Clarification of the huge Chevron gulf oil discovery

The September 5th announcement of the huge Gulf of Mexico discovery should be clarified. The announcement claims that the discovery could increase US proven reserves of oil by as much as 50%. However, the total amounts are highly speculative. The area is very deep: 7000 feet of seawater and a further 20,000 feet below the ground. The normal time to accurately estimate oil and gas field size is months. Production will only start in 2010 at the earliest; full production in 2013 at the earliest.

The US Senate is weeks away from voting on the lifting of the 25-year ban on offshore drilling off the majority of the coasts in the US. The announcement is reminiscent of the Mexican "huge oil discovery" announced last year of a possible 10 billion barrels, which was quietly revised this year to around 43 million barrels, a downward revision of 99.57%. That announcement was made a few months before the Mexican parliament was to vote on Pemex (state oil co)'s budget and rights to expand drilling. This illustrates the potential political pressure to announce oil and gas discoveries.

The wells are most likely mainly natural gas, as they are very deep. Oil tends to form closer to the surface, gas deeper. Therefore the discovery is likely to impact natural gas markets, not oil, if the gas exists in meaningful quantities. The wells are estimated to cost between $80M to $120M each. Payback period with gas at $7 is about 3 to 5 years, not taking into account new technical issues at these record depths, and very high insurance rates for these depths in the Gulf.

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