Royal Dutch Shell plc (RDS.A - Free Report) has been making remarkable progress in forging ahead with its deepwater projects of late. The European oil giant recently announced that the first phase of its deepwater Kaikias project in the Gulf of Mexico (GoM) has become functional and that too one year prior to the scheduled date. The first phase of the project is expected to produce up to 40,000 barrels of oil equivalent per day.
Competitive Kaikias Project
The Kaikias project is a joint venture undertaken by Shell and MOEX North America, a subsidiary of Tokyo-based Mitsui Oil Exploration Co. Shell holds 80% operating interest in the project, while the remaining 20% stake is held by MOEX North America. Kaikias is estimated to hold more than 100 million barrels of oil equivalent and the project is set to develop in two phases.
The Kaikias project, located in the Mars-Ursa basin, will send production from four wells to Ursa Hub that is jointly owned by Shell, BP plc (BP - Free Report) , ExxonMobil Corporation (XOM - Free Report) and ConocoPhillips (COP - Free Report) . Shell is the chief operator of the hub with 45% stake, BP carries 23% interest while ExxonMobil and ConocoPhillips own 16% each. From the Ursa hub, the production volumes will finally flow into the Mars oil pipeline.
Shell took the final investment decision (FID) on the project in March 2017 and 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 Kaikias by 30% since the FID on the project. Simplified well designs, along with utilization of the existing oil/gas processing equipment and subsea umbilicals brought down the costs. While the total cost of the project has not been disclosed; Shell expects to push breakeven oil prices lower than $30 per barrel.
Shell: A Deepwater Powerhouse
Deepwater development activities have been severely affected by the crude downturn; however, with the 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.
Along with Kaikias, Shell also has three more GoM deepwater projects in its kitty, namely Appomattox, Coulomb Phase 2 and Vito. 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 announced its final decision to invest in the project in July 2015. The project witnessed 20% savings from its original investment proposal, owing to designing technology.
Shell is also advancing its Coulomb Phase 2 project, comprising subsea system with potential tiebacks to the Na Kika production hub. With the project’s break-even price below $40 a barrel, first oil from the project is expected in a couple of months or more.
The Vito project is another Shell’s multibillion-dollar project authorized last month. Though Shell did not disclose the cost of the project, it is known to have sliced its price tag around 70% from the original project design.
Recently, the company also discovered a large deepwater well, the Dover well, in the Norphlet geologic play in the U.S. GoM — marking the sixth oil and natural gas find that Shell has struck in the region. The company has been focusing on the 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.
In the first quarter of 2018, Shell’s deepwater production stood at 731,000 barrels of oil equivalent per day (Boe/d) globally. Banking on the improving energy landscape, this Zacks Rank #3 (Hold) company expects its global deepwater production to overshoot 900,000 Boe/d by 2020. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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