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Talos Energy's Mexico Block 31 drill results bigger than expected: CEO

Highlights

Two Mexico wells drilled, one thicker than expected

Wells appeared to unearth a shallow oil play

Talos produces 52,600 boe/d in Q3, down 4% on year

Houston — Gulf of Mexico operator Talos Energy drilled two wells on Mexico's offshore Block 31 during the third quarter of 2019, which revealed a reservoir that appears thicker and bigger than expected, the company's top executive said Thursday.

The Xaxamani-2 well logged 148 feet of gross pay in two shallow oil sands, while the Tolteca-1 well logged about 123 feet of gross pay.

Tolteca-1 results exceeded pre-drill expectations for reservoir thickness and aerial extent, which raised not only resource expectations to date, but also the potential for similar geophysical characteristics that could open up a shallow water oil play, CEO Tim Duncan said during a Q3 earnings call.

"This thing is bigger than we thought [or] expected," Duncan said. "The fact that we tripped into a shallow oil play here is pretty exciting."

Because the discovery extends out of the range of Talos' existing seismic work, "we need to fill that hole," he said, adding: "We need to fill that hole, and that will take a little bit of time. That's a positive thing."

Also in Mexico's offshore, Talos continues to work toward unitization of its Zama discovery on Block 7 with Mexican state company Pemex, while at the same time attempting to get a formal resource report concluded by year-end 2019 for the find from third-party reserves consultants.

ZAMA RESOURCE PEGGED AT 400 MIL-800 MIL BOE

Both items are needed to submit a development plan to Mexican energy officials for Zama, which Talos believes to contain recoverable gross resources in the upper half of an estimated 400 million-800-million barrels of gross oil equivalent range.

"The two biggest things we have to work through [to unitize Block 7 with an adjacent block operated by Pemex] is initial equity splits and operatorship, and then ultimate to re-determine those equity splits," Duncan said. "We've spent all the money to date, and have taken all the risk."

Talos hopes to conclude those discussions and get a development plan reviewed by the Mexican government in time to make a final investment decision in the second half of 2020.

In addition, Talos received a two-year extension of the primary term on Block 7, which will allow the company to test other exploration targets through September 2021.

In the US Gulf of Mexico, Talos is drilling the Puma West prospect in the prolific lower Green Canyon area offshore Louisiana. In September, the company agreed to drill the BP-operated prospect in exchange for a 25% stake in the project.

The well was spudded in October and targets Miocene sands similar to those in BP's Mad Dog development less than 15 miles away.

BHP (then known as BHP Billiton) made the original Puma discovery in 2003 in 4,100 feet of water, 140 miles from the Louisiana coast. Puma West is two lease blocks away, or around six miles, from the original find.

ORLOV, BULLEIT TO COME ONLINE IN 2020

Two other fields, Talos-operated Bulleit and also Orlov, operated by privately held Fieldwood Energy with Talos as a 30% partner, will be online in 2020. Each is expected to produce 7,000-10,000 b/d gross of oil equivalent.

Orlov, which Fieldwood plans to complete in two months, should be online by early Q1 2020, while Bulleit is slated for Q3 2020.

Talos is also preparing for future drilling. It is putting the final touches on two rigs contracts for use next year - a deepwater rig for exploration and a platform rig for near-field tieback opportunities assets acquired over the last 18 months.

The platform rig will start with the company's Green Canyon 18 asset in Q1 2020, and may then move to the company's Pompano and Amberjack assets in its Mississippi Canyon core area in Q4 2020.

Companies that have thrived in the US Gulf in the last several years low oil prices have done so chiefly from tiebacks - smaller fields within 30 miles of a production facility that can be cheaply and quickly hooked up and produced.

Several US independent operators, including Murphy Oil, Occidental Petroleum, Hess, BP and Shell, have placed multiple tiebacks online since oil prices dropped sharply five years ago to the $50s/b level and largely stayed there.

On Tuesday, Occidental Petroleum said it will spend $100 million next year on near-field exploration. Murphy Oil is also developing several small discoveries to be tied back to assorted existing production facilities.

Companies have said tiebacks offer high returns, even at $50/b. W&T Offshore recently started up its Gladden Deep discovery, made in June, within four months.

In Q3, Talos Energy produced 52,600 b/d of oil equivalent, 73% oil, down 4% from 54,900 boe/d in the same 2018 period.

About 4,000 boe/d was deferred in the quarter owing to Hurricane Barry in July. The company is now producing at its normalized 56,000-57,000 boe/d levels, Duncan said.

Talos Energy remains active offshore US, Mexico

--Starr Spencer, starr.spencer@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com