Despite Shale Boom, Deep-Water Gulf Still Lures Oil Drillers

    By Ben Lefebvre


    About 600 workers at a shipyard here are building three-story steel structures that will make up Chevron Corp.'s (CVX)outpost many miles offshore, in an area that geologists say is promising, but where almost no oil has yet been pumped.

    "It'll be the first house in the neighborhood," said Glenn Lohfink, the Chevron construction manager at the site.

    The target Chevron is aiming at is called the Lower Tertiary, considered by many to be the Gulf of Mexico's last frontier. Its heart is buried thousands of feet below sea level, hundreds of miles from shore and almost a three-hour helicopter ride from New Orleans.

    Lower Tertiary oil fields haven't been fully decoded by geologists, but Chevron is investing $7.5 billion just to start tapping its first two discoveries there, the Jack and St. Malo fields. The company expects to install a platform with the capacity to produce 177,000 barrels of oil and natural gas a day, generating annual revenue worth billions of dollars at current prices of roughly $96 a barrel for decades to come.

    Chevron's gamble underscores how deep-water frontiers remain alluring despite the massive reserves unlocked by hydraulic fracturing in the onshore U.S. Such interest has pushed oil and gas drilling in the Gulf above the levels reached in 2010 before the Deepwater Horizon disaster, which temporarily cooled activity there.

    The bang oil companies get for their bucks spent in deep-water developments is so prodigious that it can beat drilling thousands of onshore wells and dealing with hundreds of landowners, experts said.

    "Once you pay it off you can make a tidy profit," said Wood Mackenzie analyst Norm Pokutylowicz, who added that Lower Tertiary projects are expected to pump oil for 20 to 30 years.

    The first commercial development of the Lower Tertiary, Royal Dutch Shell PLC's (RDSA, RDSB) Perdido field near the Texas coast, began pumping oil in early 2010. Analysts say the reservoir is relatively shallow and not representative of the big pool of oil Chevron plans to tap, hundreds of miles to the east.

    But production from the core Lower Tertiary didn't start until last year, when a production ship owned by competitor Petroleo Brasileiro SA (PBR), or Petrobras, began pumping crude out of the Cascade and Chinook fields, a development that is being watched closely by the oil industry.

    To minimize risk and deal with the lack of local pipelines, the Brazilian oil company decided to use a floating production ship that could be moved if the experiment doesn't work out, instead of a more permanent platform.

    But Chevron is confident enough to build a permanent platform. Steve Thurston, Chevron's vice president of deep-water exploration and projects, said during an interview that the Lower Tertiary could account for nearly half of the production in the U.S. Gulf of Mexico by the end of next decade.

    "Our view of 'Wow, this is big,' is still there," Mr. Thurston said.

    Chevron's platform will serve as a beachhead for further exploitation of the area, connecting not only Jack and St. Malo but neighboring fields such as Exxon Mobil Corp.'s (XOM) Julia discovery.

    -Angel Gonzalez contributed to this article.

    Write to Ben Lefebvre at