Shell focuses on U.S. Gulf

HOUSTON Mon Jun 13, 2011 9:11pm EDT

President of Shell Oil Company's U.S. subsidiary Marvin Odum answers questions as he participates in the Reuters Energy Summit in Houston June 13, 2011. REUTERS/Richard Carson

President of Shell Oil Company's U.S. subsidiary Marvin Odum answers questions as he participates in the Reuters Energy Summit in Houston June 13, 2011.

Credit: Reuters/Richard Carson

HOUSTON (Reuters) - Royal Dutch Shell (RDSa.L) is targeting the oil-rich U.S. Gulf of Mexico as a growth target both for drilling and possible acquisitions, the president of Shell's U.S. subsidiary told the Reuters Global Energy and Climate Summit on Monday.

"We've been growing our business there, mostly through exploration," said Marvin Odum, president of Shell Oil Co. "If something becomes available, I guarantee we'll be looking at it."

Shell is one of the biggest Gulf producers as the basin accounts for about 60 percent of its oil and gas output.

Odum said he expects "imminent" approval from federal regulators of a drilling permit in the company's Appomattox field in the deepwater Gulf, and the company's Perdido oil and gas platform, the world's deepest oil and gas production facility, is producing about 40 percent of its capacity of 100,000 barrels per day of oil from five wells.

The slow ramp-up of activity comes more than a year after BP Plc's (BP.L) (BP.N) deepwater Macondo well ruptured and spewed more than 4 million barrels of crude into the basin in the worst offshore oil spill in U.S. history.

In response, President Barack Obama banned deepwater drilling from late May to mid-October in the Gulf, which provides 30 percent of U.S. oil production and 11 percent of natural gas output.

Odum said Shell lost about 50,000 barrels per day of its Gulf production in 2011 because of the ban. The Perdido platform started up just three weeks before the disaster, and was left to produce from a single well for months until permits were forthcoming again.

Overall Gulf oil production will fall by 190,000 barrels per day, or about 12.7 percent of its current level, in 2011 and 2012 because of the ban, according to the U.S. Energy Information Administration.

The Bureau of Ocean Energy Management approved its first post-Macondo drilling permit in February this year. The agency has approved permits for 88 wells since the ban was lifted, though most were interrupted by the ban or were related to existing wells. Eight new wells have received permits, according to the agency's website.

"It's good to have that system moving again, that process moving," Odum said. "We really need to see that machine pick up speed again."

Odum said Gulf oil output will recover to reach pre-spill levels in time.

However, more regulatory oversight of drilling could stretch the time needed to drill wells, therefore adding cost, he said. New regulations require stops, checks and clearances at various stages during drilling.

A deepwater well can cost anywhere between $100 million and $130 million, whether or not it finds oil.

"This interactive process with some degree could add 10 to 20 percent to the cost of wells," Odum said, noting he believes the extra cost will be at the lower end of that range.

Regarding onshore exploration, Odum said it was a unique time to acquire more dry shale gas acreage despite low natural gas prices.

He said he expects the Henry Hub natural gas price to hover between $4 and $8 per million British thermal units in the next decade, and at a tighter $4 to $6 in the next two years.

Those levels have prompted producers to seek more lucrative oil, trading near $100 a barrel on the New York Mercantile Exchange. Shell is in the race too with its acquisition last year of about 250,000 net acres of mineral rights in the Eagle Ford, and Odum said early drilling results at a handful of wells were "very encouraging" and should show solid results in six months.

Shell's operations were surrounded by production by other companies, "and it looks like that industry performance is translating on the acreage we bought," Odum said.

But Shell finds value in some dry gas. The company bought East Resources Inc in the Marcellus shale for $4.7 billion last year, but sold more mature gas fields in South Texas.

"The more important aspect is appraisal drilling to identify where the sweet spots are" that bolster a portfolio in high- or low-price environments, Odum said. "That involves bringing in new leases. We've sold mature stuff and new shale we didn't like as much. We've also continued to add." (Additional reporting by Matthew Daily, Anna Driver, Braden Reddall, Michael Erman, Matthew Robinson, Chris Baltimore, Ernest Scheyder and Erwin Seba; Editing by Lisa Shumaker)

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