Shell Makes GoM Discovery As It Continues Coping In Downturn

Royal Dutch Shell (NYSE: RDS.A) is adding to its deepwater hits in the U.S. Gulf of Mexico’s (GoM) Mississippi Canyon area, unveiling on July 28 that it has made a discovery at its Fort Sumter prospect.

The discovery was announced the same day Shell delivered its second-quarter 2016 results and updates on its $30 billion divestment program and growth priorities such as global deepwater.

Initial estimates show the discovery in the deep Norphlet geologic trend could hold recoverable resources of more than an estimated 125 million barrels of oil equivalent (MMboe), Shell said. Fort Sumter was drilled in a water depth of 7,062 ft (2,152 m) to a total vertical drilling depth of 28,016 ft (8,539 m) measured depth.

“Further appraisal drilling and planned wells in adjacent structures could considerably increase recoverable potential in the vicinity of this particular well,” Shell CFO Simon Henry said on the company’s earnings call. “That in itself builds upon recent Norphlet exploration success at Appomattox in 2010, Vicksburg in 2013 and Rydberg in 2014, bringing the total resources added by exploration in the Gulf for Shell since 2010 to over 1.3 billion [barrels of oil equivalent].”

Resources from the discoveries could be produced through Shell’s Appomattox project, which is currently under construction. The project is comprised of a semisubmersible, four-column production host platform. Its subsea system will feature six drill centers as well as 15 producing wells and five water injection wells.

Fort Sumter’s proximity near other discoveries adds to the area’s prospectivity, added Ceri Powell, executive vice president of exploration for Shell.

“These successes demonstrate there is still running room in the producing basins of our heartlands where large, high-value discoveries have the potential to further strengthen our deepwater competitiveness,” Powell said in a statement about the discovery.

Navigating The Downturn

Delivering profits from new projects is among the levers Shell said it is pulling to manage finances during the downturn.

Like other oil and gas companies, Shell has reacted to lower oil prices by reducing costs—including cutting thousands of employees—selling assets, lowering operating costs and merging with peers to strengthen presence and offerings.

Shell, which completed its acquisition of BG Group in February, reported its second-quarter current cost of supplies, or net income, was about $1 billion. This was down from about $3.8 billion in the same quarter last year, mostly due to losses in the upstream segment, but not far off from the $1.5 billion reported in the first quarter.

Cash flow from operating activities dropped 62% to about $2.3 billion.

“Our growth priorities have a clear pathway towards delivering strong returns and free cash flow in the medium term. And our future opportunities should provide us with material growth in cash flow per share in the next decade,” Shell CEO Ben Van Beurden said. “Through all of this is our intention to be in fundamentally advantaged positions, with resilience and running room. Asset sales have an important role to play in all of these strategic themes, as we reshape the company.”

As part of a $30 billion divestment plan, Shell is looking to sell $6 billion to $8 billion of assets by year-end while starting up new projects and increasing cash flow. The divestment plan includes shedding about 10% of its production.

Setting Growth Priorities

Global deep water also remains a growth priority, Shell said, noting it currently produces about 600 Mboe/d from its deepwater assets. Output from reservoirs that have already been discovered and developed is expected to push that number to about 900 Mboe/d by the early 2020s.

During the call, Henry spoke about the company’s continuing mission to deliver profit from new projects, transforming investments into free cash flow. Less than two years from now, the portfolios of Shell and BG combined are expected to produce more than 1 million barrels per day (MMbbl/d) with cash operating costs of about $15/bbl.

The company continues to push forward with other major projects, including Stones in the GoM, Gorgon LNG in Australia and Kashagan in Kazakhstan. The startups, Henry said, should add more than 250 Mboe/d and 3.9 metric tonnes per annum LNG for Shell shareholders.

But the company also paused other projects as it realigned priorities.

Final investment decisions have been delayed for the LNG Canada joint venture and Lake Charles LNG.

In the second quarter, oil and gas production increased to 3.51 MMboe/d from 2.73 MMboe/d in second-quarter 2015.

Velda Addison can be reached at vaddison@hartenergy.com.