With the global offshore oil industry gradually witnessing a rebound, Royal Dutch Shell plc RDS.A has been making remarkable progress in deepwater projects of late. The European oil giant recently commenced production at its Appomattox offshore platform in Gulf of Mexico (GoM) months ahead of the scheduled date. While Shell owns 79% of the project, CNOOC Limited CEO owns the remaining 21%.
The Project Which Survived the Odds
Appomattox is Shell’s biggest and most significant deepwater development projects, offering attractive long-term opportunities in the Gulf of Mexico.The company announced its final decision to invest in the project in July 2015. While many of the energy companies scrapped their offshore projects amid the crude downturn, Shell decided to go ahead with the Appomattox deepwater project in GoM Norphlet formation amid the challenging business scenario.
The Anglo-Dutch supermajor has been betting on cost and technology efficiencies to make the project more competitive since then. Notably, it has managed to lower the cost of Appomattox by 40% since the final investment decision (FID) on the project. Simplified designs, batch drilling and innovative, optimized development planning brought down the costs.
The average peak production from the multi-billion deepwater project is estimated to be 175,000 barrels of oil equivalent per day (Boe/d).The Appomattox development is also expected to act as a core long-term hub for Shell in deepwater Norphlet reservoir that can be tied back to numerous discovered fields as well as future discoveries.
Shell: A Deepwater Powerhouse
Deepwater development activities have been severely affected by the crude downturn. However, with recovering oil prices, this segment of the oil industry is gradually picking up pace, with Shell leading the way. Superior technology, capital efficiency, efficient execution and structural re-engineering are enabling the company to remain competitive in the deepwater industry. Since 2014, the company has managed to trim its unit development and operating costs of its deepwater projects by 45%. By 2020, the company expects around 900,000 Boe/d from its deepwater projects.
Apart from Appomattox, the energy major has other important GoM projects in its kitty like Kaikias and Vito among others. The company commenced production from Kaikias in June 2018, a year ahead of schedule and also managed to lower the cost of the project by 30% since its FID in 2017. It also green-lit Vito project in 2018, slashing its price tag around 70% from the original project design.
Last year, Shell also discovered a large deepwater well, the Dover well, in the Norphlet geologic play in the U.S. GoM — marking its sixth oil and natural gas find in the region. The company has been focusing on exploration opportunities in the prolific Norphlet play, which will be tied to its Appomattox project. Shell, which has been operating in GoM for more than six decades, spent $84.8 million in high bids in the GoM Lease Sale 252 held in March 2019. Markedly, the company is also set to make FID on its large deepwater GoM oil find named Whale in 2020. While Shell, which is a Zacks Rank #3 (Hold) company, carries 60% interest in Whale project, Chevron Corporation CVX holds the remaining 40%. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Offshore Projects Gradually Coming Back to Life
Notably, Appomattox is the first major deepwater project authorized by Shell since the oil slump. In fact, since then only two other projects — namely Mad Dog Phase 2 and Vito — have been going forward in the Gulf platforms. Mad Dog Phase 2 was authorized in late 2016 after its chief operator BP plc BP slashed project costs from $20 billion to $9 billion.
However, effective cost controls and recovering oil prices have made offshore operations attractive again. Further, pipeline bottlenecks in shale plays like the Permian Basin have reduced producers' margins in recent times. Improving the infrastructure will take time and need investments. Hence, investing in offshore production is an attractive option at the moment.
The U.S. offshore industry has been witnessing signs of revival with new project sanctions growing steadily. Per Rystad Energy, oil and gas finders committed to more than 100 new offshore projects (at the cost of $210 billion) this year — up from 62 in 2017 and 43 in 2016. Reportedly, GoM offshore oil industry is likely to witness a 30% increase in exploration activities in 2019, its first increase in the last four years.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
CNOOC Limited (CEO) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research