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Offshore Industry Gets Respite from Shell's New GoM Find

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Royal Dutch Shell plc (RDS.A - Free Report) recently discovered a large deepwater well in the U.S. Gulf of Mexico (GoM), providing a breather to the offshore oil industry of the United States, which has been gasping for breath since the crude downturn. The Dover well — in the Norphlet geologic play in the U.S. GoM — marks the sixth oil and natural gas find that Shell has struck in the region.

The company has been focusing on exploration opportunities in the prolific Norphlet play, which will be moored by its multibillion-dollar offshore project Appomattox, production from which is expected to commence before 2019 end.

The Dover well, drilled in Mississippi Canyon about 170 miles offshore southeast of New Orleans, is located in 7,500 feet of water. It was drilled to a depth of 29,000 feet vertically. The prospect lies 13 miles from the Appomattox project that was completed and launched into GoM earlier this month. The new discovery is thus poised for further drilling and development through potential tiebacks to Appomattox rather than building new platforms, which will in turn result in cost savings for the company.

Appomattox is one of the most profitable and significant deepwater development projects of Shell, offering attractive long-term opportunities in the Gulf of Mexico, and expected to produce up to 175,000 barrels of oil equivalent a day. Shell expects its global deepwater production to overshoot 900,000 barrels of oil equivalent per day by 2020.

The Anglo-Dutch giant is the chief operator of the project with 79% of the stake, while the remaining 21% interest is held by Nexen Petroleum Offshore, Inc., a wholly-owned subsidiary of the China-based upstream player CNOOC Ltd. (CEO - Free Report) . Shell announced its final decision to invest in the project in July 2015. The project has witnessed 20% savings from its original investment proposal, owing to designing technology.

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 - Free Report) slashed the project costs from $20 billion to $9 billion. Other co-owners of the project include BHP Billiton Ltd. (BHP - Free Report) and Union Oil Company of California, which is an affiliate of Chevron Corporation.

Vito project is another Shell’s multibillion-dollar project authorized last month. While Shell did not disclose the cost of the project, it is known to have sliced its price tag by around 70% from the original project design. The Zacks Rank #3 (Hold) company has been betting on cost and technology efficiencies to make the offshore projects more competitive. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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