OIL: Stalled Offshore

“The offshore oil area,” says Magnolia Petroleum Co., “may be the last big undeveloped oil province in the U.S.” Yet, while the U.S. is worried about sources and has only an eleven-year supply of proven reserves, Magnolia and most of the other major producers are cutting back their offshore search. Last week only 79 seaborne rigs were poking their drill bits into the Gulf of Mexico; last August in rigs were operating off Louisiana’s shores alone.

Chief reasons for the slowdown are a surplus of oil and light demand. The trouble started during the Suez crisis, when oilmen expanded to meet a big demand that did not come; it was made worse by the failure of the U.S. to increase oil use at a normal 6%-a-year pace. In October, demand, ran only seven-tenths of 11% ahead of October 1956. In this softening market, the oil-rich states are holding down the amount of allowable production to hold up the price, and offshore oil has been cut by the general slash. The State of Louisiana, which supplies more than 90% of all offshore oil, has pared its daily offshore allowables from last March’s peak of 178,316 bbl. to December’s 147,506 bbl.

Below Capacity. Oilmen last week were working some offshore wells at only one-third capacity. And they were slowing down new drilling. Explained Magnolia President J. L. Latimer: “We are not going to drill a lot of new wells to bring in fewer barrels of oil.”

Magnolia, which is sinking 45 offshore wells this year, is planning only 25 new ones in 1958. Even the two biggest offshore operators, Shell (average offshore output: 45,000 bbl. a day) and California Oil Co.. are leveling off their drilling. California Oil has reduced offshore drilling by 25%. Shell, which has been expanding rapidly, plans to sink only the same number of offshore wells in 1958 as it will in 1957—about 174.

The slowdown has idled millions of dollars worth of drilling equipment. Humble Oil, which vies with Magnolia as the third biggest offshore producer (12,115 bbl. a day), has only twelve rigs operating in the Gulf now, v. 16 during the first ten months of this year. The powerful CATC oil combine—composed of Continental Oil, Atlantic Refining, Tidewater and Cities Service—last week was working only 15 rigs, v. 19 in August.

More for Less. As in many another industry, oilmen have also found that it is costing more and more to produce less and less, and are looking for ways to cut expenses. Says Kerr-McGee Oil Industries President Dean McGee: “Offshore drilling was a natural to come first. When you are trying to cut costs, the most expensive operation that is giving you the least return is where you begin.”

Since 1945, when the great offshore rush began, the oil industry has spent some $2 billion—including more than $400 million in lease payments to the U.S., Texas and Louisiana*—on the search. But it has earned back only some $400 million so far.

Onshore, a 10,000-ft.-deep well can be brought in for $100,000 v. close to $500,000 offshore. The price of everything oilmen need goes up at sea. The spindle-legged offshore drill platforms cost $1,000,000 to $5.000.000 each. They easily can be wrecked: several have been toppled by storms or in other accidents. Offshore workers command premium pay (more than $1,000 a month for a skilled “drill pusher”), and on a common tour of duty they work six twelve-hour days, then get six days off. Shipping the oil to shore comes to 75¢ or 90¢ a barrel. Summed up one oilman: “We are investing money offshore on the scale of a foreign oil development. But we are taking back our profits under strict federal and state control. By comparison, producing in Arabia or Venezuela, even with a fifty-fifty royalty deal, pays better.”

Better Chances. Many U.S. operators are indeed shifting their money from tricky offshore drilling at home to the surer onshore operation of foreign fields, even though the chances of making a wildcat strike under water are much better than on land. Of the wildcat wells sunk off Louisiana’s coast, about 40% have become producers, v. the U.S. on-land average of 11%. The offshore potential is huge. Geologists estimate conservatively that 12 billion bbl. of oil and 40 trillion cu. ft. of natural gas are locked in the offshore sands. Its total market value: $40 billion. But oilmen are beginning to worry that the oil will cost more to find and get out than it is worth.

*At least $98 million of the lease payments are held in escrow pending a final decision on who owns the tidelands—the states or the Federal Government. Last week the U.S. Supreme Court gave the five Gulf States 45 days to rebut a Department of Justice suit which claims that the U.S. holds title to all undersea lands located more than three miles from shore— meaning most of the oil-bearing offshore lands.