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Shell finds 100 million oil barrels in deep-water Gulf discovery

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Posted on November 18, 2015 | By Collin Eaton

HOUSTON — Probing one of its recent discoveries in deep waters of the Gulf of Mexico, Royal Dutch Shell found 100 million barrels of oil equivalent buried at its Kaikias field, nearby three of its massive production facilities and a network of subsea pipes, the company said Wednesday.

The one-year-old Kaikias discovery, about 60 miles south of the Louisiana coast in the Mars-Ursa basin, is nowhere near the size of the big-ticket deep-water oil fields that Shell uncovered in that region two decades ago.

But its location near existing oil-production infrastructure make it an attractive bounty for an industry that has had to dramatically rein in exploration spending and project costs as oil prices languish under $45 a barrel. The field would be much cheaper to develop than more remote projects, far removed from the Gulf’s expansive network of pipelines that help ship crude to land.

A 100-million-barrel find “is not a game-changer in the Shell portfolio,” said Rebecca Fitz, senior director at IHS Energy. “But this discovery is completely consistent with what Shell is trying to do from its streamlined exploration program. If you can deliver 100 million barrels of crude oil and have all the infrastructure built, that should be a pretty high value, quick lead-time buyback development.”

Fitz said Shell’s Kaikias find is a good example of the industry’s efforts to retain a place for oil exploration while keeping capital constrained. Shell’s $62 billion acquisition of British gas producer BG Group, which has been developing big pre-salt oil formations off the coast of Brazil, has relieved some of the urgency in Shell’s international hunt for large crude reserves.

Next year, large oil companies are expected to trim their exploration budgets to $25 billion all told, cut in half from 2013 levels, according to energy investment bank Tudor, Pickering, Holt & Co. Big Oil discoveries in recent years have come in at about half of the combined 8 billion barrels they pump each year.

At Kaikias, which is in 4,575 feet of water, Shell found about 300 net feet of oil pay, adding to the bounteous 1 billion barrels trapped under sand and salt formations in the Mars-Ursa basin. Shell has pumped crude from the region since the mid-1990s and expects to produce a peak 100,000 barrels from its relatively new Olympus platform next year.

If Shell decides to develop the Kaikias discovery, it would help refuel production facilities that have seen output decline over the years. The three facilities there, the Mars, the Mars B and the Ursa, have a combined output capacity of about 500,000 barrels a day.

Shell produces the third-largest amount of oil equivalent among the top western publicly traded oil companies, at about 3.08 million barrels a day, and it has the third-largest amount in proved reserves, about 13.1 billion barrels. Exxon Mobil Corp. ranks first and BP second in both measures.

Shell said it was able to keep drilling costs down when it was appraising the Kaikias well, shaving 20 percent off the cost to drill a well last year and completing its appraisal ahead of schedule. It cut costs from both its operations and its supply chain.

The company drilled the well to about 34,500 feet underground, driving its drill bits both vertically and horizontally to avoid some hazardous salt formations. It’s the longest well Shell has ever drilled, though not the deepest.

“It’s a beautiful discovery with good-quality oil in a good-quality reservoir,” said Martijn Dekker, Shell’s vice president for appraisal and hydrocarbon maturation.

“There’s a lot of concern in the industry on generally how we’re going to deal with lower prices, and the way to address that is to reduce our break-even price and reducing our cost basis,” he said. “The Kaikias has definitely demonstrated already we can do that on the drilling side. Our engineering studies are looking at if we can significantly reduce our subsea costs, too.”

Dekker said Shell geologists are reviewing a stream of data flowing from the well, trying to figure out “the size of the pie,” while engineers are trying to figure out ways to reduce subsea infrastructure costs of any future developments in the region.

Earlier this year, the Anglo-Dutch oil major said it has brought down its break-even costs to develop its huge Appomattox field — a project the company sanctioned in July — to $55 a barrel of Brent, the international crude benchmark.

“It’s fair to say that for something like Kaikias, which is leveraging existing infrastructure, we should be able to do better than that,” Dekker said. “But that work is still ongoing.”

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