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Another Huge Gulf of Mexico Discovery for Royal Dutch Shell plc

By Arjun Sreekumar - Jul 17, 2014 at 2:30PM

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Royal Dutch Shell plc’s latest discovery in the Gulf of Mexico’s Norphlet play looks especially promising.

Royal Dutch Shell plc (RDS.A) on Tuesday announced the Rydberg discovery, the company's third major discovery in the Norphlet play in the deep waters of the Gulf of Mexico.

The Rydberg exploration well, located in roughly 7,500 feet of water approximately 75 miles offshore in the Mississippi Canyon Block 525, encountered more than 400 feet of net oil pay. Though Shell hasn't fully evaluated the well results yet, it believes the Rydberg discovery contains approximately 100 million barrels of oil equivalent.

Combined with its other two major discoveries in the area -- Appomattox in 2010 and Vicksburg A in 2013  -- the company estimates its total resource potential in the Norphlet to be roughly 700 million barrels of oil equivalent.

That would make it Shell's second-largest resource basin in the Gulf after the Mars basin, which contains an estimated 1 billion barrels of oil equivalent, and probably among the five largest resource bases in the entire Gulf of Mexico.  

Photo credit: BP 

"Particularly exciting"
The Rydberg find is "particularly exciting" because of its close proximity to the other two Norphlet discoveries, which are located within 10 miles of one another, according to Marvin Odum, director of Shell Upstream Americas.

This means Shell could potentially use a single production platform to develop all three finds, which would be less costly and more efficient than other options. "These successes represent the emergence of another hub for Shell's deepwater activities that should generate shareholder value," Odum said.

Shell is the operator of the Rydberg discovery with a 57.2% stake, alongside Ecopetrol of Columbia, which holds a 28.5% interest, and Nexen, which was acquired by Chinese state-owned oil giant CNOOC last year and holds the remaining 14.3%.

Shell's big plans in the Gulf
The discovery underscores the importance of the Gulf of Mexico to Shell's growth plans and bodes well for the company's future in the region. Last year, the Gulf accounted for nearly half of Shell's U.S. production, contributing almost 180,000 barrels of oil equivalent per day (boe/d).

The Anglo-Dutch oil major currently operates six major deepwater floating platforms, 12 fixed structure platforms, and numerous subsea production systems in the Gulf. It is also a nonoperated partner is four major producing projects and boasts the largest contracted drilling rig fleet in the region.

In February of this year, Shell began producing from its new Mars B development using the Olympus floating platform. The field, operated by Shell with a 71.5% stake alongside partner BP (BP 1.43%), which holds the remaining 28.5% interest, will have a peak production capacity of roughly 100,000 boe/d.

Shell is also getting ready to start production from two other major projects: the Cardamom field and the Stones development. Cardamom, owned 100% by Shell, is expected to begin producing later this year, while production from Stones is expected to begin in 2016. Both projects have estimated peak production capacities of 50,000 boe/d.

At current oil prices, these projects feature strong economics and generate a ton of cash flow due to their overwhelmingly oil-weighted production. Combined with Shell's other core producing regions and projects, they should help deliver stronger cash flows in the years ahead.

At the same time, Shell plans to slash spending dramatically over the next few years and divest some $15 billion worth of assets through the end of next year, which should also help improve its financial performance.

Investor takeaway
Shell's recent discovery highlights the growing importance of the Gulf of Mexico to the company's global portfolio and lays the path for its continued success in the region. With major Gulf projects starting up this year, Shell expects its operating cash flows to exceed its capital spending this year. Combined with asset sales, this should allow the company to grow its dividend at a decent pace over the next few years.

Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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