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Untapped Oil, Gas Reservoirs Beyond U.S. Deserve Second Look, Says IHS Markit

More than 5 billion boe of resources await development beyond the United States and Canada in smaller reservoirs, tracts either bypassed or deferred, including many that could offer “shorter-cycle” successes for oil and gas producers, IHS Markit said Tuesday.

Frontier projects in undeveloped areas often take decades to reach commercial production, whereas the overlooked and underperforming basins might offer a quicker and less expensive turnaround, according to the IHS Markit report, “Back to the Basins: International Shorter-Cycle Opportunities.”

Five, short-cycle projects that break even at costs of under $40/bbl were assessed in shallow water and mature, onshore areas in Mexico, Nigeria, Egypt, Brazil and the North Sea.

“These five case studies represent just a fraction of the opportunity that we identified globally,” said author Kareemah Mohamed, associate director of plays and basins research. “Stagnant oil prices continue to limit large-scale investments in global exploration worldwide, including deepwater plays, and many onshore U.S. projects are not yet cash-flow positive, so energy investors are demanding financial returns.

“These investors want to see companies demonstrate greater capital discipline and growth while living within their cash flow,” she said. “The focus has moved away from simply reserves capture, to production growth, and now to value maximization. In this environment, reduced tolerance for exploration risk persists.”

Cognizant of the “new normal” for exploration and production (E&P), the study was done to assess mature, producing basins to help operators identify less capital-intensive, shorter cycle-time projects, Mohamed said. The projects selected could enable operators to reduce their risks by leveraging existing basin infrastructure and capabilities in the marginal plays.

The shorter-cycle projects are defined as those that may generate first cash within one to two years of development. In the case of new entrants, the shorter-cycle projects may progress to a final investment decision (FID) in less than three years. The typical deepwater project averages seven years to reach FID with more upfront investment.

The key screening criteria to identify the targets and minimize investment risk was shallow-water shelf areas and onshore mature fields, basins with a proven hydrocarbon system. In addition, the areas had to have existing production and infrastructure, with wells and associated production/well data, along with pipelines, platforms and gas processing plants in place.

After identifying the basins, the researchers looked at a combination of aboveground and sub-surface risks to pinpoint avenues for new basin entry. The report identifies opportunities that could allow for incremental added production volumes and provide a source of free cash flow.

“Due to the changing investor sentiment toward value maximization and a reduced tolerance for risk, as well as the nature of these shorter-cycle projects in mature basins, it was essential to advance the research approach from one of a project-by-project basis to a whole-basin strategy,” said Jerry Kepes, executive director for plays and basins research. “We’ve observed that the best results occur when operators target basins with materiality and two or more working petroleum systems, stacked reservoirs, existing infrastructure, service-sector capacity and technical knowledge.”

Mindful of market dynamics, researchers said the shift to whole-basin strategies is critical for operators to achieve competitive performance, representing a fundamental shift in the approach to analysis and company strategies going forward.

“Whole-basin strategies can include ‘field growth,’ where the focus is on targeting new barrels in old fields, but can also include upfront, new ventures work that targets shorter-cycle barrels in under-explored areas in existing commercial basins,” Kepes said. “Some of those mature basins present fresh opportunities for operators because an E&P opening makes new acreage available.”

Some prospects previously were off-limits because of political instability or overlooked because of single-operator (usually state-owned) access, stringent regulatory terms, or bureaucratic barriers. Those undeveloped prospects now may offer more favorable terms and are open to foreign investment.

Additional examples of shorter-cycle development opportunities now available include basins in Mexico, researchers noted.

IHS Markit’s report includes a case study on Eni SpA’s entry into Mexico’s mature, shallow-water Sureste Basin. The Area 1 discovery, with an estimated 1.4 billion boe, “was made in an underexplored area of the Sureste Basin, with first oil targeted for 2019, just two years after discovery.” Through leveraging existing basin infrastructure, the project’s expected breakeven cost “should be below U.S. $40/bbl.”

“This new-ventures screening alternative provides targets that offer operators a lower-cost path to free cash-flow in a shorter period, but also the potential for repeatable investment opportunities over time,” Mohamed said. “In the current economic environment, this makes the short-cycle opportunities very intriguing to operators, so we are currently expanding the initial research to include more basins.”

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