Mexico’s latest deepwater auction in the Gulf of Mexico at the end of January was a success. It was a success for Shell, too: the Anglo-Dutch oil major snapped up 9 out of the 19 awarded blocks and bid aggressively on the deepwater blocks closest to the U.S. maritime border.
Shell’s (NYSE: RDS.A) aggressive bidding, especially on the blocks in the Perdido area next to the U.S. border, puzzled some analysts and observers.
But Shell knew something that its competitors did not. Six months earlier, Shell had made a large deepwater oil discovery on the U.S. side of the Perdido area. Since oil firms are not legally obliged to announce discoveries, Shell postponed the announcement of the discovery until the day of the Mexican auction, as it wanted to secure the adjacent blocks in the Mexican waters.
While the cat was out of the bag as early as in July 2017, Shell issued the official announcement about the Whale discovery in the U.S. Gulf of Mexico on January 31, 2018—the day on which Mexico held its deepwater auction and all bids had already been submitted.
In the six months following the Whale discovery—which Shell described in the January release as “one of its largest U.S. Gulf of Mexico exploration finds in the past decade”—the oil major had the time to additionally study the geology of the Whale. It was also such good fortune that Mexico was offering Perdido areas in its deepwater auction. So Shell—hoping that the Mexican blocks would have geological characteristics similar to Whale’s and could hold more oil—moved on to secure most of the adjacent blocks.
Commenting on the timing of the Whale announcement, Andy Brown, Upstream Director at Shell, told Reuters:
“Post the Whale discovery we had some geological insights. It is not by accident we didn’t announce it until the day of the bid.”
In the Mexican auction, the Shell-led consortia grabbed five of the six awarded blocks in the Perdido area. Shell also won four more blocks in the Cuencas Salinas area.
“The proximity and technical similarity of this opportunity to our leading position in the U.S. Gulf of Mexico will allow us to benefit from and build upon decades of experience, complementing our position in the region,” Andy Brown said in the company press release regarding the Mexican auction.
On the same day, announcing the Whale discovery, Shell said that Whale—operated by Shell with a 60-percent interest and co-owned by Chevron with 40 percent—is adjacent to the Shell-operated Silvertip field and lies some 10 miles from the Shell-operated Perdido platform.
As early as in July 2017, Wood Mackenzie said that Shell confirmed it made a first discovery in the Western GoM in two years at the Whale prospect. According to the energy consultancy, the quick cycle time and the utilization of existing infrastructure could bring the breakeven oil price to around US$30 a barrel Brent.
While Shell has not yet released resource estimates for the Whale discovery, two industry sources close to the exploration efforts told Reuters that recoverable resources could be up to 700 million barrels of oil.
Since the Whale discovery last year, Shell has acquired specialized seismic data about Whale and the adjacent Mexican blocks, a source at an oil services company told Reuters.
“Even for us it was surprising the way Shell bid during Mexico’s deepwater auction. They really wanted the blocks close to the border, which indicates there must be a link between the formation in the U.S. and in Mexico,” the source said.
Shell’s announcement of the Whale discovery on the day of the Mexican auction solved the mystery as to why the oil major had bid so aggressively to get the blocks closest to the U.S. border.
Shell needs to replenish its oil reserves, and deepwater is a priority in its upstream operations. Offshore Mexico and Brazil are crucial for the company’s plans. Shell has recently expanded its presence in Brazil’s prolific and promising pre-salt area. Worldwide, Shell produced more than 710,000 barrels of oil equivalent per day (boed) from its deepwater business in Q3 2017, and some 330,000 boed of that production came from Brazil, the company said in October. Announcing the Whale discovery this January, Shell said that it expected its global deepwater production to exceed 900,000 boed by 2020 from already discovered, established areas.
The Whale discovery in the U.S. Gulf of Mexico and the potential for more discoveries in Mexican waters could help Shell to boost its deepwater oil reserves and production in the coming decade.
By Tsvetana Paraskova for Oilprice.com