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New oil frontier beckons offshore Latin America

ExxonMobil’s discovery offshore Guyana has renewed hopes that a stretch of waters off Guyana, Suriname and French Guiana will emerge

More broadly, it also shows that companies are still willing to drill high-risk, high-reward exploration wells in a low oil-price environment.

ExxonMobil did not release many details of the deep-water find, Liza-1, drilled in the Stabroek Block, but called it a “significant oil discovery”. The company and its minority partners in the block, Hess and China National Offshore Oil Corporation (Cnooc), say they will spend the next few months determining if the discovery is commercial and looking at nearby prospects.

The companies will hope that their progress in the region goes better than Shell’s exploration campaign in neighbouring French Guiana, which started with a bang but ended with a fizzle. In 2011, Shell and Tullow made the region’s first oil discovery at the Zaedyus prospect. That find was thought to hold hundreds of millions of barrels and raised hopes in the country, an overseas French territory, that it would see an influx of petro-dollars. Four straight follow-up exploration wells, though, came up dry and the companies have shelved any further drilling plans. Tullow was forced to take a $344m write-down on the costly frontier exploration wells.

Still, the region remains a hotspot for frontier exploration. Industry heavyweights have snapped up acreage on the hopes that the region’s shared geology with West Africa – the reservoirs the companies are targeting were laid down before continental drift put an ocean between the continents – will produce the same sort of major oil discoveries. A US Geological Survey report has said the waters could hold 13bn barrels of oil. 

CGX Energy, a small explorer with minority stakes in a number of blocks in the region, says that discoveries made by Cairn Energy and Kosmos Energy across the Atlantic in Senegal and Mauritania bode well for Guyana in particular.

The flow of good news will cheer Repsol, RWE and Tullow Oil, which hold the rights to the neighbouring Kanuku Block. Tullow says that the companies plan to decide later this year whether or not to drill an exploration well on the block later this year. It now appears much more likely that those companies will move ahead at their block. The discovery could also lead Repsol and its partners to revisit the Jaguar well, drilled nearby in 2012 but abandoned before reaching its target because of high pressure, analysts at Deutsche Bank said.

While exploration has paused in French Guiana, Guyana and Suriname will remain in the spotlight through 2016 with a string of wells ready to be drilled. In Suriname, Apache has reached target depth at its first well in Block 53 and is waiting for results. Japan’s Inpex along with its partner Tullow are drilling the Spar-1 well at Block 31. Over the next 18 months, at least six wells are scheduled to spud, most of which will be in Suriname’s waters. 

The robust exploration activity amid one of the sharpest oil downturns in decades may seem counterintuitive. But a recent analysis by Raymond James, the investment bank, has found that, somewhat counterintuitively, frontier exploration around the world has so far not been hit by the downturn. The most visible example of this is Shell’s attempts to once again drill in the Arctic offshore Alaska this summer. But across Africa, Asia and Latin America, high-risk, high-reward wells in unexplored areas continue to be sunk.

Companies, Raymond James says, see these as projects that won’t start producing for many years, making today’s oil price largely irrelevant. At the same time, for large companies they represent only a relatively small portion of the overall capital spending. In many cases, the choice is to drill or give up a highly prospective piece of property. Finally, the flip side of the oil price fall has been a sharp decline in costs, especially for offshore rigs, so for companies that can afford it, the downturn has presented an opportunity to drill for less.

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