In a deal with Shell Exploration and Production Co., Apache Corp. will acquire 26 mature shallow water fields that cover 50 blocks (209,000 acres) in the Gulf of Mexico as well as interests in two onshore gas plants. Apache, which paid Shell $200 million, will operate 15 of the fields and hold 91% of the production, and will book proved reserves of 124.6 Bcf and 6.6 million bbl, at a cost of approximately $1.22/Mcfe.

Apache’s acquired production for the last six months of 2003 is expected to average 70.4 MMcf/d and 4,600 bbl/d.

Prior to the Apache-Shell transaction, Morgan Stanley paid Shell $300 million to acquire an overriding royalty interest in a portion of the sold lower-risk reserves to be produced over the next four years, bringing Shell a total of $500 million for the two transactions. Apache acquired the remaining reserves and retains all of the potential upside from future exploration and development activities. The sale was effective July 1.

Included in the sale are 15 operated and 11 non-operated properties and an interest in two onshore gas condensate separation plants that serve the offshore fields. The properties include 107 active wells and 17 major production platforms as well as existing production handling agreements. Current net production is 29 MMboe/d, of which 76% is gas.

Apache CEO G. Steven Farris said the new assets “lay down well with our existing Gulf of Mexico properties. We will not have to add additional staff and we expect to create efficiencies in our field operations. The Gulf Coast enjoys the highest netback natural gas pricing in North America. With the current shortage of natural gas, we are hopeful of adding production to help bring on new supplies.”

Farris noted that the assets had been “capital-constrained for several years. Just as with the Gulf of Mexico property package we purchased from Shell in May 1999, we plan to invest money to maximize production and add new reserves.”

In the 1999 transaction, Apache paid Shell $716 million for some other GOM assets, and to date, it has invested another $550 million in exploitation activities (see NGI, May 3, 1999). “By year-end 2002, we had recouped 91% of our total investment and still had 74% of the proved reserves that we booked at the time of the acquisition,” Farris said of the earlier Shell transaction.

With Morgan Stanley’s transaction, Farris said Apache would be able to “concentrate our capital and abilities on adding reserves and value to mature fields, an Apache core competence.”

Shell’s sale of an overriding royalty interest to Morgan Stanley is commonly known as a volumetric production payment. Under its terms, Morgan Stanley is to receive a fixed volume of 68.4 Bcfe estimated to be produced over the next four years. These reserves will not be booked by Apache. Overriding royalties are not burdened by production costs, and therefore Apache will record a $58 million liability for the future cost to produce and deliver these volumes to Morgan Stanley. These costs will be amortized as the volumes are produced, Apache said.

Shell said the transaction was part of its “on-going portfolio upgrade,” which averages about $2 billion per year in divestments.

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