Shell’s new Gulf discovery is conveniently located

Probing a recent discovery in deep waters of the Gulf of Mexico, Royal Dutch Shell found 100 million barrels of oil equivalent at its Kaikias field, near three of its massive production facilities and a network of subsea pipes, the company said Wednesday.

The 1-year-old Kaikias discovery, about 60 miles south of the Louisiana coast in the Mars-Ursa basin, is nowhere near the size of the big-ticket deepwater oil fields that Shell uncovered in that region two decades ago.

But its location near existing oil production infrastructure makes it an attractive bounty for an industry that has had to rein in exploration spending and project costs dramatically as oil prices languish under $45 a barrel. The field would be much cheaper to develop than more remote projects that are far removed from the Gulf ’s expansive network of pipelines that help ship crude to land.

A 100-million-barrel find “is not a game-changer in the Shell portfolio,” said Rebecca Fitz, senior director at IHS Energy. “But this discovery is completely consistent with what Shell is trying to do from its streamlined exploration program. If you can deliver 100 million barrels of crude oil and have all the infrastructure built, that should be a pretty highvalue, quick lead-time buy-

back development.”

Fitz said Shell’s Kaikias find is a good example of the industry’s efforts to retain a place for oil exploration while keeping capital constrained. Shell’s $62 billion acquisition of British gas producer BG Group, which has been developing big oil formations off Brazil, has relieved some of the urgency in Shell’s international hunt for large crude reserves.

Next year, Shell and the handful of other international companies collectively known as Big Oil are expected to trim their exploration budgets overall to $25 billion, half of their 2013 levels, according to energy investment bank Tudor, Pickering, Holt & Co. Big Oil discoveries in recent years have come in at about half of the combined 8 billion barrels they pump each year.

At Kaikias, which is in 4,575 feet of water, Shell found about 300 net feet of oil pay, adding to the bounteous 1 billion barrels lurking under sand and salt formations in the Mars-Ursa basin. Shell has pumped crude from the region since the mid-1990s and expects to produce a peak 100,000 barrels a day from its relatively new Olympus platform next year.

If Shell develops the Kaikias discovery, it would help refuel production facilities from which output has declined over the years. The three platforms there now — the Mars, the Mars B and the Ursa — have a combined output capacity of about 500,000 barrels a day.

Shell produces the third-largest amount of oil equivalent among the top Western publicly traded oil companies, at 3.08 million barrels a day, and it has the third-largest amount in proved reserves, 13.1 billion barrels. Exxon Mobil Corp. ranks first and BP second in both measures.

Shell said it was able to hold down operating and supply chain expenses on the Kaikias project, shaving 20 percent off the drilling cost last year and completing its appraisal ahead of schedule.

The company drilled about 34,500 feet, driving its bits vertically and horizontally to avoid some hazardous salt formations. It’s the longest well Shell has ever drilled, though not the deepest.

“It’s a beautiful discovery, with good-quality oil in a good-quality reservoir,” said Martijn Dekker, Shell’s vice president for appraisal and hydrocarbon maturation.

“There’s a lot of concern in the industry on generally how we’re going to deal with lower prices, and the way to address that is to reduce our break-even price and reduce our cost basis,” he said. “The Kaikias has definitely demonstrated already we can do that on the drilling side. Our engineering studies are looking at if we can significantly reduce our subsea costs, too.”

Dekker said Shell geologists are reviewing a stream of data flowing from the well, trying to figure out “the size of the pie,” while engineers are trying to figure out ways to reduce subsea infrastructure costs of any future developments in the region.

Earlier this year, the Anglo-Dutch oil major said it has brought down its break-even costs to develop its huge Appomattox field — a project the company sanctioned in July — to $55 a barrel of Brent, the international crude benchmark.

“It’s fair to say that for something like Kaikias, which is leveraging existing infrastructure, we should be able to do better than that,” Dekker said. “But that work is still ongoing.”