million cubic feet of gas daily. Apache lost nine production platforms in the September and October storms and, as of the first week in October, about half its gross operated gas and two-thirds of its gross operated oil production was shut-in-largely waiting on third-party infrastructure repairs from Rita-related damage. However, every drilling rig it was using is operational again in shallow water. "We have eight operated rigs running now and plan to drill around 130 wells this year," Farris says. "We're in the planning stage for 2006 now. We have at least a couple of years of opportunities ahead. We are still drilling on the assets we bought from Shell in 1999 and 2003." In addition to traditional Gulf shelf plays, Apache is beginning to generate deep-shelf targets. In a complex and large deal inked last summer, Apache and ExxonMobil entered a series of farm-outs and joint ventures in Canada, the onshore U.S. and on Apache's interests in a portion of the deep Gulf shelf. They will explore on more than 800,000 acres of Apache properties onshore Louisiana and on the deep shelf during five years. The deal enables Apache to evaluate its deep Gulf inventory, speed up drilling and partner with ExxonMobil's technical team as well, which will operate. Drilling could start in 2006. By year-end 2005, Apache will spud Omega, a deep-shelf prospect in Ship Shoal 198-99, apart from the ExxonMobil venture. Apache will operate with 25% interest and Lafayette, Louisiana-based independent Stone Energy Corp. is the partner. The total depth is 20,500 feet. Omega offsets Spinnaker's Minuteman and New Orleans-based McMoRan Exploration Co.'s Deep Tern finds, and it sits beneath an older field that has produced more than 1 Tcf of gas to date. Independent growth From a grubstake of only $12,000 in 1983, W&T Offshore has become a public company with a market cap of more than $2 billion, some 1 million gross acres (80% held by production) and interests in 100 fields offshore, in shallow and deep water. CEO Krohn says he has 90 prospects in inventory. After Hurricane Katrina pounded the Gulf region, about 95 of W&T's operations personnel moved from New Orleans to join the dozen or so administrative folks in Houston. At press time, W&T was producing only about 15% to 20% of its normal rates. The status of much of the remainder was up to third-party operators or infrastructure repairs. Krohn has looked at opportunities onshore and internationally, but in the end he prefers the Gulf, where he says he can replace reserves organically. In first-half 2005 W&T had already replaced 150% of production. "We've been successful by going deeper-either deeper wells or deeper water." That was one reason W&T went public in January. Krohn kept seeing new opportunities that were deeper and more expensive, including a $50-million prospect brought to him by another firm. "We were not going to operate that, but if it were successful, we'd be looking at half a billion dollars in development costs. The IPO positions us to access different capital and make bigger acquisitions and bigger projects. I could see that coming." W&T has a balance of low-risk and high-risk wells, with 30 to be drilled by year-end and likely the same number in 2006. About 41% of the budget will be for deepwater opportunities. The company's deepest discovery to date is Daniel Boone, in 4,200 feet of water in Green Canyon 646. Houston-based independent Mariner Energy, which is planning its own IPO, is a partner. W&T has said publicly it intends to be an aggregator of Gulf assets. Since 1999, it has made five acquisitions totaling $188 million. It has generated $416 million in net revenues and has $1.3 billion of remaining PV-10 value, yielding an internal rate of return in excess of 90%. Another long-time Gulf operator, McMoRan Exploration is one of the few companies to focus solely on exploration on the deep shelf. Its 2005 spending will hit about $180 million. "Rita made us shut in more than half of our production but we expect it all back onstream by year-end," says McMoRan co-chairman Richard Adkerson, who is operating out of the company's temporary offices in Baton Rouge. "The good news is, we've restored our drilling operation and that is the main focus." McMoRan drills in very shallow water and marshes with barge rigs and shallow-water jack-ups. A rig at one of its development wells, the aptly named Hurricane No. 2, was back on location at press time in 10 feet of water. The well is on a 70,000-acre lease in an area where the company has acquired acreage from Chevron and through a farm-out with El Paso Production Co. The strategy is to drill wells between 15,000 and 25,000 feet deep to test Miocene sands that have largely been untapped. Above 15,000 feet, some 6 Tcf of gas has been produced during several decades from the shelf. "We started looking at the deep shelf in 1999 when prices were low and there was an exodus from shallow water to deep water and international areas," Adkerson says. "It was not something other companies were pursuing. At that time, the MMS had a resource estimate of 20 Tcf for the deep shelf, but now they say 55 Tcf, based on the success we and others have had." McMoRan saw two opportunities-a good market for natural gas was going to get better due to production declines and the challenge of finding more gas; and the company principals' 30 years of experience with the geology of the region. "We did not rely on bright spots; we relied on traditional structural geology and an understanding of the depositional environment along the Gulf Coast. We have a strong appetite for risk, we remain enthusiastic and we have prospects. We have a lot of unusual opportunities for a company our size." Historically there have been many technical challenges to drilling through these geopressured zones and depleted sands, but companies have gained knowledge about the right casing and drilling fluids. Plenty of ready infrastructure means discoveries can be developed quickly, which also makes the deep shelf economically attractive. Chevron operates the Tiger Shoal facilities nearby, through which McMoRan's production flows from the Hurricane discovery well at 23 million cubic feet of gas a day. The JB Mountain and Mound Point discoveries, part of a McMoRan joint venture with El Paso Production, attracted attention two years ago as some of the first sizable deep-shelf finds. In the second quarter, the fields' three wells produced an aggregate 40 million cubic feet a day. In 2006 the company plans to drill about a dozen exploratory wells, all with targets of 100 Bcf, Adkerson says. "But the whole logistics and supply issue is a challenge."