Shell greenlights development of US Gulf of Mexico Whale field

Shell made July 26 a final investment decision on Whale, a deepwater discovery in the US Gulf of Mexico, amid an offshore operating environment that appears to be one of the oil and natural gas industry's brighter operating arenas as recovery ticks up from 18 months of a coronavirus pandemic.

Whale, located in the remote Alaminos Canyon area of the Gulf of Mexico about 200 miles southwest of Houston, will feature a semi-submersible production host in more than 8,600 feet of water with 15 producing oil wells, Shell said in a statement.

The field was discovered in early 2018.

Whale is expected to produce a gross 100,000 barrels of oil equivalent a day at peak production and currently has estimated gross recoverable resources of 490 million boe.

The development reflects Shell's ongoing focus on "simplification, replication and capital projects with shorter cycle times" that drive greater value from advantaged positions, Wael Sawan, Shell Upstream Director, said.

"We are building on more than 40 years of deepwater expertise to deliver competitive projects that yield high-margin barrels [to] meet the energy demands of today" while also generating cash required to fund the development of energy of the future, Sawan said.

The development will also sport a hull that is 99% replicated from Vito that is currently under development, as well as an 80% replication of Vito's topsides.

BEGINS PRODUCTION IN 2024

Whale, adjacent to Shell's operated Silvertip field and about 10 miles from the major's operated Perdido platform in the far southern US Gulf, is slated to begin production in 2024. Vito, located further east in the Mississippi Canyon area of the US Gulf offshore Louisiana, will come online in 2022.

Whale will be Shell's second operated deepwater development in the US Gulf, after Vito, to employ a simplified, cost-efficient host design. Because of that approach, Shell anticipates an internal rate of return for Whale of more than 25%.

The development will also feature energy-efficient gas turbines and compression systems, and is the latest addition to Shell's Gulf of Mexico portfolio of oil production projects that rank among the lowest for greenhouse gas intensity in the world.

Whale was originally projected to come online in 2021, but impacts from the pandemic that included cash-preservation efforts delayed the project's final investment decision by a year, Shell said.

Analysts said Whale shows that even as the coming Energy Transition to cleaner, alternative fuels continues to gain traction, large oil and gas projects that have been on the drawing board for years are still profitable.

Those projects offer what Sami Yahya, an analyst with S&P Global Platts Analytics, called "attractive and competitive opportunities."

"In any scenario, we're not necessarily seeing the Gulf of Mexico as a diminishing resource anytime soon, particularly as technology and design continue to improve and open up previously uncharted offshore areas and operators continue their push to reduce costs," Yahya said.

EXPLORATION BUDGETS TOOK A HIT

"On the flip side, following the most recent oil price crash [in 2020] and the ongoing transition to the Shale 3.0 model of prioritizing cash flow and debt reduction over output growth, exploration budgets have taken a hit," he said. "That could elongate the timeline for discoveries to be made and subsequently developed."

Shell owns and operators Whale with a 60% stake; partner Chevron USA holds 40%. Whale will be Shell's 12th deep-water host in the Gulf of Mexico.

By leveraging the engineering, construction, and supply chain of Vito, Whale is expected to achieve first oil 7.5 years after discovery. But that is about the same time length that Great White--the first of the three Shell discoveries that produce through Perdido--took to get online. Great White was discovered in late 2002 and Perdido came online in early 2010.

Whale will help keep US Gulf production at a plateau into the second half of decade, said Matt Snyder, head of US Gulf of Mexico research for energy consultancy Welligence.

Other large US Gulf projects that could be set for a final investment decision in the near-term include Chevron's Ballymore, LLOG Exploration's Leon and Moccasin, TotalEnergies' North Platte (TotalEnergies) and Beacon Energy Offshore's Shenandoah, Snyder said.

Offshore appears to be ticking up as current oil prices in the $70s/b, coupled with growing confidence that more oil will be needed even after newly raised production levels of OPEC+ are eased into the market during the second-half 2021.

Giant oilfield services provider Schlumberger saw a notable increase in offshore during second-quarter 2021, CEO Olivier Le Peuch said during his company's quarterly call July 23.

"The offshore rebound [in Q2] was led by high single-digit deepwater activity growth, partly in Brazil," Le Peuch said.

Other regions that will benefit the most from near-term offshore development are the existing deepwater hotspots - including the US Gulf of Mexico, Guyana and Suriname and Brazil, said Snyder.

"These areas, which offer scale of resource, top reservoir productivity and material exploration potential, remain very much on the radar of the Majors and will continue to attract investment."

Le Peuch said about 50 FIDs on global projects have been taken to date, onshore and offshore. But "we expect 100 FIDs, most of them in offshore, at the end of the year," he said. "This is 50% more than it was last year, and the trajectory is toward 150, another 50% increment after that."