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Explaining Exploration and Production Timelines (Offshore)

Oil and natural gas companies are in the business of supplying energy. Companies have every
incentive to produce as much oil and gas as possible today.

A lease is only a rental agreement with no guarantee that the leased area contains any oil or
natural gas. In fact, most leased areas do not contain oil and gas in commercial quantities.

Companies invest as much as hundreds of millions of dollars to acquire and maintain their
offshore lease inventories. Acquiring a lease costs a company the initial bonus payment. The
past four offshore lease sales since 2006 brought in over $9 billion to U.S. and state treasuries
from bonus bids.

When a company buys a lease it gains the right to risk its limited investment capital to explore
for resources and to produce them if the search yields a commercial discovery. Since the only
way for a company to recover this initial investment is to initiate production on a lease, there is a
significant financial incentive to develop these resources in a timely manner.

Companies are required under government leasing regulations to develop a lease expeditiously
(between five- and 10-year terms depending on the area and water depth) or return it to the
government. In general, leases not producing by the end of their term are relinquished back to
the government, which can then re-lease them. All the capital spent by the company to acquire
and keep the lease is lost if the lease is returned to the government.

The time line from lease to production in the OCS can vary from four to ten years depending on
water depth at the lease location, the drilling depth needed to reach the target reservoir, the
distance from shore and from infrastructure, the geological characteristics of the reservoir and
complexity of production facilities design. Capital costs can be considerable for OCS projects,
particularly those in deepwater. Marine seismic surveys can cost upwards of $200,000 per day.
The cost of offshore exploratory wells can range from $25 million to more than $100 million for
some deepwater prospects. It is not unusual for a company to spend more than $100 million on
an exploratory well only to come up empty with a “dry hole.” If a company actually finds
commercial quantities of oil or natural gas, the subsequent design and installation of the
deepwater production facilities may cost in excess of $1 billion to design and install.

In general, from purchase of the lease to first production can take anywhere from 7 to 10 years
in areas that have existing infrastructure. In this context, the timeline for OCS exploration and
production can include:

• Six months to a year for MMS administration and execution of lease sales in unleased
• One year for preliminary geological investigation and selection of areas of interest for
additional seismic data acquisition.

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• One year to two years to acquire and to process 3D (and new wide azimuth) seismic
data, and to identify drillable prospects from this data.
• As much as a year or more to contract and schedule a drilling rig.
• Six to 10 months for drilling and completion of an exploratory well.
• Six months to a year for follow up evaluation of drilling results, which can include drilling
a sidetrack well.
• Another two to three years for additional delineation drilling, and formulation of a plan for
reservoir development if the exploratory well proves successful. During this time, the
company also is working on pre-permit studies, permitting, and design and procurement
for production facilities, including surface and subsurface equipment and systems,
• One year or more for facilities installation, followed by development drilling, which may
take from one to two additional years. During this period, the company is involved in
design, permitting, engineering, procurement and installation of a pipeline or offshore
mooring system to bring the production to market.

One recent example is Anadarko’s Independence Hub, a natural gas facility located in 8,000 ft
of water about 120 miles from Mississippi. The lease was purchased in the Sale 181 area in
December 2001. The first exploratory well was drilled in 2003, with first production seen in mid-


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