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Majors eyeing lucrative plays outside the Gulf of Mexico

ExxonMobil isn’t alone among majors in turning its gaze from the US Gulf of Mexico to significant deep-water and onshore shale opportunities elsewhere

ExxonMobil is testing market interest, assessing operators' appetite for acquiring some of its upstream US Gulf of Mexico properties. The major's move highlights the ongoing trend for many oil majors operating in the US to high-grade their upstream portfolios. This means searching the globe for tempting deep-water plays or attractive shale openings.

Analysts say reservoir quality and favourable logistics are viewed as premium qualities as companies continue to emphasise cost control. In Exxon's case, this trend has led to its focus on deep-water discoveries, such as the nine in its Stabroek block offshore Guyana. The company also acquired new acreage in Brazil's fifth pre-salt bid round.

At the same time, Exxon has increased unconventional oil holdings in the US Permian basin. The company's strategy reflects that of other major oil companies: in a study released this month, consultancy Wood Mackenzie sees industry spending on unconventional oil development in the US nearly doubling over the next five years, to $23bn by 2023 from $13bn in 2018. Targeted spending on conventional oil and offshore development together, by contrast, falls to $33bn from $44bn over the same period.

Following the withdrawal of historical Gulf of Mexico deep-water oil producers such as Marathon Oil and Anadarko Petroleum, smaller independents have staked out positions. These include Kosmos Energy's acquisition of Deep Gulf Energy, which adds Gulf of Mexico acreage to Kosmos' deep-water projects offshore West Africa.

In addition, Talos Energy, which is developing its major Zama discovery in Mexico, acquired Whistler Energy II and its portfolio of Gulf of Mexico assets. Among larger companies, Total and Equinor this spring jointly acquired Cobalt International Energy's North Platte discovery. Analysts say that while trimming expenditure, including the adoption of improved project management techniques, has helped reduce deep-water play costs to make them competitive with quick-to-develop US onshore plays, majors are redeploying capital to address US onshore opportunities.

According to Wood Mackenzie, without US unconventional production the combined output of BP, Chevron, Equinor, Exxon and Shell will begin to decline after 2020. By 2030, US unconventional oil will account for 20% of total production by the five companies. Projected pre-final-investment-decision internal rates of return on unconventional oil projects for the five companies are between 13 and an astonishing 46 percentage points above those on conventional projects, according to Wood Mackenzie. If those projections are borne out, the US is by far the most attractive destination for upstream investment, outstripping by far the 15-20% returns cited by many as "hurdle rates" for new upstream investment by large oil companies.

A significant boost for both US onshore unconventional and big deep offshore projects could come from favourable logistics to transport oil and gas to market. In the US offshore, companies benefit from established Gulf of Mexico infrastructure. An example is the expansion of BP's and Exxon's Thunder Horse field, which has added 30,000 barrels a day of output, bringing total production to over 200,000 b/d.

Onshore, activity in the Permian Basin slowed earlier this year as pipeline bottlenecks and limited port facilities constrained production. Current Permian pipeline export capacity is estimated at about 3.1m b/d, compared with about 3.3m b/d of production. However, an expected 2.5m b/d of additional pipeline capacity and over 10m barrels of new storage are expected to come on stream by 2020, allowing new output more easily to find a market. Also, new refining and chemicals capacity along the US Gulf Coast is expected to provide additional domestic demand for the prevalently light tight oil produced by US unconventional drilling.

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