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Shifting Gears in The Gulf of Mexico


With the US gearing up to offer more offshore acreage, and Mexico’s ongoing campaign to lure explorers to the Latin American nation’s upstream, the Gulf of Mexico is drawing in drilling dollars at a critical time in the global E&P sector. That’s particularly true for Mexico, where the Comision Nacional de Hidrocarburos (CNH) recently carried out two successful rounds (Deepwater 2.4 and Shallow-water 3.1) showcasing the country’s largely underinvested offshore.

The production profile in the US is on the rise, due in part to the fact that the offshore is less susceptible to knee jerk reactions when prices wobble. The lag time between discovery and first oil helps to ensure that big budget projects hopefully have space on the runway for profits to improve. That momentum means that after the recent slump, offshore production growth is in the cards.

According to a recent report from the US Energy Information Agency (EIA), crude oil output in the GOM will increase to an average of 1.7 million bo/d in 2018, before rising to 1.8 million bo/d in 2010.

A Tale of Two Indies

A closer look at two US-based independents help to underscore the potential success that smaller operators can secure in the changing regional offshore. In the oil price driven Gulf of Mexico, two companies (Talos Energy and Fieldwood Energy) in particular have ridden the waves of consolidation lapping at the gunwales of the industry.

Figure 1 – Blocks acquired from Noble by Fieldwood and blocks in Talos/Stone merger

In November 2016, both companies (alongside Energy XXI and Arena Energy) launched a coalition to support oil and natural gas extraction and oppose federal financial regulations related to offshore infrastructure decommissioning.
Since then, Talos has acquired equity from Sojitz Energy Ventures in ten Green Canyon leases, which occurred in Feb/Mar 2017, in addition to signing a deal in November 2017 to acquire Stone Energy, an American oil and gas corporation based in Lafayette, Louisiana who are participants in some 60 deepwater Gulf of Mexico leases.

This merger will result in the creation of a new offshore-focused exploration and production company, named Talos Energy Inc, which will be focused on E&P activity in the US GOM. The merger, which has been unanimously approved by the board of directors of the two companies, is anticipated to close in late Q1/early Q2 2018.

Meanwhile, Houston-based oil producer Fieldwood Energy made the unusual move in mid-February 2018 of both filing for bankruptcy and also announcing the US$ 710 million acquisition of Noble Energy, in a debt-for-equity swap. The deal, which was completed in mid-April 2018 (effective as of 1 January 2018) and essentially represents Noble’s departure from the GOM. Cash proceeds included in the transaction total US$ 480 million.

The deal was contingent upon Fieldwood successfully implementing its contemplated restructuring process. Fieldwood’s acquisition included all of Noble’s interest in six producing fields and all undeveloped leases. Those producing fields are: Galapagos, Swordfish, Gunflint, Dantzler, Big Bend, and Ticonderoga.

For its part, Fieldwood has assumed all abandonment obligations associated with the properties, which the company recorded at a book value of approximately US$ 230 million as of 31 December 2017, the terms of the deal state. Noble may also scoop up a cumulative contingent payment of up to US$ 100 million from closing of the transaction through the end of 2022, determined quarterly at a rate of US$ 2/bbl produced when the average Light Louisiana Sweet oil price exceeds US$ 63/bbl. Noble forecast that the assets will produce 20,000 boe/d in 2018, while total proved reserves in the US GOM at the end of 2017 totaled 23 MMboe. On the same day on the announcement of the sale, Noble indicated that its Board of Directors has authorised a US$ 750 million share repurchase programme.

The Treasures of Old Mexico

Mexico’s largely successful offshore rounds to date has drawn in a new class of explorer.
State oil Pemex no longer lords over Mexico’s E&P in splendid isolation.

While supermajors like ExxonMobil and Chevron have carved out an early footprint in the Mexican upstream, Talos Energy has bragging rights for chalking up the mouthwatering Zama discovery in Block 7 (Contracto CNH-R01-L01-A7/2015).
In July 2017, Talos and partners found contiguous gross oil bearing interval of over 335m, with 170m-200m of net oil pay in Upper Miocene sandstones with no water contact. Initial gross original oil in place estimates for Zama range from 1.4 Bbbls to 2 Bbbls. That figures eclipsed pre-drill estimates.

Perhaps just as importantly, Zama will provide Mexico with a litmus test in unitizing discoveries in the offshore. The Zama structure extends into Pemex’s AE-0005-M-Amoca-Yaxche-03 contract. The state-run company is planning to drill the Asab 1 well to investigate the oil pool in its acreage.

Figure 2 – The Zama discovery and Asab 1 planned well

Officials close to talks say they are progressing, and both Pemex and Talos are separately working on appraisal campaigns to map the magnitude of the structure. It is interesting to note that the Mexican state-run company has advanced its plans to the point of seeking a rig to drill to the Asab 1 well in the AE-0005-M-Amoca-Yaxche-03 contract.

First oil at Zama is expected in 2022-2023, (20-30,000 bo/d), with a potential daily peak of 150,000 bo at a later date via a floating production unit. Talos operates Block 7 with 35% WI. Sierra holds 40% WI and Premier holds 25% WI, after Premier exercised its option to increase to 25% from 10% WI). Fieldwood is likewise bringing its experience in the US side of the Gulf to Mexico. Fieldwood, and Mexican partner Petrobal, a company led by the highly respected former Pemex executive Carlos Morales Gil, on 7 January 2016, signed a Production Sharing Contract (PSC) with the CNH for CNH-R01-L02-A4/2015. The PSC includes the Ichalkil and Pokoch fields. The contract area covers 58 sq km on the Mexican shelf. It was awarded during the second phase of the closely followed Round 1 licensing process.

Since then, Fieldwood Energy is understood to have successfully reached TD in the Ichalkil 2DL delineation well in the Ichalkil Field. The original Ichalkil discovery well had objectives at a depth of around 4,900m, it is understood. As for the Fieldwood-operated Ichalkil 2DL, tests are planned for the well (possibly in the Cretaceous). The delineation well spud on 2 February 2017 using Diamond Offshore’s “Ocean Scepter.” Partners, Fieldwood Energy and Petrobal, each hold 50% WI in the PSC, which includes the Ichalkil and Pokoch fields.

The Fieldwood-operated area is located on the prolific Mexican shelf. It was awarded during the second phase of the Round 1 licensing process. The area is located in the Pilar Reforma-Akal Basin. At the time of the original discovery, Pemex (the then-operator) pegged 3P reserves at 501 MMboe. Fieldwood Energy also drilled Pokoch 1DL delineation well in the Pokoch Field. Fieldwood plans to submit a potential development plan to regulators for the area.

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Tom Liskey and Don Campbell

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